Ladies and gentlemen, welcome to the NIBE Q1 report. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions via the telephone lines. May I now hand you over to Gerteric Lindquist, CEO, and Hans Backman, CFO. Please, go ahead.
Good morning, everyone. Thank you for calling in. Good morning.
Good morning.
It's a wonderful setting here in Markaryd today. You know, the Q1 report always coincides with the annual shareholders meeting, and there are some 1,150 people, you know, on their way in here today. I must say that we are proud when we see our facilities the way they are now, and I hope that you all could be here and have a little bit of a view on what we have accomplished here in Markaryd. The nature is, of course, as beautiful as it possibly can be. It's almost like when you quit school and you went there with a bouquet of the lily of the valley or some lilacs. A typical setting for a graduation day. Having said that, welcome once again to listen in to our presentation in the Q1.
We are pleased to be a bit clearer, perhaps, about the forecast and the future. We know that it's been difficult for us to present everything in the past, what's happening out in the market there, particularly on the heat pump side. And of course, it's a weak start to the year, unusually weak, we write. And it's been difficult to really analyze the inventory adjustments in the distribution chain, particularly in Europe, of course, on the heat pump side. And we feel that we have a slightly better idea about that now. And it's been a fairly dramatic decrease in pump production output, almost cut in half the Q1.
And the difficulty there is, of course, that the statistic provided from each country is not on the level where you sell to the end customer, but rather on the production level. So the entities, they report what they have shipped out and invoiced, and then, of course, it has been an absorption of too many products out there after, if we may call it, the hype, 2022 and great part of 2023 even, and now that has to be digested and for the manufacturers to come back. Not only that, of course, we've seen a dramatic increase, and when I say dramatic increase in interest rates, of course, that's from a level that was perhaps artificially low, but still the increase was quite sufficient.
That has also raised question marks, of course, around customers' willingness to to invest. One very certain sign is, of course, that the new construction is down in almost all countries, because people react with the uncertainty, with the level as such of interest rate, but also where it's heading. It's pleasing now to see that, at least in Sweden, they started to decrease even a few weeks ago or just a week ago, and that's the same idea, as we understand it, to interpret it in the rest of Europe. But then, of course, on the other side, we shouldn't complain too much about the politicians, but we must say that there is a little bit of a indecisiveness regarding the phase out of fossil fuels.
But I think that's why we are here in business. We have to counteract and we have to attack, but that is also important to know for you out there, that if we're now gonna leave the fossil fuel, that should also be something that we all strive for, not necessarily only the producers of heat pumps. There have been some trade barriers, and now we talk more about the Element group, where it's been a cumbersome situation for particularly the producers of equipment or components, rather, for the semiconductor industry. And it seems like the new factories going up now in North America and also in Europe, they will sort of bridge over the cumbersome time where we see that that industry will start to lift towards the end of the year.
Of course, we started initiated this action program, as we call it, that was announced three months ago. It's cumbersome and painful, you know, when you've been growing, as we have for many, many years, it's difficult to comprehend even for us to start with, that, okay, now we have a little bit of a headwind. Now we have to do something. Coming from a very, very strong 2023, actually the strongest year ever, and a few months later, we're right in the middle of this action program. That has now, of course, taken place, and we are practically through that as far as people being redundant. It's very sad, but just a few agreements still to be signed. As I say, 95% is through there.
But then we also feel now that through interviews and through research, that there will be improvements in the second half of the year. And we didn't really have that clear vision only three months ago, and we see now that in most cases, the inventory levels are diminishing, and that, of course, will bring back the industry, not only us, but the industry as such on the heat pump side, to a more normal level, if you call it. We are perhaps not known for showing statistics, and we definitely do not talk about our colleagues here, but we thought it would be appropriate just for educational or clearness purposes to show this picture.
This is illustrating deliveries from the heat pump producers in Q1, and that is, of course, the situation where we are sitting right now, with a quarter that is going down between 40%-50%, and that's very dramatic compared to where we've been in the past. And that is, of course, also a sign that something has happened in the market that's not only linked to the immediate demand at the customer level, but there's been, for the second time now, a congestion, if I may call it, too many products in inventories at installers and distributors.
So, of course, the revenue is down dramatically, and sometimes you almost have to pinch yourself when you see the figures being down 18.5% on revenue, and operating profit is down so much, and the operating margin is, you know, split in three. But at the same time, we also feel encouraged internally that we were, you know, bold enough to take the decision. It's always difficult. We hate to see our working friends leave the company, but when you're in the middle of it and when you're on your way out of it, then you feel that we have a better suit that's better fitting us than when we entered into this constRailed period. And the result, you've read, I shouldn't dwell too much about that.
We already noticed that it's down heavily, of course, with a minus 18%, and that's even held by the acquisitions, as you see. So it's been a difficult quarter for us, and to come out with an operating profit of that magnitude is something we hope we'll leave behind us and also the operating margin. And we can only refer to the years where we've been passing through similar passages in the past, 1992, 1993, and 2007, and we've been through similar processes. Every 15 years, we hope that this will not occur that frequently or more frequently than that.
