Welcome to the NIBE Q2 2022 results presentation. If you have a question during the Q&A, press zero one on your telephone keypad. Please register via the link provided in the invitation to be able to see the presentation. Now, please say your full name and company after the tone and then press the hash key.
Jenny Moos from S&P Global Market Intelligence.
Ladies and gentlemen, welcome to the NIBE Q2 2022 results presentation. Throughout the call, all participants will be in listen-only mode, and afterwards there will be a Q&A session. Today, I'm pleased to present Gerteric Lindquist , CEO, and Hans Backman , CFO. Please begin your meeting.
Good morning, everyone. Gerteric Lindquist speaking here.
Good morning. It's Hans as well.
We're going to have the usual structure, where we try to present the report in a fairly short manner, then we have the Q&A session. As before, we believe that we should finish around 12:00 P.M. at latest, because we have a few other arrangements after 12:00 P.M. today. Once again, thank you for calling in, and as we mentioned in the headline, we believe that we've had a fairly strong first six months, although it could have been stronger, of course, hadn't it been for, you know, shortages of components. That's become sort of a very usual saying. At the same time, we also feel that there are some improvements, so it isn't totally dark.
Of course, our sub-suppliers, they have to get adapted to a totally different demand, a totally different picture, compared to what we've seen in the past. When it comes to our three divisions or business areas, we can say that they are driven fairly much by the same factors. Of course, the sustainability trends, they are there. They've been there for a long time, but they've been more underlined, we dare to say now, and it's being broadcasted all the time, and EU is very certain of their means when it comes to legislation and so forth. During the pandemic, we had home refurbishment, and that has continued. Perhaps it's modernization, you can call it, and we see that is continuing.
Sadly enough, as we say, of course, the dependence on Russian gas has also made us all aware of how vulnerable we are in our society, particularly in Europe. That's another driving factor. Of course, as a consequence of this, the energy prices have really soared, which means everyone, I dare to say, is trying to minimize their energy bills. Adding to this, that we haven't written here is, of course, the very positive signals in North America. I'm sure you all notice, or noticed just a few days ago, when Mr. Biden signed a new bill that is now legislation regarding the climate and energy, should I say, support. The bill as such has a little bit of a challenging abbreviation, the IRA, and I think it's called Inflation Reduction Act.
That's, of course, something that is very, very positive for our North American operations, particularly on the climate solution side, where now they have a 12-year program of subsidies. The first 10 years is 10% or 30%, tax reduction, both on residential and commercial, and then another two years with slightly lower percentages. That gives a very, very solid signal, of course, to consumers and also to the industry as such, that now, you know, America is also moving in the direction that's been the trend in Europe for many years. As a consequence of these demands within all three areas, of course, but particularly within the climate solution, we also announced that we're going to increase our capacity fairly dramatic.
I'm sure that you've all seen more or less the figures that are predicted, where we're going to leave gas and oil as soon as possible. Realistically, of course, it won't happen overnight, but the desire is there. That means that the capacity that we have now, of course, we can sustain a year or two, but we have to increase, not only in Sweden, but also in Germany particularly, but also on the stove side and the element side, naturally. One thing that is sort of diluting in the first quarter and then adding to the results in the second quarter are these one-off effects, where they decided to get out of Russia, of course, we were hit by SEK 114 million one-off effect.
Now when we sold an additional 26% of the shares in Schulthess, it was the other way around, and we had a gain of some 232. We are very cautious to mention that, so no one believes that the results, if they are just on a neutral level, but it's actually affected here in the first six months with SEK 118 million. Just a few other comments. I mean, the growth has been there. Could have been an invoicing. The order intake is just phenomenal. But the invoicing is also up fairly substantially. In the old days, you'd have dare to say that, of course, the growth or the pure organic growth with double digits would have been very good.
Now, it could have been much better had we had the components necessary. Nevertheless, it is a fairly good growth, and the operating margin is also up there for the operating results, slightly below last year. That is, of course, effect of our own price increases lagging a little bit, but also to some degree that when you have that stop-and-go production like we had in many factories, it is difficult to maintain productivity increases anyway, like we always try to do. That's a combination of the two. On the acquisition side, we have the Argoclima in Italy, it's a heat pump company.
We believe it's very important to have a better presence in Southern Europe because that is the market there is also, it's not exploding, it's gaining volume very rapidly. It's a good company that we know since many, many years. It's a solid family that we're going to work with for the coming years. On the stock side, we of course acquired 10% of the Pacific Energy biomass products shares already, a little bit better than a year ago. Now we acquired the remaining or the 41%, meaning that now we consolidate the company. The remaining or 49% will of course eventually also be bought.
We can also notice now that even if COVID is not gone, the negotiations and companies up for sale, they of course greater numbers now than just the 12 or 24 months ago. That's also a growing trend. If you just look at the figures themselves, I'm sure you've been through them very cautiously. Saying that we've had a growth of close to 26% is of course quite substantial, particularly when you see that the acquired part is only 2%. That is important, as we mentioned also that we have of course had the currency gains and also price increases. Nevertheless, we had a healthy growth and of pure organic.
