Ladies and gentlemen, welcome to the NIBE second quarter report. Throughout the call, all participants will be on listen only mode, and afterwards, there will be a question and answer session. Please note, this call is being recorded. I would now like to hand the conference over to our speakers today, Erik Lindquist, CEO, Hans Backman, CFO. Thank you. Please go ahead.
Thank you. Good morning, everyone out there. It's Erik speaking here, and Hans is here as well. Good morning to everyone. And we're gonna have the usual order. I'll start with some comments regarding the report as such, and then Hans fills in, and then we open up for Q&As. And we've noticed over the last conferences that there are so many questions, which we appreciate, of course, but there's some irritations sometimes that not everyone get a chance to put his or her questions. So we try to bring in a new order that two questions per delegate, so to say, if that's all right. Having said that, once again, once again, welcome. And as you see, the headline, first half characterized by large adjustments, and of course, that's been a tough period for us.
But, we also see some positive signs, but the market is still very tough. But, we are very eager to communicate in a very transparent and honest way, the way we look at it and where we are right now and where we're heading. And of course, that's no secret that, we were taken, or the industry was taken by surprise last fall when the demand slipped down so dramatically. And the whole heat pump industry, primarily, has been suffering ever since over the overcapacity in the distribution chains that were built up. And it's been a destocking process for many months now. Sort of similar in the stove business, but to a lesser degree. And, what we have done?
Well, I mean, the conditions, you know, out there, as you say, the interest rates are still high, and the construction industry, of course, still limping along. And when it comes to political indecisiveness, we would have liked to have clear signal in the market, both from individual countries, but also from the EU., are we really heading towards this fossil-free community as we have, you know, been communicated to believe in, as much we have been reacting to. And of course, the inventories, as I said again, they are, you know, on their way to be more acceptable, but it's not totally over, and that's very important also to underline, particularly we could address German, the German market, that is still hindered by too high inventory levels.
But on the positive side, we must say that the internal program is coming along. We are well into that, and of course, it's not totally completed yet, but we are very firm when it comes to its completion. It's been a tough period for us to let many good members of our teams in different countries let go. But at the same time, we have been very determined to charge through. But we have, we hope, should I say, talk to our individuals out there in a civilized way, making the door or keeping the door open for better times, so they're always welcome to come back when volume is coming around in a more positive way.
Of course, we also see that the interest rates, there are indications that that will eventually come down, which is also a very important factor when we talk about the future market. So as we predicted, some even nine months ago, we thought that the first half year would be tough, and that is very much true. We reacted, particularly in February, March, when we came out to the market and said it's absolutely crucial to do something about the situation. And we also said that the second half would most probable show some sort of gradual improvement, and we are still standing behind that commitment. And of course, the whole idea is to bring back our group to, if I may call it, the more normal operating margin span, 2025.
So, that's, I think, in short, the message that we have to the market. And the numbers, of course, you have already looked at, so we just go through those very quickly. And of course, when you compare it to the previous year, it's a large contraction, but now we have to look at the relative figures as we go along. And of course, the margin is also down, but we look at it from the relative perspective. Now it is to improve that as we come along, and we are gonna combating whatever issues we have out there because we have not cut the costs to the point where we are severely injured. Of course, we've cut costs, but we are truly aware of all the challenges out there when the market really turns up again.
Then we have to be ready with R&D, with sales and all that. So it's been a balanced, should I say, action that we've been in the middle of, or have passed the middle of. So it's a delicate balance, of course, when you're out there doing this kind of operations. And we don't necessarily comment so much on each quarter, because trends and tendencies, they are, you know, for a longer period. But just to make a few comments about quarter two, and on the next slide, of course, there is a slight improvement when it comes to invoice sales, and also a slight improvement in operating margin. I guess that's what we can say.
And if we just look at the typical bars that we are looking at, that's a very illustrative picture, that, of course, the curve that we see in the dark above there is not very pleasing. It's something that we don't like to see, but at the same time, we see that the graph is also indicating that it, it's a little bit of a positive sign that something is going up, although that also is built on, naturally, acquisitions. So we don't like to paint two rows of a picture, but the picture we like to paint and to give you out there is that we are in charge of the situation, of the internal factors that we can control. But of course, it's also important that the external factors eventually be on the right side.
So results, of course, when you come to that, that's always a reflection, as I said initially, of the volume or the revenue. So, that's, that graph is very illustrative as well, very dependent on the volume. So that's something, of course, that we have now to really improve, and it won't come overnight, but we hope that our predictions are on the right side. So looking into more specifically Climate Solutions, we can say that being the large one, that's very much challenging out there. Nothing has really been extraordinarily positive, but at the same time, as I said, for the overall picture, it isn't totally dark. I mean, the European heat pump production still at very low levels, naturally, but inventories are gradually changing in the different markets.