But we've been through the severe bank crisis without losing any money, and 1992, 1993, and we also went through the Lehman Brothers crisis, slightly below 10% margin, whereas 1992, 1993, we were down to 5%, but we were totally different company. So of course, the bar chart here illustrates itself. It's not going up right now, but that's something we eventually will change, of course. And the same thing on the profit of the financial items. I mean, that's...
No one likes to see that curve, and that triggers, you know, the fighting instinct in all of us that we're gonna bring that back, because we still believe that we are a position in the market that is very, very buoyant, just giving it a quarter or two and then to show that this curve gonna change direction. If we just have a few comments about it, upon that, really, I mean, that's where we've seen the most dramatic adjustments in inventory, and we believe that we are going another quarter, that the quarter we're in now, and we feel that now we are on the way out of that.
But that doesn't mean that everything will be peachy keen just because of that, but we believe that the high interest rates that we've seen during the Q1 will help, now when we have rumors and even some clear indications from the national bank, Riksbank, whatever you call it in English, and that's a good indication, because that is something that the people react to. We all react to that. That's a positive sign. Possibly we can do some investments, and we can maneuver a little bit more freely, when interest rates are going down. It's been tough now for some time. Something that is, that comes on for is, that is the price differences between gas and electricity when it comes to kilowatt-hour prices.
So that's something that we really urge the political side to be more fair on that side, being a little bit more decisive. "Okay, let's go now. We have to change this." Action program, of course, that might be a shortcoming in our report. We apologize for that, and we think we're gonna be, Hans is gonna be more precise. How is that divided? It should have been in the report. I think that we should put that on the web later on today, where we present it in a fair fashion. So that's something we're gonna report to you here during this presentation. And again, the action program, well in progress, sadly enough, but that's how it is. And there'll be improvements, we feel, in the second year.
Not that everything gonna turn, you know, 100%, July first, but it'll progressively in the right direction. And here we are. Operating margin 5.7 might not be that severe if we hadn't had 17.5 a year ago, then it's, it's very, very severe. And if we just have a quick look at the Stoves, 'cause they, they've also had some stocking issues in the distribution chain, but to a lesser degree, and it's the same pattern there that we couldn't deliver, or the industry couldn't deliver. I, I take this as a group, the producers, and of course, it's been a cumbersome time where the installers or our outlets, they have bought so much equipment and that's now being sold out.
And it's just as with climate solution, interest rates, of course, they hurt the willingness to buy Gerteric or to invest in homes where you then will install Gerteric. So it's pretty much the same, can I say, pattern within Gerteric. But of course, action programs, they are underway in all the different business areas, although climate solution, of course, will have the biggest one. And if yeah, the profit margin is down to 60, that's cut in half. That is, of course, suggesting that it's not, it's bad or weak, but it's not as dramatic as it was in a climate solution. Bad enough that the operating profit is going down and the operating margin cut in half, but that's also an illustration that it's quite...
It's a little bit different, I should say, than it is on the climate solution side. And then coming to Element, there, we've had a decent development in several segments of the business. But of course, being exposed to the HVAC area has been burdensome for Element, and that's not only supplying internally, but also supplying the whole industry, and not only on the heat pump side, but also on the convector side, on the heater side, and so forth. So that is that's the major drawback. The semiconductor market hasn't been that buoyant, but there we also see now a recovery during the second half of the year, and I referred to that earlier.
Automotive and rail develop in a positive way, and as we said before, action program is initiated there as well, but percentage-wise, to a lesser degree, of course, than climate solution. And there also, for reasons already mentioned, we are on the right track, we believe, for the second half of the year. And, of course, the program that is meant to come in full effect during 2025, and of course, there will also be some effects, naturally already during this year. So Element, as we see here, they go from 9.3 to 5.1 in operating margin, and that is suggesting that they have parts of that business that is fairly buoyant, as we said now for the second time.
That distribution of sales, yeah, that's pretty much as before. The Climate Solutions is slightly lower than, than before, and on the next pie chart, you'd see that first, it maintains the 26.1%. Typically, when the margin is up, they would have a larger portion of that pie chart when it comes to operating profit. Internationally, of course, active, and that means that North America has grown up to 30%. If I recall it correctly, it was like 26 or 27, the full year 2023, up to 2023, and now, of course, the North American market is more stable. And that's an illustration also that it's good to be distributed more evenly, not only in Europe, but also in North America.
And to some degree, that is primarily Element, which is also present quite heavily in Asia. And I think, was that my last slide?
I believe so.
I tell you, I hand over to Hans, and now he is gonna shoot.
Thank you. Thank you, Gerteric. All right, so I will take you through the next part of the presentation, hopefully without repeating myself too much, but still giving you some more color on the, on the business areas, and then, of course, the balance sheet, cash flow, key figures, and the action program as such, and then to leave room for you all to put some questions. If we then look again at climate solutions, I mean, Q1 is for the reasons mentioned before, and it's a little bit of a perfect storm now, you can say, going downwards as it was going upwards in the other direction, not too long ago. So all of these factors now coinciding, giving us this, for us, very poor development.
