Ladies and gentlemen, welcome to the NIBE Year-End Report 2019 Q4. Today, I am pleased to present Gerteric Lindquist, CEO, and Hans Backman, CFO. Mr. Lindquist and Mr. Backman, please begin.
Good morning, everyone.
Good morning.
Thank you for calling in. We're going to have the same procedure as before, as we call it. Hans and I are going to present the report in brief, and then we're going to have an open session. We believe that we should be ready about noon, so be given an hour. If I start, Hans, same procedure as previously. The headline we called it is a robust full year in a diverse markets. It's no secret that 2019 has been a challenge for most companies. For us being quite a bit into the sustainability market, of course, we've seen a very positive sign there or signs. We're also exposed to, as you know, the regular consumer goods, and that has been of a lesser positive situation.
Also, we've been in a political situation in the world, with trade barriers and tariffs of all kinds and instabilities and also the Brexit, of course, has influenced us. We believe that after all, we are coming out with a fairly decent result if we judge ourselves, considering the conditions that we live in. Of course, interest rates has been another issue, particularly during the first part of the year, when people were worried about the interest rates going up. That concern has diminished, and now it's rather on the other side. We see a possibility there that demand could actually be spurred by lower interest rates.
Just in general, of course, we've had growth both organically and through acquisitions, and the result has improved, and that is naturally a function of the revenue itself and the way we focus on productivity, both in the already existing units, but naturally also in the units coming into our group. The operating margin is slightly lower, and that's the reasons I mentioned initially here, where the market has not been so favorable in all aspects. When it comes to acquisitions, of course, there was a criticism we heard, during the first two or three quarters that we were inactive, that we had to buff and to acquire companies. We've said all along, there's no reluctance, there's no slowdown whatsoever. It's just that it takes two to tango, and sometimes, we have to wait a quarter or two before acquisitions go through.
Now we've had a number just in the last three or four months. It's the same rate of discussions going on as before, so nothing has changed there. If we just look at the figures themselves, we are, of course, comparing ourselves during Q4 with a very strong Q4 2018. Nevertheless, we are coming out with a result slightly above previous year. The margin follows the same pattern, really, that we've had during the first quarters. It's lagging a little bit, and that is mainly due to Stoves and Element lagging behind their previous quarters. Other than that, we see that we continue to grow even during the fourth quarter. For the full year, we passed SEK 25 billion, which we are pleased to see coming out with a margin overall on 12%, and that is like 0.6% units below the previous year.
Of course, we're not pleased with that, but when we talk about our robustness, I think that should be viewed as a softer year overall, and we are able to come out with a result that's, after all, in our books, fairly decent. When we look at the graphs coming to life here, we see that the growth is fairly much following the previous path where the full line there is although having a steady upturn. When we look at the profit of the financial items, we see that it's a slight, should I say, tendency towards a flatter situation. Nevertheless, we believe that that's more that we compare ourselves to the very strong quarter previous year.
If we just look very quickly into the business areas, of course, the business has been very positive for Climate Solutions, continued stable growth, the sustainability discussions, and our way of living anymore that is influencing all of us. We are right in the middle of that market, that thinking with our products. That is, of course, giving us a spur. On top of that, we've now been able to acquire a number of companies. Rhoss was more like the remaining part of the shares earlier in the year, and then ÜNTES came in in the fall, and also the Tiki Group in Serbia.
Just a few days ago, we were able to acquire 51% of Nathan Holding in the Netherlands, which is alpha innotec's import of heat pumps since many years. We're very comfortable and happy to have that on board, with Netherlands being one of the strongest markets when it comes to growth in the heat pump segment as it stands now. On the downside, we can, of course, also say here that the Swedish market for heat pumps, new construction has gone down, whereas the refurbishment market there is very prosperous. We notice that the new construction went down considerably, particularly during the last six months. We've been able to compensate that, at least partly, with the refurbishment market.
We had a very good product range, strong product range, and we focus very much now on the green, we can call it, or the environmentally friendly refrigerants, and that'll be a focus for us in the coming quarters. We, of course, also talk a lot about connectivity and intelligent controls, which we believe belong to the future. As a summary there, we look at Climate Solutions coming in with a SEK 16.4 billion and the operating margin slightly above the previous year at 13.8%. All in all, Climate Solutions has performed relatively strong, we believe. If you look at the Business Area Element, that's been the most, we can say, sensitive business area for us during this quite difficult year 2019. In particular, since we are exposed to the consumer goods and white goods, for instance, that has not been so buoyant.
At the same time, we are very strong in the renewable, with the heat pumps, of course, being supplied and also the wind turbine industry. That has not been enough to support the margin that we had the previous year. What we can say about Business Area Element is, I think, that we have a totally different resilience now than we had in the past. A downturn in the economy that we've seen in the previous years affected us much more than what it actually has affected us this particular year. I think that's due to the broad product range that we have now and also our presence in the market in both Europe, North America, and Asia. Overall, we believe that the Element has never been as strong and as resilient, again, as it is right now.