There, again, I'd like to say that German market, to our understanding, is an exception, where we would need another, or the industry or the wholesalers and installers, we need another 2, 1-2 quarters, really, to bring it down to an acceptable or more acceptable level, as we can say. And, as far as the action program, most of it is, put through, and, we are-- We've been very, very determined to make that in a, in a professional way, but still in a human way. And I've said that earlier this morning when, we were interviewed in some, media, that it's not without wet eyes, you have to part from good employees, but at the same time, you have to stand tall when it blows. And, that's important from, from, our point of view.
Then, of course, the whole idea is to bring back NIBE here on every business area to where we were margin-wise, you know, historically. So that's a few words about climate solutions. Then we just look at the first two quarters individually. Yeah, I mean, we've been used to much higher operating margins. I think all the contraction that we've seen in revenue, it's almost impossible, at least with our measures and our capabilities, to reduce the cost at the same rate as the revenue is reduced. So that's why the margin is down, but our aim is to very determinedly improve that as time goes by.
If we then look at Element, they, of course, have a great variation between their different segments, because they suffer severely from the heat pump industry going down overall in Europe, and that is very tough, naturally, and also the white goods. And that's a reflection of high interest rates and low construction and combining with that. But at the same time, there are some positive indications from the automotive industry, particularly when it comes to the electrification of vehicles and the heavy or commercial vehicles, particularly, and also the rail, and the semiconductor industry seems to now come back gradually. And those are positive signs, and they won't change overnight dramatically either. But we like to give you a little bit of a whiff of how we perceive the market.
Here, again, the action program has been implemented, and we are well through. And now, of course, we hope to see all the results of that. And that's why we say, well, the second half of a combination and the improvement in due to the action program, lower inventories, also going to affect this business area, particularly when it comes to heat pumps then. And yeah, the semiconductor industry, we believe, will come back. And all those factors together makes us come out and say, "Well, the second half gonna be, you know, we expect that to be, to improve." And then, of course, for the full year next year, that's what we are really aiming for. But nothing starts exactly January first.
There has to be a gradual improvement, and then, you know, 2025, that's when we really like to be back, with the, with the margin levels that we, or span that we had, in the historical years. Just, a few, pictures regarding the, the sales itself. I think that, perhaps I'll skip that, but that is also, of course, a reflection of the margin being, much lower now, when, again, when we are at a, lower level, and also different margins between the different segments. If we just have a quick look at the stove business, that is, also has been suffering or is suffering from, variations in, in the demand, naturally. They were overstocking.
We don't have so much of a distributor, or we call it a wholesale stocking there, but it was more like on the individual retailer's level. We believe that's also coming to an end, and what we see now when the economy is, should I say, the demand is returning more, I shouldn't say normal, but to another level. It was hysterical, you can almost say, for a while there, when everyone was trying to protect themselves for high gas prices and so forth. Then, of course, now we are more back to the seasonal pattern that we've been used to in the past, where the second quarter is the weakest one, whereas the fall and the latter part of the second year is, or the second half of the year, they are always the strongest.
So, we also there see that we've seen improvement during the second half. But naturally, here again, we aim for 2025. That gonna bring us back to, you know, our historical, should I say, span of profitability or operational margin. Let me typically have a few pie charts illustrating where we are standing as far as distribution of sales and so forth. And perhaps I forgot that. Yeah, there we are. And that is pretty much the same after only the climate solution, about 63%, and then, of course, the Element, just about a quarter, and then stoves, a bit less than 10%. And I think that typically, stoves will grow or will have a slightly larger portion of the pie.
We're returning to the normal pattern, the remaining part of the year. As far as operating profit, that's pretty much the same as before, that the Climate Solutions, although relatively high, lower, of course, but NIBE Climate Solutions is still by far having the large part of the operating profit, and Element and so share the rest, pretty much as in the past. Geographical split before Hans comes in. Yeah, it's pretty much as it's been for a while. It hasn't changed that much. Europe and the Nordics, of course, being together, they're the biggest chunk. North America, a little bit better than 30%, and also outside Europe and North America. That is primarily on the Element side, where we have some 6%. I think, Hans, I stop there, and hand it over to you.