The gas contracting thereby, you know, since the acquisition there has helped us with some 7%, and with such a quick drop in sales, it's hard to counteract on the profit side. So the gross margin is down from the 36.3% to the 31.2%, and the operating profit has, of course, taken hit as well, since the SG&A costs are too high, if you like, for which reason we are running the action program. Then we come in at the 5.7% operating margin. If we look at the split of sales for geography, this is... I mean, what happens in climate solutions very much colors the group.
What Gerteric just mentioned is that North America has gained this year, having a more stable business in general, but also a more precise and, and long-term subsidy scheme, you can say, when it comes to sustainability. At least that's part of the reason. So, North America is now 26%. It was 22% last year, so that has gained nicely, of course, then on behalf of Europe, including the Nordics, within Gerteric, I mean, after two consecutive strong periods, if you like, we're now facing, of course, some challenges here as well.
I mean, first we had the period where post-COVID, where people—or during COVID even, where people spent a lot of time at home, and they began to renovate their homes, which had a very good effect on the sales of Gerteric, which we then thought would come to an end when people could travel again. But that's when this brutal attack on UkRaile occurred, and oil and gas prices rise quite substantially, and people were looking for alternative or complementary heating sources, where the sales for Gerteric picked up quite nicely again. But now we're into a phase, of course, with, as Gerteric mentioned here, some products in the system, also the high interest rates, less willingness to to invest at home. So we've dropped some 18%, basically, in, in sales. There have been some, some help from acquisitions there as well.
Gross margin is also down, although it's not as dramatic as in Plant Solutions. And we then came in at 6.2% operating margin, which of course, is cut in half compared to last year. But if you know us from previous years, you can say this is a little bit more of a traditional pattern as well, where Q1, Q2 typically are weaker, and where most of the business takes place in the second half of the year. In terms of geographical distribution of sales, there has not been too much of a movement here. A slight, a slight increase in North America. And then last but not least, in terms of the business areas, we of course have NIBE Element, which, as you all know, is our most global business area.
It follows the GDP trend in most parts of the world, so to speak, in geographies and segments. If we would exclude for a second just the HVAC business and the semi business, the business areas, you know, performing on target, basically. But with a strong presence in HVAC and semiconductor, and with the profitability levels we have seen there, the areas of course hit as well. But the drop is not as dramatic as in the other business areas. Here we talk about roughly 12% of a drop in sales. The gross margin has also dropped, and it's on another level than in the other businesses, given that it's a B2B business, but they also have lower SG&A.
and here, the operating profit came in at SEK 137 million, representing a margin of 5.1%, which, of course, is far from where we want to be, but we know fairly well where the issues lie, so to speak. And as Gerteric mentioned, there are some positive signs or several positive signs within individual segments like the automotive, like Rail, and with the prediction that semi should already be coming back during the second half of this year, and where wind looks positive for next year. In terms of split of sales per geography, this is again, our most global business area, and here the other pie chart there, or piece of the pie has increased, and that is our Asian business. It was 9% a year ago and is now up to 16%.
Leaving the business areas and looking at some group numbers again, there is not really much to comment upon the balance sheet, neither on the asset side, nor the equity or liability side. It's very stable from where we were at the end of 2023. More interesting to look at is the cash flow. And of course, it's not pleasing to see that the cash flow generated from operating activities is SEK -300 million, where it was SEK 1.4 billion last year. But it's a direct consequence of what we've just been talking about. A little positive sign in this is that we've had a positive change in working capital. It's not big, but it's still there and a little signal that we have really been addressing this.
It's quite frankly not that easy to reduce inventory when the market is almost at a standstill. But that has come into play, and we've also been able to put a brake on the investment, you can say. Well, both put a brake on them, but as Gerteric mentioned, we're basically through our big investment program as well, so we will not see the same levels or amounts of investment going forward as we've seen in the past. Then with some small finance activities, basically from some of our subsidiaries, and a positive effect from exchange rates when we translate cash out in the companies into Swedish krona. We've had a less negative change this year in liquid assets than last year. Nevertheless, looking at the key financial numbers, of course, they are affected as well.
But as I said, the balance sheet has been stable, and interest-bearing liabilities in relation to equity is almost on par with the end of this year. Net debt to EBITDA, which of course, is a critical and important key figure, has jumped up from 2.1 to 2.5, but is still at a reasonable level, I would say. And also the equity assets ratio is very stable. Take from the working capital. Yeah, that's true, but of course, it's still too high. I mean, obviously, we're still sitting on finished goods inventory, component inventory, and also with not purchasing as much from our suppliers, there's not much to obtain from the accounts payable days, so to speak. And the second to last picture, I believe it is, the key financials here.
I mean, return on capital employed, adjusted is 11.7 compared to the 17.7. So of course, it's a drop there of 6 units. Return on equity is also down at 12.7, and the net profit per share is not much to brag about at this moment. But overall, a stable balance sheet, I would say. And then just ending up with this last picture, which we will include in the report that's being published. We realized this should have been included, of course. It gives us a little bit more color on the program. I mean, what we announced on February sixteenth, was that we would have one-time costs of around SEK 900 million, leading to savings, annual savings of some SEK 600 million.