The gross margin, and I'm sure Hans is going to come back to that, is slightly lower than a year ago, and that is of course due to the fact that I mentioned previously here. The operating margin is like 13.6%. There again, it's important to know that the 118 one-off items, they affect the operating margin. Results are 0.6 percentage units. Otherwise, it would have been like 13.0%. Yeah. I think that's pretty much what we can say about that slide. The quarter as such, the growth of some 24%, so slightly lower growth, you can say, compared to the first quarter. As you also mentioned in the report, and it is important to remember that the second quarter last year was very, very strong.
To see that we now have been able to increase another 24% is substantial, of course. The gross margin , pretty much the same as for the first six months, is substantially lower or two percentage points lower. We of course try to cure that as the months are coming now and here in the second half of the year because we believe that the price increases, although is very volatile, we don't expect the price increases for us to be as robust or as strong as they've been in the past. In some instances, we also see price decreases, whereas our own price increases, of course, will come into effect and hopefully cure this.
There again, the operating profit, it's important that in this particular quarter, the operating profit is influenced by 232 million when we sold the shares in Schulthess, so that's 26%. Other than that, it would have been like 13.8%. I think it's also important to mention, you know, that during the COVID, we had a substantial growth in margin, and we were just looking at where it was in the past. It's no dramatic thing. Of course, we have also increased our costs somewhat because we are more active in the market and we are, if not totally back to normal, but we are pretty much active as we were before in marketing.
Of course, a lot of things affecting results when you increase production as we are just in the process of doing. We have a typical regular graphs, you know, indicating our growth pattern, and we see that pretty much tags along as it did before, where the second quarter comes out always better than the first. Of course, the fourth quarter always being the strongest one, but not so pronounced last year due to shortages and deliveries. You know, we hope now that we will improve our ability in the fourth when it comes to deliveries, providing that our sub-suppliers will help us. It's a very complex situation, as you all know, with the semiconductor industry being lagging and all the supply chains and shortages are late and so forth.
Whereas we had a very sad development during the COVID as far as casualties or dead people, business-wise, we believe that we see a lot of reactions that we can read now from that. On top, of course, we have the Ukrainian situation. On the profit side, it's pretty much the same. Of course, here, that graph is illustrating the one-off effects in the second quarter here. That's a little bit unrealistic. Also, the first quarter is the other way around. We're burdened with those 114. We try to be overcautious when it comes to illustrating those one-offs, so no one is sort of blindfolded or anything like that. Just a few comments about the business area Climate Solutions, of course.
That's where tremendous interest is stirred among analysts and investors. It's a very strong growth. The order intake is we've never seen anything like that before. Again, of course, we cannot deliver as we would've liked to, but we hope that that will be something that eventually going to fade away. Here, of course, when we announce the investment, the majority of the investment is going to be in capacity increases in this particular business area. Margin, again, pretty much the same for all three, but the Element division, which we're going to come to, they've been able to cater for the same operating margin as last year. Here, we had a time lag on our price increases, and also the productivity has not been developing as we would have liked it.
Not any dramatic things, but we have a steady program in all companies, and when you have that stop and go, then it's not ideal for the product productivity development. Ole's going to come back, of course, in more detailed figures. Here we've had a growth of some, well, just south of 26%. Operating profit, again, is of course, influenced by the one-offs. In real terms, it should be like, 1,698, if I calculated wrong, correctly here, with an operating margin of some 14.2%. A very solid figures. On the stove side, same thing. I mean, here, we usually have a seasonality, but, you know, the second quarter, again, has been very, very strong, illustrating that stoves, at the moment is almost like a, real heat source.
We've been saying that it's something of interior design, particularly up in the northern part in this part of the world. It's totally different now. It's been, you know, one of the rescues from the high energy prices, and particularly on the wood-burning side, of course, where whereas gas and electricity have all soared. We've spent quite a bit to solve in order to come down on particles on the wood-burning side, and we are very determined to solve that. Of course, we also need. Eventually we'll need investments a little bit above the depreciation rate, but not so dramatic as in the Climate Solutions side. Here again, somewhat weaker margin due to the reasons that we mentioned before. It's a very interesting growth as we see, you know, with a
Having a growth of some 24% just under. No acquisitions here. It's truly organic. Of course, currency and price increases. It is almost able to keep their margin from last year. We apologize for the, well, some, I guess, spelling mistakes on the ambitious investment program. I guess we turned the N. The N should have been turned upside down rather than as it is now. It's an ambitious investment program. Nevertheless, NIBE Element, of course, and being influenced very much by the HVAC development and also by the, particularly the semiconductor industry. Also other segments, most of them are growing. Of course, the white goods segment that is lagging due to the expected higher interest rates and so forth.