Of course, the acquisition of the Therm-X in California earlier this year is also a step in that direction that will improve, again, our assortment. It has a different volatility, you can say. It doesn't follow the ordinary economic development. It's rather when something is happening in the electronic, the mechatronic industry, like the 5G now coming about, then we see the demand is coming up fairly quickly, and that's something that we had not really been aware of before. When it slackened, well, it was sort of a generation of product that went out of, not business, but there was a slackening demand, and that was, again, not following the economy overall. That's something that's going to balance, we believe, the business area as such. Operating margin, of course, we would have liked to see that remain on the 10%-10.2%.
We've taken a hit there. The reasons mentioned already. The costs, of course, that we have incurred in R&D because the automotive industry, for instance, is very positive long term, but it's been a little tough short term with people or customers being a little hesitant. Should I buy an electric vehicle or should I buy a hybrid one? We are certain that going to come back, the demand for vehicles, and we feel ourselves very well-positioned there with our different companies exposed to the vehicle industry in broad. Of course, one thing that we should not forget is the cost increases in some of the so-called low-cost countries like Poland, Czech Republic, and Mexico, for instance, where they've had immense cost increases. We try to combat that, but it's not done in one quarter.
To automate and to robotize, it's the only way to go forward. We just had to fight the conditions out there. That's why we are here as management. If we then swing over to stoves, that's been a relatively flat market as well. Also on top of that, there's been a debate, or there is a debate about emissions both in North America and Europe. The North American new regulations, they're going to come into existence in May this year. Our assortment is, of course, fully up at par. The only thing we can say that during 2019, the demand in North America and Europe has been hindered somewhat by, again, the uncertainties and the debate going on. We have, of course, approved all our products in Europe. They're already approved for the new standards 2022. Nevertheless, it's a debate going on.
We have taken a self-imposed goal to say that we're going to try to improve our product even further as far as efficiency and lesser emissions, just to demonstrate that the market leader has to take that position, and we believe that these products are very much appreciated by the final consumers out there. The broad arrangement that we have with pellets, with gas, with electric stoves, and then, of course, the wood-burning ones. We're going to continue to drive that, and we see that's the main reason why we are strengthening our position in the market, that we have the full range, and we have had the full presence. Looking at the figures, we see that stoves is still the only business area that's been able to position itself above 10% ever since we launched our group on the stock exchange.
Now it's a thin margin, we can say. Of course, despite the fact that we have an organic or growth, at least, over SEK 100 million over previous year, we still suffer operating profit that's below previous year. We are taking quite a bit of a cost when it comes to R&D marketing, and in some instances, we've also felt like there's been a price competition out there when the market has been softer. Just a few graphs before Hans is coming in. This one you've seen so many times before. The tiny company 1993, hardly visible in this graph. Some SEK 300 million in turnover, and now we're past the SEK 25 billion. Nothing has curbed our positivism or our ability, we believe, to continue to grow. This graph is a good demonstration of that. Same thing when it comes to profitability.
It's a steady uptick. Of course, you can see there that compared to 2018, it's a lesser margin to the previous year. Just a few words about seasonality. You can also see here that it's the third and fourth quarter when our sales typically would come in. It's very persistent, it's very consequent year after year. The first quarter is relatively weak, then it comes up to 46%, 47%. Then it goes even further. It's relatively easy to follow us when it comes to the seasonality. Even if we acquire companies during the year, the pattern is pretty much the same. It's even more pronounced, as you all know, sitting out there, when it comes to our profitability, how the third and fourth quarters really are the ones where we make money.
At last, three pie charts here with the distribution of net sales. Climate Solutions, typically around 63%-64%. If you add the other ones, 27% and 10% for the full year. When it comes to operating profits, of course, neither Climate nor Solutions, having a higher or better margin, they represent a little bit better than 70% of the total group's operating profit. The final pie chart here on the geographical spread, pretty much as before, where the home market, as we call it, the Nordic countries, now represents some 25%-30%. The rest of Europe, some 14%. North America, 30%. Other continents, 5%. Of course, we can foresee that it will possibly grow slightly more on other continents or the others there. Overall, we see that's a very stable and robust, you can call it, distribution of sales. With that, Hans, I let you comment on a few other things.
All right. Thank you, Gerteric. I will continue then with taking a slightly deeper look at Climate Solutions. As Gerteric mentioned, it's been a continued solid growth and performance of that business area, and most markets have actually performed quite well. Sweden, as Gerteric mentioned, has been stable and grew initially more, flattened out some when the new builds were reduced. Has been on a high level. North America has also continued quite well. The Netherlands has continued to grow. Finally, Germany is starting to move, although it's not quite there where we, of course, want it to be. The overall organic growth has been quite good throughout the year, although the last quarter was somewhat weaker.