During the last three months, where we've been deep diving into this in all business areas, although it is more of a European heat pump issue that we are addressing, but we've taken the opportunity to address costs in all three business areas. While doing that, we've actually come up here that if we spend a little bit more money on making these adjustments, the 1,095, instead of the 900, we will be able to save some SEK 750 on an annual basis instead of SEK 600. Here, what you see, what's missing in the report, the splits between the different business areas. So for example, in Climate Solutions, we will be spending some SEK 794, approximately, I mean, of course, SEK 800 as well.
and where we expect them to save some SEK 570 million on an annual basis, and the corresponding numbers for Gerteric and Elements. And you can possibly ask, why is it, why is this sum so much lower in Elements? But I think this has to do with this being the more global business areas, where I mentioned before, it's only a few segments there that are now heavily impacted, but also they have, for decades, been living under a very tough business climate in their B2B environment, where they have been chased, if you like, by automotive suppliers, by the white goods industry. So they are quite skilled at maintaining a healthy cost level. I think that was my last picture.
All right.
I don't know if you would like to add something before we open up for the Q&A?
Well, I'm sure that we could add a lot of things, but now it's the floor is yours out there. We try to answer you as as expediently as possible, and we just have to say that at 12 o'clock, we have to break, if we are not in polite, because then we have interviews with the other parties, but please, the floor is yours out there.
Thank you. Thank you. We will now begin our question and answer session. If you have a question for our speakers, please dial star one on your telephone keypad now to enter the queue. If you find your question is answered before it is your turn to speak, you can dial star two to cancel your question. The first question comes from the line of Carl Ragnerstam from Nordea. Please go ahead.
Hello, it's Carl from Nordea. A couple of questions here. A bit curious to know more about your statement on, on sort of, Q2 demand, where you said that, that at manufacturing level, the demand will troughen out during that quarter. So should we necessarily expect Q2 sales in climate solutions to be sequentially lower, or how should we interpret that, message?
So very delicate questions. I don't think that we can forecast any more detail than we've done or indicate. I think that's not fair, but I think this is coinciding with what we said already at the break of the year or start of the year, you know, that the first two quarters would be weak, and I think that's pretty much what we maintain in our thinking and our assumptions here. Knowing that the inventories were not at a level of a year or two, or a year and a half, they were lower, and we're fairly certain that they will diminish now. But to give any more precise figures, I have to obey that, if you don't mind.
For sure. Thank you. And, you also talk about the gradual improvement of demand during, during the year. Could you help us with the components to that guidance? I guess you have consumer sentiment with the rate cuts, you have subsidies in, for instance, Germany, materializing comps. Obviously the inventory level, at some point during 2024 expect to return to organic growth, or maybe that is a bit too optimistic still?
Well, I think that what we try to explain here is that we're gonna see improvements. I know that everyone wants to have more precise figures. I think now we've come one step further. We feel comfortable or relatively comfortable anyway with our forecast given, you know, six months ago. And now we dare to say that rather than painting the second half in grayish tones we now see that there could be some improvements there. And of course, for us to give anything more clear than that, but it's our sincere opinion that that will improve. But specifically, you know, quantify that more than we've done, there we're a little bit cautious.
And the components to the improvements, I guess, is it everything that I mentioned, or is it a specific thing? I guess, inventories must be one of the more important factors, I guess.
You mean components like on the Element level, or what, what do you think?
No, no, I mean components behind the improvements of the demand in climate solutions.
Yeah, well, we believe that, of course, when the inventories have been normalized, then, of course, the rate where we are going at now will not only be absorbed by the installers and the distributors that had to large inventories, but that will pass through to the manufacturing level. So that's one factor. We also believe that, when it comes to, refurbishment, in houses, that becomes more of a- or the customers are more willing when the interest rate is on its way down. Perhaps you, you're waiting, they will, should we really replace this? But then you see it won't be more expensive if you can't finance it strictly in yourself, then you could possibly borrow some money. And we also know that, of course, the house builders, they are very eager and, ready to sign contracts.
Families out there waiting for, you know, the signs that we're just now seeing in the markets, and that's the third factor. Politically, I mean, we know that there's no, won't be any immediate help, but we still like to address that because we've been given such clear signals from Brussels and everywhere, that this industry, particularly the heat pump, we have to be ready for the big change or the big leap, if you like to make it very clear. And we say, "Well, we are ready." We say that the industry is ready. Please, it's your turn, really, to fulfill that. So I guess that's in a quick way to answer your question there.
That's very fair. And the final one from my side, if I may, is around the margin for climate solution in 2025, where you guide for sort of a normalized margin level for that business. Would you say, when you talk about normalized margin, is it the past five years when you had obviously very good volumes and good margins, and 2023 included, or is it since its inception or when we could track it, early 2000s, or what, where, what should we compare it?
We've been given a pause, you know, the sort of spectrums of something, anything from 13-15. I think that's where you find in our, in our long-term views, and so that's more statistically proven. And of course, last year we came out with a relatively good margin. I think that was the highest ever, and to predict that they're gonna be the average in the future, that would be, no one could stand behind that. But I mean, history speaks its own language. And if you go back since we introduced NIBE share on the stock exchange in Sweden, I think you find the answer there.