Overall, it's a very strong growth with 26% and there are no acquisitions or just that is about 1% this unit. Yeah, what can we say? It's been a very, very good price discipline here. I'm not saying that we haven't been disciplined on the other two business areas, but here we are presenting the same operating margin as last year at 10.7%. Yeah, I think that's pretty much on that side and three more pie charts. The distribution has not changed, it's pretty much the same as before. 64, 65% on NIBE Climate Solutions and the other two making up the rest. On the operating profit side, it's also very solid. NIBE Climate Solutions representing a bit better than 70%, and the other two making up to 29%.
Due to the growth in Europe, particularly the European turn, shall I say, part of it is of course relatively high. We just hope now that North America also will get going with that new legislation that's coming into effect, and both consumers and the trade as such start to realize what a tremendous opportunity they have there. We're very pleased to note that we've acquired all those four North American heat pump companies prior to the expected growth now that we're going to see the coming 10 or 12 years. Hopefully, they're often just like we've seen in Europe, these are also subsidized historically. But it isn't until you really get going politically, and also of course when other energy prices go up, then you're really motivated to invest.
I don't know whether that was a short story about that, Gerteric Lindquist , but nevertheless, I'll leave it over to you now.
Yeah, I'll try to make it not too long anyway. I mean, there will be some repetition, but let me just quickly go through the business areas again and then some balance sheet numbers, and we'll open up for the questions. Taking a look again at Climate Solutions, I mean, what Gerteric Lindquist said here, a continuously very strong order intake, especially in Europe, but also with North America beginning to move. That was really before the announcement came of this tax credit being reinstalled, although there have been talks about that, of course. There's a general need, of course, to decrease utilization of oil and gas, and that's also reached the U.S., so to speak.
A very strong order intake and, you know, a strong order growth in sales as well, although it could have been higher had we not had the challenges on the supply chain side. The acquired portion of that growth of somewhere close to 26% is only 2.7 units, meaning that the organic part, including price increases, was the substantial part, around two-thirds. We had a portion of currency in there, you know, around one-fifth. We came up from 9.5 billion to almost 12 billion in sales, but with a gross margin that is still lagging behind for the reasons that we've mentioned here with the supply chain issues and, of course, substantial cost increases on that.
The official operating profits being 1.8, adjusted for the one-offs, rather 1.698, with a margin of 14.2%. Where the price increases have not kicked in fully, but also where we have not been able to fill our factories to the extent needed or wanted, you can say. Below this, of course, this very ambitious investment program to meet the future demands. If we just quickly look at the quarter as such, we were able to grow with some 22% there, 22.5%, up from 5.2 billion to almost 6.4 billion, with about the same split between organic growth and currency, as I just mentioned. But with a gross margin that is substantially lower than last year.
As Gerteric mentioned, we shouldn't forget that the second quarter of last year was a very strong quarter, so it's tough to compare to that as well. The underlying operating profit landing in at 972 with an operating margin of 15.3%, adjusted then for, you know, the sale of Schulthess. In terms of distribution of sales for geography, no major movements, but North America has gained a couple of percentage units up from 18% to 20%. That's been the major change, you can say. The Nordics have come down a little, and then Europe has also gained. A strong momentum in Europe continuously, but also North America coming more and more.
If we move into stoves, it's also been a very, very strong, almost extreme order intake for the business area, especially for Q2, which typically is a softer quarter. There's been a very good demand for the wood-burning stoves, especially in Europe and not the least in Germany. This is, of course, driven by a continuous home renovation trend that started during COVID, but also the sad war that is going on, where people are looking for both ways to save costs in terms of heating, but also for a safe product that works, you know, also if there would be an electricity shortage. Sales up from 1.4 billion to slightly more than 1.7 billion, a growth of more than 23%, where the organic portion was around 75% of that.
With price increases, of course, but where more price increases should kick in as we move along because we have not been able to raise them as quickly as we did in some other areas. The gross margin is also here affected by this. It's at 35.8% as opposed to 36.9%. The operating profit coming in fairly well despite of this. 11.4% as opposed to 11.9%, thanks to a good cost control. The individual quarter is, of course, a very tough comparison. We had a tremendous growth increase last year of 71.4%. This year we've been able to increase by 19%, two-thirds of that being organic, roughly, and the rest currency.
As I mentioned before, an unusually strong second quarter, and no acquisitions contributing to the growth. For the quarter as such, the gross margin has come back. We've been able to increase the operating profit in absolute terms by some 13 million, landing in a margin there of 11.3%. In terms of geographical or sales per geography, Europe and the Nordics have gained a little bit on behalf of North America, where the portion of wood is slightly less because the strong demand has been in the wood area as opposed to electric stoves or gas stoves. Moving on to Element.
The order intake remains at a very high level, also very much driven by these trends that we've been talking about, home renovation, sustainability trend, the war as such, a need to shift away from oil and gas and electrifying the society. Of course, the strongholds here have been and continuously are the HVAC and the semiconductor businesses. White goods and also some Asian markets have been a little bit weaker. Sales have grown with 26%, up from about 4.1 billion- 5.1 billion. Good organic growth. A little bit more help of currency here than in the other areas due to the geographical mix, but around two-thirds of the growth still being organic, including price increases, of course. A small portion of help through acquisitions.