Thank you very much, Erik. So yeah, let me take you through the business areas a little bit more in detail, and then, of course, balance sheet, cash flow, all of that, which you're used to, but, and before we then open up for, for the Q&A. But first, I would just like to clarify one thing upfront, and that is, the group, or the elimination of group transactions, which you can read on, on page five in the report. I believe that would otherwise be a question afterwards. There you see a positive figure of some SEK 24 million, where it usually is a negative one of around SEK 35 million. And the simple reason for that is related to settlement of acquisitions, you can say.
As I'm sure you all know, we need to recognize a liability for contingent considerations when we acquire a company and have the second and third tranche to pay for and bring on board later. And the funny thing here is that if a company performs better than you anticipate, you will have a negative effect because you haven't set enough aside. And if a company does not perform quite as you anticipated, you have a small upside, and that's what we experienced this time. We settled a couple of acquisitions, and we also had a case for two, where management of the local companies wanted to stay on board as shareholders for some further years, where we had to, you know, adjust the accounting according to that. So that's the simple reason for that.
Heading on to Climate Solutions, as Erik said, and as he stated in the report, I mean, the market is continuously tough, for sure. Still high inventories, although they have come down, high interest rates, a low new construction, and this political indecisiveness. This has led to an overall low production, not only by us or with us, but with every player out there, I would say. And we have, as you see, come in at some SEK 12.3 billion of sales, as opposed to almost SEK 15.9 billion last year. So it's a drop of sales of some 29%. And as Erik pointed out, when sales fall that quickly, although we do take measures, we cannot compensate for that immediately.
So gross margin is affected, coming down from 36% last year, which on the other hand, was very, very good because of other factors where everything was, you know, pointing in the other direction, you can say. And now down to the 30.9%, landing then an operating profit of some SEK 840, basically, and an operating margin of 6.8%. If we look at the second quarter as such, we lost some close to 27% of sales, which of course also is a dramatic drop, but slightly less than the drop in Q1, where it was basically 32%.
So as a consequence, and due to the action program we have in place and the reactiveness that we have in general, I mean, we've been able to protect the gross margin slightly better with that. And also the SG&A expenses, which are not explicitly stated on this page, but which are in the operating profit obviously. We came in at an operating margin of 7.8, and as Erik said, but without giving any forecast, of course, with the effects now of the savings program kicking in during the second half, and hopefully a market that will step by step pick up, we should see improvements moving on from here.
In terms of geographical distribution of the sales, there are no major changes, but as a matter of fact, the Nordics last year represented some 25% and is now some 20%, and this is where we've had, you know, the major drop, you can say, together with Europe, although the acquisition of Climate for Life compensates slightly for that. We were at 50 last year, and now came in at 52%, you could say. And North America has gained and is at 25% as opposed to 22% of last year. So it's very much a reflection of the heat pump development. Moving on to Element, the significant variations between the different segments are very clear here, especially with the weak HVAC performance and semiconductor up-to-date, also with some not so rosy development within the white goods industry.
I mean, we've definitely had a major impact on the business area, although the other segments typically are doing fairly well and are growing. We talked about, or Erik mentioned automotive, for example, rail, wind. So there are good opportunities as well. But due to the weight that the HVAC industry has and also on the profit side, we are naturally affected. Here, the drop in sales was roughly 9%. All in all, I mean, yeah, both for the group and Climate Solutions, Element, and Stoves, is that currency has not had much of an impact at all, so far anyway. Yeah, and here we came in at an operating margin of around 5%. Gross margin is not quite where we want it to be, obviously, but expect also improvements here moving on.
In the individual quarter as such, sales have continued to drop, but much less than in Q1. Here we came in at 2.8, as opposed to 2.95 last year, but the drop in Q2 was only some 6%, as opposed to 13 in Q1. So improvements are being seen, and that has also led to a better operating or gross margin there of just about 20%, as opposed to below 19 in Q1. And the operating margin also here at 5%. This has also resulted in some movements in sales between geographical areas. As we've said many times, and as you know, this is our most global business area, where we are present in most parts of the world.
But there have been some shifts following very much the development in climate solutions, due to the drop in HVAC, you can say. So the Nordics is 13%, 18% last year, and Europe, 32%, was 37%, and then North America and the other region, being Asia, both have gained, as a consequence. Stoves, after two consecutive, very strong, periods of growth, first the homeowner trends during the pandemic, where everyone renovated their home with a wood-burning stove, and then following Putin's invasion of Ukraine, where everyone, or many at least, wanted a second heating source, we are definitely now into another phase, you can say. After that, consumption, and now with high interest rates, low new build rates, and a strong hesitation amongst customers, sales have obviously, dropped.