As we've been through, as I said earlier, before 1992, 1993 and 2007, those have been indications that we are not, you know, we are not standing above difficulties, but our way to counteract and come back, that comes without saying, is pretty good.
Hmm. Very clear. Thank you so much.
The next question comes from the line of Victor Trollsten from Danske Bank. Please go ahead.
Thank you, operator, and hi, Jeppe, Gerteric, and Hans. Thank you for taking my questions. Perhaps firstly on the gross margin, obviously down, but could you help us or remind us how much of, you know, cost of goods sold is fixed for you guys? Just to understand, you know, sort of the volume leverage in that.
Well, we, I don't know whether we disclose any, you know, analysis of our calculations. I appreciate the question. I don't know whether I fully comprehend it, but, you mean that we should disclose what's material and what's direct labor, or what, what were you saying?
Yeah, I guess that's one way of looking at it. What's direct labor? Because I guess that's, you know, fixed costs in COGS.
Well, I think with all respect, I think that's something you really have to expect, respect that we don't answer in full term. But I mean, you-
Mm.
You know, what kind of... If you read our annual report, you know, that's, there you see the group direct material, so that's not—that's no secret. And you also see the direct labor, but that is, of course, on the group level. That's as far as we report when it comes to being a public company.
Mm.
But to go into each individual calculation, I mean, that goes beyond what we typically would answer.
Yeah. No, I see. But I guess what I'm after is, of course, you know, how much of the gross margin decline would you, you know, refer to volumes being down, and would you say that there's any in the gross margin being down?
Yeah. I'll tell you, we've said that before, and that we are not in the market where we like to decrease prices, and no one wants to decrease prices. We have an assortment in all our three business areas where of course we respect prices, and we are not out there trying to circumvent the difficulties. The difficulty that we have in demand will not be cured by cutting down prices. What we sell is value for money, and we're going to continue that. Of course, when you hold the stock somewhere in the distribution thing, there might be some kind of a offer or offers, but we don't stand behind that. We have a very solid price structure. So,
Mm
I think you have to take it from there.
That, that's very clear. Thank you for that. And just finally, on the gross margin, I'm sorry for that, but a couple of quarters back, I remember that you sort of had the ambition to get back to 36% gross margin, which you had in 2014, 2016, and now of course, the short-term issues we all know. But is that still, you know, sort of the ambition when things normalize, would you say, or has anything, you know, changed?
Well, very much about the future now. I mean, we are all fighters, aren't we? But who wants to see figures deteriorating? We, of course, have the greatest ambitious idea to counteract difficulties, and that's why we are here. That's why we have these jobs that we have. But then say, Well, now we're gonna be back to that and that figure. You just have to believe in us, who we are, and how do we counteract, and no one is that satisfied at the margin level where we are now. So-
Mm.
I mean, or it's more like a reflection of our, you know, identity.
Mm.
Okay?
No, that's clear. I'm sorry, just one final on my side. I'm sorry for pushing a bit, perhaps. Yep.
Do you know, do you know one thing? You have now three final ones, but this is the final one, please, because otherwise, the other guys would like to come in. Okay, we take that one because you're such a nice guy. Come on.
Thank you so much. Then one final. But you referred to the statistics of climate solution margin historically, and then you have done a lot of M&A, which is, you know, dilutive. Just, you know, should we—is it, you know, 13%-15% normalized level we should think of with or without M&A?
Well, I think that you've seen our history, and our target is to arrive at SEK 80 billion turnover. Of course, we're going to have acquisitions on the path forward as well. So to, you know, to say now individually on that, on the organic side, on the acquired side. Of course, what you've seen in the past is a fairly healthy average of what we've been able to do, and I think that's the way we have to perform also in the future. You have to bring up acquired entities to the level where the original body is, and then you take it from there. So the figures, you know, statistically shown in our annual reports, I mean, they are a good blend of organic and acquired. Okay?
Fair enough. Thanks a lot. Thank you.
Thank you.
The next question comes from the line of Vivek Midha from Citi. Please go ahead.
Mm-hmm. Please.
Thank you very, thank you very much, everyone, and good morning. I'd like to start with a follow-up for Hans. So you mentioned that the net debt to EBITDA has crept up to 2.5x. Below your target, sorry, beyond your target of the equity to assets ratio of 30%, are there any other metrics or levels we should have in mind as to what you think is an adequate balance sheet? Thank you.
Well, I think we've had this. I mean, if you look at our financial targets that we've had for quite some time, I mean, you have the growth target in there, 10 + 10, you have the operating margin, and then we have the equity assets ratio, which should be at least 30, and then we have return on equity. I mean, those have followed us for a long, long time, and when we can meet those targets, we see that we have a healthy growth in the business in general. Then, of course, we can deep dive into individual targets like the net debt to EBITDA or return on capital employed, and so forth.
And, I'm not sure if you're getting at something specifically, but of course, ever since we, in a way, acquired Schulthess and paid the 40% with shares, and then we made rights issues several years later, of course, the balance sheet has been very strong in that sense, but then showed some slightly lower key figures, so to speak. But that's why we are pretty solid and in a good position to continue the M&A growth.