With the gross margin here not being affected as much as within Climate, but still down slightly. Thanks to a very good cost control, we've been able to maintain the margin at above 10%, landing in at 10.7%. If we look at the individual quarter, sales were actually up by 28%, and the gross margin being at the same level as before, but where we've been able to land in the operating margin slightly above from last year, coming in at even above 11%, 11.2%. A very nice development for NIBE Element.
In terms of sales per geography, the Nordics have in this case gained a couple of units, but the picture as such is very much as it has been before, with Europe being about 1/3 and North America being the biggest portion. This is also the area where we are most present in Asia, with some 12-13%. If we then leave the business areas and quickly look at the balance sheet and some key figures, our total assets have from the beginning of the year increased from 43 billion- 48 billion, which is a natural development, our growth. There are two items you can say sticking out here on the asset side, and that is that non-financial current assets, meaning inventory to a large extent, have increased, and the financial current assets, being the cash you can say, have decreased.
We've been trying to source components for our production to cater for the challenges on the supply chain side. Of course, building inventory costs. That's where we have the shift. If we look at the equity and liabilities side, I mean, given that we are continuously profitable and have generated some good profits, equity has increased and it's an overall very solid balance sheet. Coming back again to the changes in inventory, we see that on the cash flow side, the operating cash from the business has been roughly the same as last year despite this increase in sales.
Where then the change in working capital, which now was some 2 billion as opposed to slightly below 1 billion last year, of course, had a negative effect on the cash flow. Then we've continued to invest twice as much as last year to meet future demands. The operating cash flow after these changes has been a negative 750 million as opposed to a positive 850 million, roughly, of last year. Of course, it's an unthankful task to drive working capital reduction projects in these times where we need to get products on board to be able to deliver as soon as we have everything we need. Just a quick glance on the key financials, key financial figures. I'm not going to go through all of them.
I mean, we still have a very solid or good portion of cash in there, slightly more than 4 billion. And that together with a very decent net debt-to-EBITDA level of 1.1 and equity assets ratio of 50%, we still have very good room to maneuver, both for our growth and investment program, but also growth through acquisitions. Of course, it hurts a little bit to see that working capital, excluding the cash portion, has gone up here from some 15% up to 23%. We know where it comes from and what it's related to. I think we have it fairly much under control.
The last slide, of course, building inventory, being as solid as we are in terms of equity assets ratio and so forth, the return on both capital employed and equity do take a hit, landing in at roughly 15% and 16% respectively. It's not quite where we want to be, but overall, we've been able to increase the net profit per share, equity per share. So it's a solid balance sheet after all. I'm sure you will have some questions related to the business. Unless you have something to add, Gerteric, we open up, I guess.
No, I think it's very solid. Nothing to add. Please go ahead and shoot.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. The first question comes from the line of Viktor Trollsten from Danske Bank. Please go ahead.
Thank you, operator. Good morning, Gerteric and Hans. I hope you can hear me loud and clear.
Yeah, absolutely. Absolutely.
Fantastic. Firstly, on margins, you said that price hikes now compensate for input costs, which I suppose, you know, started to impact by end Q2, given that gross margins in Climate's still down. How should we read that into the second half of this year? I guess it sort of sounds like margins then at least should be flat year-over-year in the second half, while volumes in practice also should have a positive impact. Any comments regarding that, please?
All right. Well, I think that we are, you know, not shocked, but it's a very, very uncomfortable situation where we've been hit very hard by price increases. We don't feel it's our task really to increase our margin just because we could say, "Well, price increases from our suppliers have been so extraordinary. Now we have to increase our prices and gain market that way." I think we have to be fair. Of course, we don't like to lose either just because we were hit on price increase. The first step, we like to be at par, you know, with the margin, not necessarily saying, "Now we're going to use this to squeeze additional out of it." It's something else. We have to sell much more.
We have to be better on productivity, but not saying that the end consumer should help us improve the margin. Perhaps that sound a little Boy Scout-ish or Girl Scout-ish, but I think that's. We don't like the margin to be lower, but the first step is to bring it up where it used to be.
Okay. No, I guess that's clear. I guess historically, at least you have had, you know, 20% leverage or economies of scale on additional volumes. So if you can compensate for input cost, I suppose at least flat margin should be within range. But that's helpful. Then secondly, on the inventory buildup now in Q2, just out of curiosity, you know, it sounds like the majority of that is components, no finished goods, from that perspective. I guess what I'm after is, you know, whether you have had any overabsorption of fixed costs in Q2.
Oh, I think it's. That hasn't helped the result. We
Hmm.
I mean, that's a very delicate balance. Of course, if it were to dig into the figures even more in detail, we are, you know, also overstaffed. We don't like to chisel every detail out. To be able to perform as good as you possibly can, we have, of course, predominantly increased our inventories of components and raw materials. On top of that, we have overstaffed our factories, because when you get something in, you have to be able to produce. Because if you just have the regular staff on board, you'll never get to any improvement. That's a little bit painful to just present that, but that's exactly how it would happen.