We're, to some extent, back to the traditional pattern also, where the first half of the year has less sales than the second half. So here, sales came in at just below SEK 1.9 billion for the first half year, down with some 22%. And obviously here as well, the gross margin is hit because impossible basically to react that quickly, and the operating margin came in at very low 3.3%. But we've been there before in a way, because traditionally, we did not earn that much money in Q1 and Q2. It all happened in the second half, and we're, as I said, back to that pattern. It is, however, a very long time since we did make a loss in an individual quarter within Stoves. And that's what happened in the second quarter.
Sales actually dropped slightly more, or they did drop more in Q2 than in Q1. Coming in at some SEK 800 million , down from almost SEK 1.1 billion last year. And a gross margin, which is far below what we're used to. So we came in at a minus 3% there. So obviously also here, the action program is fully underway. To some extent, it's been more or less already been carried through in the North American operations. As you know, we have quite some businesses up in the Vancouver area in Canada. And you can see that their portion of the geographical distribution of sales have gained. It's 32%, whereas it used to be 27% last year. And the Nordics used to be 23%, which is now 19%.
So this is a direct consequence of what I just mentioned. Europe and the, well, Continental Europe is basically the same. That heads us into the second part here, and I'll try to be quick to open up for your questions. No major changes on the balance sheet. I mean, we have total assets of close to SEK 70 billion. I guess the, well, what I would like to point out here, although the movements are not huge, but if you look at the non-financial current assets, they are at SEK 19.5 billion , coming down from SEK 19.9 billion at the beginning of this year, which means that during this phase, where we usually typically build inventory, we've actually been able to reduce it somewhat.
And it's very important because our working capital is still high, and in my role as finance, well, responsible for the finances, you know, it's still too high, quite frankly. But we're definitely addressing that and moving in the right direction. On the liability side, it's stable. The equity is basically the same, as in the beginning of the year, slightly lower, which is connected to the long-term liabilities, which have increased some, both to well, mainly for taking care of acquisitions and these tranches that we pay to bring companies on board in our stepwise approach. But the working capital and, yeah, the performance so forth, this year, of course, colors off in the cash flow analysis.
We generated SEK 700 million from the operating activities, which is, of course, a huge drop from last year, which was almost SEK 3.1 billion, which, on the other hand, was a very boosted year. So I mean, we're not pleased with that, but it is, it is a positive number, of course. And the, the change in working capital, although still negative, is much, much less negative than last year, which is a sign of us improving within, especially the, the inventories. You might react on the investment side, they are basically the same as last year. I still dare to say that the investments are, in a way, coming to an end, at least these large programs that we announced back, you know, some four or five years ago.
What you see here is the last bits and pieces, basically, of those investments, where we said that what we have started, we would complete, except maybe for machinery that is not needed at this point in time. Some quick words on key figures. Unappropriated liquid assets, that's basically the cash. It's a complicated word for that. It's at SEK 4.6 billion, so we're still, you know, relatively cash rich. So that's a good thing. The net debt to EBITDA is about 3.1.
It's obviously much, much higher where we are used to being, but, you know, those of you who have followed us for a long time know that the average is just about, about 2, you know, ever since we went public, despite all the acquisitions, and the growth and the expansions that we've made over the years. I think it's still manageable, and the equity assets ratio is, is at close to 43. It came down with bringing on board Climate for Life, but, it's, it's still at a healthy level. Yeah, the working capital I mentioned, it's at 25%. That's, not where we want to be. We were as low as 12% when we couldn't deliver, and we emptied out everything we had. That's not either a level to be at, but we should definitely be, at 20 or, or below.
Last picture, the return on capital employed, return on equity, are obviously affected by the phase that we are in right now. We are determined to bring those back. And, although, I mean, we can on the one hand lean on historical numbers, saying that that is in our DNA setup, but at the same time, you're never better than your last game. So this is definitely something we are addressing as well and looking very much into, but I think we will manage that as well. By that, I think we're ready for Q&A, unless you would like to add something, Erik?
Yes, nothing can be added to that precise description. So please go ahead.
Thank you. If you do wish to ask an audio question, please press star one on your telephone keypad, and if you wish to withdraw your question, you may do so by pressing star two to cancel. Once again, please press star one to register for question. There will be a brief pause while this question is being re-registered. Our first question comes from the line of Carl Ragnerstam from Nordea. Your line is open. Please go ahead.
Hi, it's Carl here from Nordea. The two questions from my side. Firstly, I'm a bit curious to know more about the pricing landscape for both your thermals as well as air water pumps. I mean, we heard some rumors or indications recently about the tightening price and sentiment in the market. Have you experienced similar trends in any of your bigger geographies, and have you made any adjustments to your prices, either on a campaign or fixed basis? Thank you.