Understood. My question was ultimately getting at, you know, where do you see as an upper level for where that net debt to EBITDA can go, and that you'd be comfortable with? You know, are you still comfortable with doing deals and so on, if there's temporary upward pressure on that net debt to EBITDA because of the weaker profitability that you're seeing? Thanks.
Well, of course, I mean, we need to balance, of course, everything we do. But if you look back at our history, we've had, as an average, we've had a net debt to EBITDA of around 2.3 or even below that, you know, over the last 10 years. But from time to time, when we have made acquisitions, we have been above 3, even up to almost 4, but then being able to amortize our loans and our debt back down again. But having bonds on the market, I mean, we indirectly say that 2.5 is an average level that we should stay within. Yeah.
Understood. Thank you very much. I'll get back in the queue. Thank you.
Oh, we appreciate that. Thank you. Now, we have at least 10 individuals that would like to have some answers, and I would suggest, without being impolite, that we at least give 1 individual 1, 1 question per individual, that it will give it like, at least 10 answers, if that's fair. So, you guys that happen to end up in the lineup, place, 13, you should also be able to put at least 1 question. Sorry for rationing this, but also trying to be fair. Please.
Thank you. The next question comes from the line of Christian Hinderaker from Goldman Sachs. Please go ahead.
Yes, good morning, Gerteric, Hans, thanks for the opportunity. I'm having to be selective here. So I guess, let's focus on the margin, if I may. Rather than talking about guidance, forecasts or anything else, can we just talk about the mechanics and how we should calibrate our expectations for drop-through margins for the climate solutions business? I believe 20%-25% is the range historically. Does that still hold, given the capacity investments you've made, and also the offset, potentially, in terms of cost actions you've recently announced? Thank you.
Well, I think that we are fairly flexible with all costs, you know? If, of course, revenue goes up, then we try to stay a little bit below that to get a better leverage. What we cannot avoid is, of course, the fact that we have invested relatively heavily. So, the depreciation is coming in, whether volume goes up or not. But that's, of course, that's in the cards. But we've done this gradually over the four and a half years, where we paid primarily our investments from own generated cash. But of course, depreciation is higher than it was in the past. That's what we have to calculate with. But of course, the idea is that the growth as such, will be the leverage to even that out.
I don't know whether I answered that question correctly, but that's the adjustment that we make now on the cost side. You can argue we should have done that two months ago or something like that, but you also have to have some time. It was a little bit of a surprise, a very big surprise, you know, that this happened. Otherwise, we are... We always praise ourselves being fairly good at adjusting costs, but of course, the depreciation, we cannot avoid. They are there due to the investments were made. But on the other hand, now we are ready. No one can say that NIBE isn't ready for the growth, for the leap. And we are there with the products, we are there with the facilities.
But as you see now, when volume is stagnating, of course, the depreciation comes up to a level that's not actually what we would like it to see. All right?
Okay, so a higher incremental margin, perhaps?
Well, I pass on that. All right.
The next question comes from the line of Alexander Virgo from Bank of America. Please go ahead.
Yeah, thanks very much. Morning, Erik, morning, Hans. I guess my one question would be, you make a comment in the report that growth rates in the market will not match previous expectation levels in the medium term. So I just wondered what you actually mean by that, given your broader optimism and the comments you just made on the backdrop of demand and the context of your own 10% target, growth, growth target. Maybe you can give us a sense of what you think that growth, market growth outlook actually ends up being.
Well, it's another $10 million-dollar question, but I guess what we saw during last year, for instance, climate solution, I think for the full year we had a growth of some almost 20%. And of course, that is something that we cannot promise by any means unless we have, get some help. But we believe that this industry is gonna continue to prosper, so we stand behind that. But we also have, as Hans mentioned before, that the war, sadly enough, of course, made people panic, and that was not in our favor, really, as we see now. Neither did the pandemic work in our favor in the long run, although people stayed home and installed all sorts of equipment like wood burning Gerteric and even heat pumps.
I think that we've said in the past that if you are able to grow 10%, and Hans indicated that before, then you're on the healthy side. If we exceed that, you know, that's a pretty good year. I think that's. We haven't changed our targets in any way. I don't know whether that gives you some comfort in your question or in the answer we are giving you. I hope so.
Okay, I'll get back in line. Thank you.
The next question comes from the line of Carl Deijenberg from Carnegie. Please go ahead.
... Thank you very much. So, one question from me then. And I just wanted to follow up. I really appreciate the picture you showed in the beginning of the estimated deliveries here in Q1 on the individual countries. And I just wanted to ask you, you know, if you could provide any sort of quantification of what the actual installation development have been, i.e., how big has this inventory drag been for the OEM? So are we talking, you know, 15-20 percentage points, or do you have any good sense of that? Thank you.
And that is practically impossible. The only thing we can say is, of course, that if the inventory is gathered up from, say, during the fourth quarter, more or less, and it's been trying to digest that, that's a substantial build up in inventory. And now we say that when the market is down, like 45%, that gives it still a healthy portion out there, that's, you know, provided by the installers and by the distributors. But to do any guesswork there on the... I think we refRail from that, if you don't mind. But that is, of course, a little bit of a surprise as well, that the inventories out there were that large.