Had we had, of course, products ready-made, you know, they would have been sent out directly. So, there's no buildup of inventory of that kind, and we haven't been able to do that since the first half of 2021. Why the second quarter turned out to be so good last year was predominantly because we delivered what we had produced during the first four or five months that was sent out prior to the vacation period here in Sweden. Ever since then, I mean, it's been fairly bare in our inventories of ready-made goods, sadly enough.
Okay. No, that's clear. Thank you for that. Then on organic volumes, if I may, up quite a bit year-over-year, despite component shortage and or rather tough comparables. Is it possible to sort of, you know, break that down into how much is your capacity up year-over-year, and how much is your capacity utilization down year-over-year?
Well, that was – I don't know whether we can answer, but maybe, I guess, we could answer it had we been given a bit more time. I think now we are into the specifics. It's an equation every day, every week at least, where you have to monitor your capacity both on the sourcing side and on the components that you have. I don't think that we should dwell too much into that equation, if you don't mind.
Okay. No, no worries. Then, just another sort of question on volumes. At least from my perspective, you know, component shortage, let's say impacted sales by 8%-10% in Q1. I would expect something similar now in Q2, and I expect that you had an impact already in 2021. How should we think about that now when, you know, component shortage could ease? Is that the figure that, you know, tallies up to a cumulative impact of, you know, more than 20%, or is it a net effect of, let's say around 10%, if you see my question?
Yeah. We couldn't answer that ourselves because that depends on. We don't like to, you know, should I say, blackball our suppliers because the industry, not only us, the industry has not been giving them the proper figures because there's been an explosion. No one can say that we, 24 months ago, could have foreseen the dramatic growth in demand. The industry, including ourselves, is also to be blamed. Now, of course, all suppliers, and not only ours, but suppliers to the heat pump industry, and for that matter, to other sectors as well, they are gearing up. We don't believe that there's going to be a gearing up process that, as of that particular date, everything is peachy keen.
We believe there's going to be a gradual improvement over the coming quarters. We're hopefully now going to see a positive sign or positive signs during the second half of this year.
Okay. It's by no means my intention to push you. You know, if we in theory say that component shortage eases tomorrow, how much would you be able to lift on, let's say, volumes and or capacity given the investments that you have been doing? Just if you could give us any figure.
Well, as far as capacity, I do believe that we could cater for that, when it comes to what we have, staff on board and potential sourcing. We don't believe that the components going to run out that quickly as you indicate. Of course, it's important for you to know that the capacity increases we are going through now with building factories and so forth, it's not the case that now we are up, you know, under the gun and not being able to increase where we are for now. Of course, a new factory, a new machinery takes like four-six quarters to get on board. What we are saying is that the factories being built now or the capacity increases above the regular level of investment, that's something that going to come during next year.
The capacity is there.
No, that's clear. And also, maybe just one final and more broader question regarding the nature of the element business, which at least historically have been rather cyclical, you know, with high correlation to industrial production, margins took quite a big hit in 2005, et cetera. Just curious to hear you. Would you say that the element is less cyclical today and with more resilient margins, and could you in that case explain why?
Depends on what business area you talk about or sector. Of course, like 15 years ago, we were more dependent on the white goods sector, which is very cyclical. Now with a tremendous growth on the HVAC side and also on the semiconductor side, just to mention two examples, and the electrification enhancements in here, that pattern is broken for now very clearly.
Hmm.
It is the seasonality. We can see that just like with stoves. The second quarter here, there's no comparison to demand that we've seen. Even if we have invoiced quite a bit, the demand has been phenomenal. It's difficult for us to say. The seasonality pattern is broken right now. The seasonality pattern is totally different. But is that going to prevail three years from now or four years from now, we can't predict that, but it's totally different from the past.
Okay. No, tha nk you so much. I step back. Thank you.
Thank you.
The next question comes from the line of.
Yeah, please.
The next question comes from the line of Carl Ragnestam from Nordea. Please go ahead.
Hi, it's Carl here from Nordea. A few questions from my side as well. First, you mentioned the Inflation Reduction Act in the U.S. I guess it's early on, but I don't know if you have reviewed it. What's your best guess on sort of the market growth in the U.S. over the coming one-two years, perhaps? Would you say it's maybe too optimistic to expect similar growth pace as in the E.U. or?
Well, we believe that it's a very, very solid sign from the authorities of the government that now you have 12 years to invest here. I think it's very important that this is particularly in the geothermal side of it, where the 30% tax, you know, incentives are in force. Of course, it's been a hindrance in the past. It started already after the Lehman Brothers crisis, where we got incentives. They were limited in time. They were five years. The industry is such at the same time, you remember that the energy prices went down. There was a bit contradictory. Gas and oil prices were down, and subsidies were introduced, but that wasn't enough. Then, of course, they were taken away.