Well, if I understood your question correctly, I think that the inventory adjustments or the distribution chains, when they have distributed their overstock, and I'm sure that we've seen price decreases there to more or less get rid of it, if I may, might use a brutal word. I don't think to any degree, well, any large degree anyway, the manufacturers have been behind that. That's at least our understanding. I hope I answered. I understood your question correctly. Otherwise, you have to repeat it.
No, it's very clear. So you on a manufacturing level are not lowering prices, that is?
No. I mean, we are, you know, always observant, of course, but we are premium product manufacturer, and that means that, of course, we always ahead when it comes or in the forefront when it comes to our performance and our products, and that's not something you dramatically, where now we have to sell those at a lesser price. I think that would be very strange. But of course, we're observant on, on the price movement in the market, and then I think what you see is mostly the destocking phenomena.
Okay, very clear. And my second question is a bit on if you could help us understand the volume development a little bit month by month during the quarter, and possibly entering July and August as well. On the manufacturing levels, we could get the sense on the underlying market improvements and/or whether, I mean, the uptick in demand has been driven solely by inventory reductions easing.
I think that, as we said, during the initial part of the year, the market more or less dropped 50% during the initial part of the year, and of course, that is not representing the actual demand at an end consumer level. And that's what we tried to convey, and I think that the second part or the second quarter, it's pretty much been the same. But of course, this destocking started already end of 2023. So we've been three months or three quarters into that now. In our judgment, already last year, at the end there, suggested that would be a destocking phenomena, not representing in the manufactured level, the real demand. And what we're saying now, coming into the second half of the year, that should help the overall demand.
Then, of course, if you also get signals that the interest rate will go down, that will also, of course, store a more positive attitude among consumers. Then thirdly, our own program, first, we're gonna sell as much as we possibly can. We are prepared for that now. But of course, the action program is mainly meant to improve internal efficiency. So those are the three factors we are working with. All right?
Okay, very clear. Thank you so much.
You're welcome.
Our next question, Douglas Lindahl from DNB Markets, please go ahead.
Yes. Hello, gentlemen. Thanks for taking my questions. I have two as well. I'll take them one by one. Starting with your commentary there on the inventory situation, which I think stands out as quite positive relative to what I hear from your peers. I'm just curious to hear what gives you this confidence, and if you could just maybe give some countries where you see this improvement as an example. Over to you.
Well, I think we named one particular country that is very on the negative side, that's Germany, of course, and that has a certain explanation, we believe. Because last year, already before summer, came out very positive signals from the German government, that they were going to really boost demand on heat pumps and because gas was going to be prohibited relatively soon. Then something happened during the summer vacation, and there's been a little bit of a unclear situation ever since. And I think there was a very obvious signal to the wholesalers and the installers, "Now we better get ready for a phenomenal increase." But that didn't come.
So I think, or we believe, that the German stockists, the German installers, they perhaps took too much on board, believing in what the politicians said at the time. Now I'm just naming one, one country. I, we have not seen in our major markets the same dramatic inventory buildup, and now it's diminished according to our observations and our contacts with our wholesalers and, and installers. That's the answer I can give you on that question.
Yeah, sorry to push you a bit, but.
No, no, no.
Erik mentioned that, just if you could give an example of a country, maybe Sweden then, because it's an important market for you. What are you seeing there on distributor inventory? Is that incrementally better quarter reported?
They have not since many months back. There, there's no way.
Sorry.
There's no inventory of any abnormal levels at all in our home market here.
Okay. Maybe I'll, I'll move on then to the cost reduction program. Thankful for more clarity on that. I just. I think I picked up your take during the beginning of this call, that you said that your employees are welcome back once volumes come back. But previously, I think we talked about these cost reductions being of structural nature. But within climate solutions, are you-- Can you just maybe give some examples of what you're doing there in terms of structural costs? So not, not reducing headcount, but maybe investing more into automation or. Yeah, just be interesting to hear what, what you're doing there.
Well, I think all investments that we carry out is of course in a direction of the more modern, the more rational, and also be more environmentally friendly. So there are a number of factors when you invest. And you have to robotize, automate as much as you possibly can, and that's been the whole driving idea with this program, both volume wise, but also producing in a more rational way. And then, of course, when you have companies in a group like we have, you brought together many former sort of colleagues or competitors, and it's not so immediately clear that you're gonna do everything on a joint basis. I mean, purchasing or procurement, that's very obvious.