But that's also indicating, it's coming back to that, that our installers and the distributors out there, they are also business people. They saw the shortages and said, "We will not make our customers disappointed." So they started to stock. And, you can't really blame them. We are all in, in that way, you know, we start to stock even privately, like toilet paper, they did in Sweden during the pandemic, which we laugh about now. But I think you see that instinct in businesses, so it's impossible. But I, as I said, I can't answer it more precisely. Then we can have an idea about it, but to say, "Well, I believe it's like 25 or 35," or anything like that, I refRail from that. We do. We?
I don't use the word we too much. Oh, yeah, please.
Okay, thank you.
Yeah.
The next question comes from the line of Douglas Lindahl from DNB Markets. Please go ahead.
Yeah. Hello, gentlemen. Thank you so much for taking my question. I wanted to circle back to the climate solution margin comments there for 2025. It would just be quite interesting to hear what your sort of base case assumptions are for the heat pump industry by 2025. Are you assuming sort of volumes back to 2023 levels at that stage? The competitive environment, you assume any sort of, sort of, you know, macro or heat pump specific commentary would be quite interesting to just hear how you're thinking.
Well, I think that, we, we don't have that clear equation, but we know that there were at least 6 quarters that were sort of, unrealistically good, and there was like, 2022, the 4 quarters and, 2023, the first 2 quarters. And I think that, as sad as it is, having a war on our doorstep here in Europe, and UkRaile is of course part of Europe, but, that, that means that that boosted the demand because the people panicked. And I, I think we have to be realistic and, and say, "Well, Were those 6 quarters a little bit too buoyant, and now they are a little bit too mellow?" You can call it, because they are, we are, again, getting rid of inventories.
But to say this year is a normal year, and now we expect that, that would be a 10 million dollar answer, and I cannot provide you with that. But again, we have to look at history, how we've been able to maneuver, how we've been able to grow. One very important factor substantiating this is, of course, that all politicians, we might criticize them sometimes, they are aware of the fact that particularly Europe has to get back on track, and you certainly don't do that with higher interest rates. They have to come down. That would stimulate new construction, because new construction is relatively low from historical point of view. We believe that will be restored as the years go by. They're gonna come now.
Because more and more people, no, no one, they don't have adequate apartments or houses. And that's very important. And I think also that people are becoming more aware of the fact that we have to do something about the change in climate, if I might be a little bit dwelling on that. But it's not only that we sell a heating device, we sell a climatizing device, a climate control device. It's heating, cooling, and ventilation. And on top of that, you feel like you are contributing to the assistance of making the world better. I think that we shouldn't be too one-eyed.
It might well be that they have a very positive young generation growing up saying, "We like to be part of the new green era without being a fundamentalist." We, we have great hopes for the new kids growing up and forming families. They have a different attitude, and they are willing to look into the future for their children and their upbringing. Now I'm philosophizing, but I think that's something we have to bear in mind when we discuss about the future. I understand it's difficult for you guys out there, and you just have to follow us, and we try to be as transparent as possible, guiding you as we've done here today and as we're gonna continue. But for us to look in the crystal ball, it's very difficult.
We indicate that we try to come back to old historic levels. I think that's a pretty bold and forecasting statement.
Okay. So, so just, summarizing, you don't expect any sort of changes in the industry dynamics from a competitive standpoint or anything like that in your base case for 2025, right?
Well, I think that, any market that's growing is, of course, attracting, new, actors. That's like that in any industry. But, we believe that we've been here a long time, and it's our duty to be part of that and even be a leader of that. Competitors or colleagues, they're always gonna be there. And, we're fine. We cannot hide anything. We cannot say, "This market is ours," of course. You know, if we improve things, someone else is gonna come and say, "Well, we do it a little bit, you know, different, and what do you think about that?" That's how the market is operating, and, we are full of confidence that we will master the demand out there. But of course, the business dynamics or market dynamics is such that it attracts new, companies.
And we've heard that now for the coming... for the last, you know, eight quarters, and what are gonna happen. And, I mean, now everyone realizes that it's not that easy possibly to just come in and say, "Now we're gonna take over this." It's also an indication that the market dynamics is there. Okay, Crystal is indicating that we shouldn't dwell too much on that.
Okay. Yeah, thank you so much.
Thank you.
The next question comes from the line of Axel Stasse from Morgan Stanley. Please go ahead.
Hi. Good morning, everyone. Thanks for taking my question. In the past, the firm has stated that, products sold are, you know, at the high end, of all the heat pumps out there, and this has enabled NIBE to protect its pricing strategy. The problem I have and the question I have is that all the other players are pretty much the same, saying the same thing, and as a result, everyone is expecting pricing to remain quite stable for the next, year or so. So what is the risk here on your 2025 EBITDA guidance for climate solution that we see some pricing cuts?
So, you know, long story short and put my question in another way, what is the risk that we only see volumes recovery with potential pricing cuts next year, rather than volumes and pricing on this specific guidance of 13%-15% EBIT, EBITDA margin, EBIT margin, sorry?