They were extended a couple of years, and they were taken away for a year. Then they came back five years, and now they were supposed to be taken away again. It's been stop and go for the industry, particularly for those companies, you know, that really would like to concentrate on this, would like to go for the trenching of the coils and so forth. Now it's a very solid signal to the industry. Well, try to rebuild or try to build now a more sustainable society, just like with the electric vehicles. Of course, in Europe, it is a little bit different because here with the Ukrainian crisis, that has further accelerated this attention. Whereas North America, if you include Canada and U.S., they are pretty much independent of crude, gas, and oil.
Here it isn't that urge to stop something for the same reasons as we do, as we're doing in Europe now. It's more the climate matter, less of a political crisis with someone invading the U.S. or Canada or Mexico for that matter. All right?
Very good. Also, if you compare your organic growth in the climate solutions in the quarter, would you say that you've been able to keep market shares in Europe or lose somewhat market shares? In the sort of longer perspective, we have seen other players as well building capacity, traditional pump manufacturers. We have seen gas players, Asian AC manufacturers entering the air-to-water space in Europe. Do you believe that you could keep your market shares in the coming years? I know it's a sticky market, but what's your view on that?
Yeah. Yeah. I mean, that's any entrepreneur, you know, in the market would go for, of course, at least keeping and possibly improving. The order intake doesn't suggest anything else. Of course, the proof is going to be reviewed in the quarters to come. Of course, we might lose in some markets, and we might gain in some others because it depends on the particular product that's available right now. I think in general, there's a shortage of components to all manufacturers. Could have been that someone had been more bold to have like supplies of components, and they've been able to deliver during a quarter, some months better than others.
The components we are talking about, it's not like some companies, you know, have gotten a nice avenue and gotten everything. We all suffer.
The final one from my side is on the component issue situation. You said that you see some light in the tunnel, at least. Is it just semiconductors where you see a better supply situation, or is it other components as well?
Oh, yeah.
Yeah.
There are other components, but I mean, the common denominator you can call it is that, when you look at our reported electronics, of course they are very substantial part of that. We also buy many components and many products that in themselves have also semiconductors, which means that that's also a hindrance for our sub-suppliers. Yeah. Yeah, I think that's the answer to that. It's not like it's only if we've gotten our semiconductors for our, you know, boards. Everything would have been peachy. That's not how it is, because there are other components or other products that are just as sophisticated, our suppliers believe, because everything is driven or has been driven towards maximum efficiency.
Motors, you know, that just like a regular motor, they have to be integrated into our control board, which means that they have to be more sophisticated. They also include a number of semiconductors in their, should I say, specifications.
Mm.
Okay?
Okay. Super helpful. Thank you.
All right. We continue.
The next question comes from the line of Gustaf Österberg from Carnegie. Please go ahead.
Thank you, operator, and good morning yet again, Hans. It's two questions from my side. Just to follow up on the investment program, you've announced this, like, 5 billion in gross CapEx the coming years, and I was curious to know whether that includes any expansion plans to cover sort of higher demand in the U.S.
That's predominantly for Europe.
Okay. With sort of the Inflation Reduction Act support to the HVAC sector, I mean, would it be reasonable to expect sort of further capacity expansions in the North American market?
Well, eventually, but as we said many times, I think during meetings like this, that we've had capacity. The companies in North America, when we acquired them, they had quite a bit of capacity. We haven't seen in the past, you know, that demand increase as we see in Europe now. Whereas Europe has been gearing up, and we all know the figures, roughly of course now within, we are coming towards a point where we are, you know, using up all our extra resources as far as productivity or production capacity. Whereas in North America, the four factories that we have there, or manufacturers, they have not sort of been glorious when it comes to volume expansion. It's been more regular. You know, like we've been stable.
Okay, some years perhaps not even up to 10%, 8% or 6% and so forth, but now we talk totally different figures in Europe. That's the reason. That's why we are not... I mean, we are not going to slack in investments. What we say now is going to be additional investments. You know, the rate where we have been in the past, that's more a regular rate when we grow according to our normal, should I say, organic targets. What we see now is something extraordinary, and we have to be prepared for that.
Got it. That's very helpful. Thanks. Just a final one. I appreciate you mentioned that sort of there's more ongoing discussions on M and A. Could you give us an update on what's happening with the valuation of the assets you're sort of in a broader sense? I mean, private and public valuations have come down quite a lot in general, but also the sort of interest in energy efficiency related products much that also increased. I was just curious to know whether you know what you're seeing in terms of those aspects.
Well, I mean, I think, and Hans can fill in here, I think we've been historically very cool when it comes to extraordinary multiples and stuff like that. Good companies, you know, they have a tendency of not becoming too inexpensive in times of trouble because they keep their value. If you have a good company, they continue to make money. If it's a family-owned company or a industrially owned company, they just wait and see. I think that when we acquire companies, we are we like to do it from a truly industrial point of view, not like a short-sighted, should I say, investment. That's why we are cool if the multiples, you know, are just exploding.
We just say, "Well, hold it a bit here," because we know that things going to eventually return to normal. I don't know whether that was an answer to your question, but I will open the floor.