Everyone wants to participate there, and everyone wants to participate when it comes to, "Okay, well, I like to borrow that production recipe," or, "I like to do the same thing." But of course, when you come then to say, "Well, perhaps we should more, be more rational by exchanging products and so forth," then of course, we are into another subject. And also when you say, "Well, let's jointly develop products now." And those are the things that we are working on now to do that in a constructive way, that everyone should have a certain part of the pie, you know, on a positive side.
So those are a few, two examples on that working together. And when you say that we're gonna invite all the employees back again, Of course, that should not be interpreted as the next, just as soon as you turn around, you're gonna start to employ people. But what I'm saying, and I'd like to clarify very much what I said then, when you have to part from an employee, no matter where it is or who it is, you do that in a civilized manner. And that's always a very, very tough thing for a manager or management to draw the line, who is going to leave.
But you have to explain that clearly in a civilized way. So one day when it turns around, you should not have left with a very negative or sour taste in your mouth.
Okay. No, that's fair. I understand that, and it's a delicate issue. Thanks for that answer.
Thank you.
Our next question, Viktor Trollsten from Danske Bank. Please go ahead.
Thank you, operator, and hello yet again, Erik and Hans. So perhaps I'll put two questions, please. Firstly, on, you know, the underlying heat pump demand. Now, when inventory levels are moving towards, you know, more acceptable inventory levels, can you just perhaps give any sense or indication for where, you know, end demand is? I mean, if climate solutions have negative organic growth of, let's say, 30% in Q2, is, you know, end demand, is it down 20, is it down 10? Just any indication would be very helpful, please.
Well, I mean, we are fairly sincerely, we don't have that precise figure. But of course, if, you know . In an overstocking situation, of course, the demand is higher than the, what we've been experiencing in the production line, because otherwise the inventory reductions or the destocking couldn't have taken place. So it's a delicate math to say, "Well, has the market really deteriorated with 50% like we suggested in the first quarter?" No, of course not. But has it deteriorated with 25% or 30%?
I wouldn't like, I couldn't really give you a precise figure there, but I would, what I could say is, of course, and that's the whole idea here, that the destocking situation is not illustrating the actual figure in the consumer level, because the installation numbers are higher than the production levels that we talk about. And I, I think that I can't really answer that question.
No, no, I see, I see. I understand it's difficult, but just, you know, I guess it's quite interesting into, you know, Q3, how to sort of calculate on it, given that let's say it's a 20% impact, 10% impact now in Q2, and that is, you know, gone in Q3. That would, of course, imply, you know, quite, you know, sequential improvements in Q3 versus Q2. That, that's what I'm asking, but, but I understand it's very difficult.
I think that we like to be as transparent as possible. But if we can't really answer everything, then we don't like to do any guesswork. I'm sure we appreciate all of you out there. We like to be as transparent as possible, but also at the same time, as correct as possible. Yeah.
Question on my side. On cost savings, you know, noticed redundancy of 314 employees on eighteenth of March, if I'm not mistaken. And I guess that, you know, that saving should reach full run rate in Q3. But am I right to say that there were very limited impact now in Q2 from that program? It seems OpEx space is up in Climate Solutions, the way I look at it.
Well, yeah, as we said, you know, if you're gonna do these cuts in a, if I, may use the word again, civilized way, it's not something you just don't send out a message, and now you're redundant. You discuss that intelligently, so that's why we haven't seen that much of an improvement. And therefore, of course, will take some months to come here now. So, it's very important that we give you a balanced picture. It's still, the market is still tough, the program is running, but, it'll gradually, we'll gradually see the improvements over the year or the rest of the year. And, of course, the clear aim that everything should be in place at the end of the year, because next year we have promised the market to have the full SEK 750 million as an improvement, and I think that's what we're working towards.
Okay. That's, that's clear. Thank you very much.
You're welcome.
Our next question, Carl Deijenberg from Carnegie. Please go ahead.
Thank you very much. Hello, Erik and Hans. So two questions from my side as well. Maybe if I can ask first here on the sort of ambition of 2025 to return to this historical margin range. I just wanted to ask you, in that sort of ambition, does that assumes, you know, a significantly better market, or does it just, you know, incorporate normalized inventories in the channels and your cost savings program? Would that sort of be sufficient for you to reach those historical margins? That's my first question.
Yeah. Again, a very difficult question. Naturally, starting the year, this year, is very, very low production output. Of course, the assumption is that the market should not, from that level of where we are now, contract any further, but we should benefit on the destocking, and hopefully, it unlocks the better market than we've seen so far. But not assuming, you know, like, unrealistic figures without giving those precisely. But again, saying that if interest rates are coming down and the construction starts to move again during 2025, which I think those are the ambitions, and we can only read the newspapers. We don't have an immediate contact with all the national banks or whatever you call them.