Well, I mean, that's again a very complicated question. But in general terms, we can say, what we say is that, of course, we have products in the upper end of the markets, and that's our legacy. And you cannot depreciate the value of those by saying, "Now we're gonna sell it for a 10% lower price." Then you have to come in with products that have a lesser specification, and we also have that. So that doesn't mean... But it still has to carry the NIBE brand name. I mean, just like the, if I may call it, the automotive industry, of course, they have smaller models, so they have models that's specified, and that's how we, that's how we act in the market. I don't...
If you see that on our homepage, when you go in and look at the different categories of heat pumps. I don't know whether I answered your question fully, but that's, that's how we act.
So-
It's not saying that we have one category.
So you don't see any risk from the excess capacity and the competitive landscape on your guidance for 2025 in climate solution, EBIT margin?
I think that's a question that you should be very cautious answering, that we don't see any risks. I think that when risks occur, you have to counteract. And the needed reaction to us would, of course, be that when the market is as it is, then you don't gain any profitability by decreasing prices. And I think that's the best way I can answer that for anyone that would like to enter the market, to be present in the market, or been in the market for a long time. Everyone wants to make a decent margin, and that's also including us. All right?
Thank you.
You're welcome. Okay. We have... Do we have anyone else?
The next question comes from the line of Bhavin Patel from Bloomberg Intelligence. Please go ahead.
Hi, thank you for squeezing me in. So I was just wondering about the European Union was kind of planning to implement something called as Heat Pump Action Plan, which was kind of aimed to incentivize heat pump installations in Europe. But it was kind of sidelined given the upcoming elections next month. Just wanted to hear your view, if you're expecting to hear any update on this action plan once the elections are over next month.
Yeah, well, what the politicians will do after the election and prior to that, I think the difficulty is in Brussels and in every individual country. But we have a saying here in Sweden that they are very much opposing one another, the political parties, prior to you know, when you go to the polls and when you vote finally. But once the voting is done and the new government comes in, it's not that often that they start to change everything. They rather perhaps groom other issues. And I would assume the promises given so solidly since so many years back, I think it would be difficult for anyone to change that attitude in Brussels now.
Because, we understand it's a big tanker, difficult to change direction of, but if even someone would totally new come in, we believe that promises given, and now this is just an old experience that we have, you know, they do not very commonly, or, yeah, change things that have already been decided. So I think that, that's perhaps my personal view, and that's how we reason among ourselves. Let's see what are gonna happen, but that's a very straightforward answer.
Thank you so much.
We have a last question here, if you allow.
The last question comes from the line of Pritish Sahu from HSBC. Please go ahead.
Hi, Hans. Thank you for taking my question. So, I just to the previous question or the question before about competition. So if you look at in the market, there are competition who are kind of talking about growing 40% this year or early into next year. Given you're talking about recovery and you do expect that to be slow and gradual as we move, how NIBE is positioned to kind of fight this competition out? Because the competition is talking about having a wider distribution reach or making the installation easier. So just wanted your thoughts to understand what NIBE is doing in the marketplace to fend off competition.
It's probably not a kind of a number-wise question, but anything you can give us on a qualitative term, what NIBE is doing differently, and the customers can rely on NIBE products versus any other competitor products.
Well, I don't know whether we should disclose that. No, jokingly saying, of course, we feel that we are very personalized in the market, meaning that we work with different brands and well-known in the markets, and all the relationships have been established over years, and we feel that's very important to reach customers with a well-known local brand. That's what our ambition. Not disqualifying anyone else, but we're doing it differently. But that's how we've been so far, fairly successful in keeping the brands, keeping the management, and maintaining our philosophy from here, but grooming things together, but having a face to the customer that is a combination of what you've had in the past, and hopefully some improvements by injecting some of our philosophy.
So local presence with local brands and, of course, doing and working together as much as possible, when it comes to new R&D and so forth. Not disqualifying any of our colleagues, but that's how we have been able to handle the market so far. And if things have to be changed or modified slightly, then of course we are open to that. But we are not fearful, we are respectful.
Understood.
All right.
Just, can I take a follow-up on that last point you make it about you're very confident where you are? How do you position, see, competitors thinking about distribution being an edge, and would NIBE consider that as a strategy going forward to be more focused on distribution so that you own the value chain and hence can control the market and understand how the inventory cycle is running and all?
Well, I think that you, as I said before, we are not deaf or in any way. We look at, of course, the market, and we do it in a respectful way, and things, if things have to be modified, then we will do that. But we are not so fearful that, oh, no, someone is just doing something else, and they talk about it. First, we are known for viewing, analyzing, and if things have to be changed, then we do that. But we do not look off and say, "Well, now we have to do that, and now we have to do that," because then you lose absolutely speed. You have to have confidence in what you do yourself, but at the same time, you have to be open enough. If things could be improved in some fashion, then we do that. All right?
Fair enough. Thank you very much.
Thank you. Thank you. Thank you for all the questions. I hope we haven't left anyone without an answer, not as fully, you know, satisfied, but as previously, we took another 10 minutes. Thank you once again, and perhaps some of you are gonna attend the annual shareholders meeting, and we look forward to that here in Markaryd. As I said initially, that's a festival in our little community here. So thank you for calling in. Thank you.
Thank you. Ladies and gentlemen, thank you for your attendance. This conference has been concluded. You may now disconnect.