Yeah, that's very helpful. Thank you very much. That was all questions from my side.
Thank you.
The next question comes from the line of Vivek Midha from Morgan Stanley. Please go ahead.
Thank you very much. I have three questions, please. My first question is about the 5 billion new investments for the capacity expansion. Could you please give me a more detailed breakdown of how that is split between the business units? What is the total percentage increase in capacity that would be as a result of the 5 billion and by when? Where I'm coming from is that you had a target of group revenue reaching 40 billion by 2025. With the capacity expansion you're going through now, should we actually think about double it? The second question I have is for heat pumps specifically. You're talking about the new plants under construction in Sweden and Germany are the first step to double heat pump manufacturing capacity, which is the same statement you made, as per your Q1 report.
Could you please tell us when the doubling of capacity will be completed, and how quickly will this capacity ramp up to full utilization? Obviously, bearing in mind that many of your competitors are also spending a lot of money to build up capacity at the same time. Final question is, given the dramatic movement in German energy policy, it is really financially incentivized to have a heat pump now. Could you please talk about the actions you are taking or you plan to take in order to accommodate such a surge in demand in the near term?
For example, do you have any immediate capacity gain in Alpha InnoTec in 2022 and 2023? And/or can you allocate more productions from your Swedish plants to the German market? Thank you.
Well, at the moment, just to clarify things, we have two factories in Germany, and we have two sites in Sweden, and now we have an additional site in Italy when it comes to production of heat pumps. Of course, the growth that we see now in Climate Solutions is very, should I say, intriguing, very interesting. Doesn't mean that we're going to forget stoves and elements by any means. When we announced the 5 billion investment, they are predominantly in Europe and predominantly in Climate Solutions. That is just precisely going to be on that side. As far as products, I mean, we supply Alpha InnoTec and Waterkotte in Germany. They supply their markets, just like NIBE and CTC or Enertech. They supply their markets.
It's not like one company can only produce for one country. It's a setup where independently they cover their markets that they have concentrated on at the cost. Of course, now when you see that it's growth in Germany, of course, we have foreseen that in a way by having two manufacturers in Germany and also having two companies up here in the north, where we can supply the German market. I mean, we've been in Germany from the NIBE side since 1993, so we've been there for some 29 years. It's not really going to start now. Of course, Argoclima in Italy, that's more like a Mediterranean attempt, of course. That is going to be important for us to use that platform. Are they covered? At least an attempt or two to answer the question.
The middle question I almost slipped.
Sure. The middle question I have is your in the heat pump manufacturing capacity, you said there are new plants under construction in Sweden and Germany as a first step to double the heat pump manufacturing capacity.
Yes.
Just wondering how quickly will that be completed, and how quickly will the capacity fill to full capacity? Obviously, bear in mind of competitors that also build that capacity. How do you think about that and how should we-
Yeah. I don't think that anyone building a factory in six months. Realistically, you always talk about four-six quarters to get a factory erected and to get it up and running. That's pretty much the horizon when you make an investment in production. All right?
I suppose one of the questions you haven't answered is your previous group target of 40 billion revenue by 2025. I mean, how should we think about that now with all the new capacity expansion?
Well, I think that we are on the run rate now is SEK 36 or SEK 37 billion. It wouldn't be a miracle if we didn't hit that prior to 2025. It's very difficult to predict. I mean, we've been predicting 40 billion, you know, like, four years ago, and now it seems like things are moving very, very quickly. No one could have foreseen the pandemic. No one could have foreseen the invasion of Ukraine. Why we allowed ourselves up to 2025 was actually the experience during the Lehman Brothers horror when we lost two years. The pandemic, we thought there would be a period of suffering, but it turned out to be not so bad because people started to concentrate on refurbishment and so forth.
Came the Ukrainian side of it. As sad as it is, as Hans mentioned, here, that has also added to the demand. Of course, I mean, realistically saying the 40 billion is going to be hit sooner than 2025. Other than that, any models or math would be incorrect.
Okay.
All right?
Thank you. Thank you.
Thanks.
The next question comes from the line of Karl Bokvist from ABG Sundal Collier. Please go ahead.
Yes. Hi. Just one question to match the time. Just the one thing I was curious about when you say that North America is picking up and the commercial segment. I think previously you said kind of normalized before the pandemic, this was maybe 15% of your heat pump sales. Just, you know, strong volumes in all segments that we should keep something in mind with the commercial segments having lower margins or anything like that. Just, you know, to keep in mind going forward in terms of profitability.
Well, of course the products are more project-oriented when it comes to commercial, but that also means that your marketing efforts and your squad of salesmen, it's thinner of course. I mean, at the end it's pretty much compensating for that. That's pretty much how we read it.
Understood. Thank you.
The next question comes from the line of Douglas Lindahl from DNB Markets. Please go ahead.