But obviously, the economy, or the economists in Europe, particularly, everyone wants to revive them, and we believe that even our sectors will be positively affected eventually, but not perhaps by dramatic figures, but it won't be a further reduction. I guess that's as far as I can go with that.
Yeah. Yeah. Yeah, yeah. Fair enough. And then I had a second question also on the expansion program, which you've been undergoing for quite some time now, SEK 10 billion in total. I think you're at roughly SEK 8.5 billion now. So I just wanted to ask sort of, what's left here? Is that gonna be. If we're talking about the timing and the phasing, is that gonna be, you know, do you have good adjustments there, depending on how the market develops? Or should we think, you know, a fairly linear pattern here, towards mid-2025 or end 2025 on the CapEx side, sort of from the finalization side?
Well, I think that when you build a new factory, as we all know, those investments are fairly major, of course. But I think we're gonna return to a more, should I say, not streamlined, but a I call it more of a investment level to depreciation, because that has been increased now. And our aim was always to keep up with the depreciation rate, and now we've increased that. And we believe that we've come to a point now where we should not necessarily increase that much in the current percentage. But of course, when volume or revenue has gone down, the depreciation level has, of course, naturally gone up.
I think we've structured our production in such a way that whatever is installed this year, now, we have the buildings, we have the machinery, and the buildings are of such a capacity that you can further install lines but you also have a flexibility. So before you install a line, you can add another shift in the existing premises, allowing you to further investments if you need that capacity long term. That's our way of reasoning. I hope you're following that reasoning.
Yeah. Yeah, yeah. Yeah, yeah. Yeah, okay, very well. Thank you very much.
Thank you.
Our next question, Christian Hinderaker from Goldman Sachs. Please go ahead.
Yes, good morning, Erik, Hans, and this is Hinderaker . I want to start on the incremental margins, given the acquisitions and of course, that SEK 8.5 billion of capacity investments that we've just discussed since 2020. Does the prior guidance that you've given on incremental margins still hold, in other words, 20%-25% for climate solutions, and somewhat below that for both element and stoves?
Well, I think that you have to repeat that question if you don't mind. The margin, you mean operational margin, what was the question precisely?
Yeah, sure. So, so the incremental profitability, so for every unit of volume, the expansion that you might see in margins, historically, I believe you've talked to a 20%-25% incremental or drop-through margin. And I just wondered if that's changed given the capacity investments and acquisitions you've made over recent years.
Well, I think that the instance, naturally, just a result of heavy investment would be that the depreciation rate naturally goes up, both as a percentage and in, in real ter- numbers. And we then can keep the operational margin. I mean, I think that we have to look at what we've been able to do historically, assuming that 2022 and 2023 must we must admit they were a little bit of extraordinary times. But, we've been through better times and worse times in the past, and, we wouldn't say that we would come back to, some sort of a span in, operational margin if we didn't believe in that.
I think that's as far as I can really answer you that, because it is, but it's dependent on volume eventually, naturally, because you see the depreciation rate going up, and the actual depreciation going up. So I think that when we were hit by this wonderful, if I may call it, increase in volume, we were a little bit taken by surprise. But then we said, "Okay, we will not be taken by surprise when this next wave comes around, but we won't invest crazily either." And that's why we put it a little bit on a hold on further equipment right now. But what's done cannot be undone. And we feel comfortable what we have done in investment-wise now has been, for the long term, a very, very important factor.
Because to run the previous premises at a high rate, that also comes at a cost. Now, of course, the likelihood of increased productivity is much better than we were with the previous premises. All right?
Thank you. My second one then, maybe, just wanna talk a little bit more about the comments on the inventory adjustments in the channel. I guess broadly speaking, firstly, can you give a sense for how many distribution partners you have in Europe? And then secondly, what are the quantitative data points that you're using to inform that view on channel inventories? I appreciate, and I know you've said on the call that the visibility is, is difficult, but you did mention that installation numbers were higher than production. Just curious as to, to what quantitative signals you've seen. Thank you.
Well, I think I tried to answer that before, and I took Sweden as an example, where we naturally have very good contact with installers and with wholesalers, and they are certainly not overstocked. But they were, even here, being in a home market, overstocked, but they've taken that down. And there are other markets out there that have done the same, that we have been able to acquire information from. Now, coming back to. I perhaps I shouldn't, I should no reason to badmouth Germany here. I explained the reason why they were overstocked. And I think that's, it's just like any. We, we react as human beings. When demand is higher than the supply, we start to collect and or gather inventories, and I think that was done in the industry.
But we wouldn't tell you out there, investors, that this is coming more to acceptable levels. That's not the vibe. Yes, that's something we have gained, or from all, or from many of our, wholesalers and installers, but also talking to some markets that, we are not totally, finished yet, and we also send a signal about that. And I think that, we also had a disadvantage. You can say, "Why didn't you have better contacts in the past?" And, there was a little bit of a, I think, the overall heat pump industry, if we talk about that, we had a, call it civilized f- friction there, because we could not supply, you know, 22, and until, beginning of, yeah, the second quarter last year, then we, we, started to deliver most in the industry.
But here in 2022, there was chaos, you can say. So having asked at that time, "Do you have too much inventory?" It would have been a sort of a silly question in many wholesalers and stores here, that you can't deliver what we need. Why do you put that question? But of course, at the same time, again, coming back to how we react, they had built up inventories, because they also believed that the market was now going, after all these years of talk, and the Green Deal, and everything we talk about, what the politicians have been talking about, now we're gonna go... Now we're gonna rebuild Europe, at least. And that was not fulfilled. So now we are back to, I shouldn't say normal, but a different situation. And I think we had to apologize to our partners out there.
We did not perform, you know, during later part of 2021 and 2022. Eventually came up their production, and when we and our colleagues, if I may call them, started really to pump our products at the rate that they would have liked much earlier, then demand out there slackened. So it's a difficult, we call it a, a bullwhip effect, and that's exactly what it is. Okay?
Understood, Erik. Thank you.
Our next question, Karl Bokvist from ABG Sundal Collier, please go ahead.
Thank you, good morning. Most questions have already been asked. My first one is a bit of a follow-up on, on one regarding SG&A. It looks like it is up year-over-year here in Q2, so I'm just curious if there is anything temporary explaining this? And, if you could please elaborate, you know, when we will start to see material benefits from these savings actions.
Yeah. And, that's of course, once the programs are fully in place, you will, you will see those. But, we also like to address, you know, that, if you were to cut cost to a point where you would endanger your future position, we, we will not do that. So, that's a very important factor to remember. Then also, when you look at, the cost side, SG&A, as you call it, you also have to remember a substantial acquisition coming on board with the, acquisition in, in Holland, or Netherlands, Climate for Life. And I think that that comes out as a big chunk, I would say. So I think that explains part of that. Of course, we will not reduce that amount, but from a program point of view or the action program, there you'll see reductions, of course, in that part. Okay?
Understood. Yeah, understood. And then, on just a bit of a more long-term question on inventories, do you think that either you or if you think, can think also about the, the industry as a whole, how, how one should think about the inventory levels going forward? Hans, I believe you mentioned an ambition to go down towards 20, but that is still above the levels we used to see, like pre-2020. But is there a strategic shift now that one still wants to keep, inventories, sales or working capital to sales a bit higher than what we've seen historically?
Oh, no.
No, I think that, coming back to that, you know, the word or saying of the bullwhip effect, of course, we like to return to having a working capital of more ordinary levels, as Hans suggested here, below 20, and also having a reasonable inventory return. I think that everyone is striving for that. Also, our partners out there, and even everyone's partner, our colleagues or competitors, they're doing the same. So no one wants to have too much money tied up into inventories. And I think that now the distribution chains, they're well on the way to cater for that, but then, of course, it's up to us as industry to keep up with the demand that they would they were gonna see at the end user level. So it has to be a better balance.
I think that the only way to facilitate that would be to communicate better with one another and being very transparent. When we have problems, we should inform our partners that now there might be shortages of products, and we're gonna cure that within so many months. But what we couldn't really do as an industry coming back now, but because we were, I may use the word, fooled by so many suppliers that gave us promises, and they could not perform. So I think it's been our task now in the production line to gather and to secure our supply chain partners. They have to have a readiness in the future. They can't fool us, or I'm gonna say, as the industry. That's very important. So it'll be a, a work in progress for some time to come, I'll say. And then?
Um, um.
Was that all right, Carl?
No, no, sorry, I interrupted you.
No, no.
Okay, if that's the answer, then thank you.
Yeah. Thank you, Carl. I must say now that we've spent, like, 62 minutes, and I think that we have other issues that we have to deal with here or questions. So if you are not blunt or too impolite, we like to just say thank you now for calling in. And if there are any specific questions you might have to call Fredrik or Hans here after this, because we have to run to the next assignment here, if that's all right. Thank you again for calling in.
Thank you, everyone. Thank you. Have a nice day.
This now concludes our presentation. Thank you all for attending. You may now disconnect.