Hello, Douglas Lindahl. Thanks for taking my questions. It's been a long call, so I'll try and be short, but I have a few. Quick on cash flow, you doubled CapEx now in H1 compared to H1 last year. Will this pace sort of continue throughout the year, or is CapEx for this year more H1 heavy rather than H2 heavy, would you say? And secondly on cash flow, the Schulthess divestment, what is the full cash flow impact to start with? Thanks.
I think that should be paying cash flow.
I mean, we are into a phase now where we are of course investing. As you know, if you've followed us more in detail, we've been increasing our investments and cash flow for the investments over the last couple of years. The trend we are in now will remain for a couple of quarters. The cash flow effect coming in from the divestment of the further 26% of Schulthess is included.
You don't want to break out the full effect of that though?
Sorry?
The Schulthess divestment. I mean, the full cash flow effect of that. Did you give a number on that, or could you give a number?
No, I haven't decided in detail.
Okay.
Okay.
Moving on to, we already mentioned Argoclima a few times, but just it'd be interesting to hear how that business has performed so far and the opportunities you think it has presented, if it's sort of matched your previous expectations here in Italy.
Well, it's been very short, but we can just say that, with the temperatures, you know, that we've had in Europe, of course, when the heat waves are in the air conditioning side of it has been very prosperous during these few weeks that have been on board with it. It's very oriented in Italy and pretty much air conditioning side. We have
Mm.
We have really established to say, you know, everything with our products to them, yes. Of course, it's a team working with that, but I shouldn't say you're seeing any significant impact in the figures from that.
No.
Okay?
Fine. Would you say that you would be able to sort of sell the NIBE brand through Argoclima within the year or?
That's absolutely the idea. Absolutely. There you go.
Okay.
Absolutely. Yeah.
Okay, great. Yeah, that's it for me. Thank you.
Mm-hmm.
Our last question comes from the line of Philip Buller from Berenberg. Please go ahead.
Hi. Good morning. Thanks for taking the questions. If I can try and squeeze in just a couple of very quick ones, please. Firstly, just perhaps I missed it, but how much of the growth in Q2 was volume versus price, please?
How much of the growth in Q2 was pure volume?
Yeah. Well, we've, I think we've indicated that that's solidly above the double digits, as Bobby said also in the report, right?
Okay. Sorry, I must have missed that one. In terms of the supply chain, obviously we've already struggled with suppliers and now they're being asked to match some very strong expansion plans. I'm wondering how realistic that is and if we might need to see some vertical integration of some of your key suppliers. If I look at your CapEx spend profile, it seems to imply that there is some visibility of the supply chain situation improving. What are you seeing in terms of the ability to hire labor at the moment? Thanks.
I think that's a challenge for all of us, you know, when you see expansion. I think that our suppliers are also facing that problem. That also leads to more mechanization, more automation to be able to use the labor that you already got on board to produce more units per hour or per time unit. There's no quick fix, we are absolutely right. I think that manufacturing is moving back to North America, including Mexico and also to Europe. That's no secret. Of course, people have been, should I say, disturbed in their, if I may use the word, in their behavior. They've been a little bit spoiled perhaps, and some are a little bit reluctant going back to work.
I think as the quarters go by, I think that eventually people have to return to work and also have to be remunerated in a correct way.
Mm.
So-
Thanks. Yeah.
It's an interesting question that you bring up, but we all sit in the same boat, and people have to support themselves. I mean, the government can't support individuals, you know, for their lifetime. They have to get back and work. The employers, we have to be attractive, we have to pay people in a disciplined way, but you also have to expect productivity out of them. It's a long answer, but that's the best I can answer.
No, I think at the moment we're all focused on supply chain, but I guess the labor markets are very tight.
Oh, yeah.
... so that may become a big topic next year. Just finally, if I may, it's slightly more broad topic I guess, but I think a lot of us are attracted to the potential upside to margin when capacity utilization starts to come through. But I'm wondering if due to the nature of the industry with things like tax credits and other incentives that are called upon, which effectively stimulate demand for your products and solutions, if there's potentially a ceiling on margin, given that demand is somewhat politically supported. Thanks.
It is an impossible question really to answer. If you look at our presence in the market the last 25 years, we've been through tougher times and better times, and I think that we've demonstrated a very robust margin development. It's been very small deviations, you can say. Like in every industry, we've been solidly above, I think, the 10% but for one year. It's been 2000 or even 1999. Then it's been more like between 10% and 13%. Lastly, we were slightly above. I think that during almost a quarter of a century, we've been demonstrating that we can be above the 10%. Whether what the future will hold, it's impossible to answer it. History tells you quite a bit about your potential also, potential performance in the future. All right?
Thank you.
Yeah. All right. We have now 12:10 P.M., and we don't like to be rude, but we just have to get on with another interview here in four minutes. Could we just leave it like this? If you would have any particular questions, you could possibly mail that to us, and we'll try to answer as polite as we possibly can. Hello? What happened? We have to ask perhaps our administrator to help us there. With that said, something happened to the sound. Thank you very much for today. Hopefully, we didn't cut it too short here at the end, but the other people are waiting for us. Thank you.
Thank you very much.
Bye-bye.