I think that is, to some extent, influenced by the way the working days fell out in December in relation to the holidays, where a lot of people went for a longer period of vacation. I guess it remains to be seen in Q1 here, if there was any spillover effects into the area. In Q4 anyway, the sales amounted to SEK 4.6. The growth there of 10.7%. There is a help of currency in there, but a fairly decent organic growth after all, and improved gross margin, and then landing on the same operating margin as last year. For the full year, we were able to grow by 15.3%, coming in at 16.4%. Whereas the operating profit actually grew by 16.1%. That's quite pleasing to see that we were able to increase that more than sales.
This despite that we still have some larger units in there that we've mentioned before, like the Climate Control Group in the U.S., the IMCS Group , the Rhoss companies, which are not yet at these levels, so to speak, even if they are increasingly performing better and better. In terms of geographical split, it's to a large extent the same as last year, but Europe has taken a slightly larger share. It's now at 42% of sales, up four percentage units from last year. The North American pie chart there, or share of the pie chart, has also increased by a percentage unit, which is good in a way because it decreases the dependence on our old home market, which of course is continuously very important, but it means that we're growing in these areas, which is quite nice to see.
In terms of the profitability, ever since NIBE was listed, Climate Solutions has, with the exception of the two initial years there in 1997 and 1998, been well above the 10% operating margin. The one bar there that is lower is in 2007 when we had the overall financial crisis. The reason for being slightly lower these three last years, as you can see on the end of the chart, are of course these larger entities that have come on board and where we're working on improving their profitability. With an element, as Gerteric mentioned, it's been a softer demand for sure in several segments. This is our most global business area, and the performance is, to some extent, a reflection of what's going on in the world in terms of geopolitical decisions and environmental challenges and Brexit and whatever there may be.
In general, ESG-related segments have been performing quite well as the HVAC industry and wind, whereas consumer-related areas have been weaker. As Gerteric mentioned, the automotive industry is continuously very interesting, but is currently at a crossroads where there's a lot of hesitation in the business. The train segment, which also is an important one, sort of lives its own life, has the potential to be good, but it's dependent on state subsidies and how they kick in. They don't follow a traditional business cycle. Anyway, the business area landed at SEK 1.85 billion in sales in the fourth quarter, up 13.3%. Acquisitions drove that to close to 8%, a large portion of currency effects. There was a small underlying organic growth, and we were able to defend ourselves and had some comeback of the business area, you can say, in the last quarter.
We landed in with the operating margin on a level of 8.4% versus 8.2% of last year. Also here we grew profitability slightly more than sales, which was pleasing to see. For the full year as such, it has been a challenging year for sure. The overall result did not come in as expected. I mean, we came in at SEK 622, down from SEK 650 of last year, and we're just below 9% on the operating margin side. Whereas we were slightly above 10% last year. Of course, we've had to combat with wage costs and increases in several low-cost countries. We continuously address those questions, of course. We're not satisfied, but we're not either worried, I would say, on the level.
In terms of geographical split, this is the area where we have the most global splits, and there have been very few movements within that compared to previous years. When looking at the operating margin from 1997 to the end of this year, we've had a steady climb since a restructuring reserve was taken there, as you can see, in 2005, up to a level where we came in above 10% for 2016, 2017, and 2018. For those of you have been around for a while, they were slightly helped by one-off business that we had, but we had a very good and stable situation then. Given the movements or what's happening on the market this year, we came down now slightly, but are of course determined to get it back above the 10% going forward again.
Stoves then. As we stated, it's been a very flat market in a way, but with variations between the markets. In general, gas has been stronger than wood, and North America has been stronger than Europe. With these mild winters and weather that we've seen, they have not either really helped sales. We don't like to blame it on that, but it does kick in as an effect sometimes. Sales grew by 1.2%, which in reality is a decline in organic growth in the fourth quarter since we were helped by currency when converting our North American and British operations into the Swedish krona. Nevertheless, gross margin was fairly stable, and we came in there with a very decent result.
As you can see there, we have a strong seasonality in this business, where we earn most of the money in this fourth quarter, the SEK 142 in relation to the SEK 252 for the full year speak for themselves. For the full year, SEK 2.5 billion in sales are very thin, but still existing organic growth behind that. Of course, not being satisfied quite where we ended up on the operating profits level being slightly below last year. On the other hand, pleased to see that we did manage to maintain an operating margin above 10%. The geographical split is also similar to last year, Nordic, roughly a third, and then the rest of Europe, slightly less than 50%. Thanks to the acquisition of FPI some years back, the good foothold in North America there with some 23%.
Then just the operating margin over all these years since the listing. As Gerteric mentioned, it's the only business area that has constantly been above the 10%. Therefore, it was, as I just said, very pleasing to see that we've just managed it this year as well. Summing up 2019 from income statement point of view, it was an overall robust year. Although not quite there where we wanted to be, we grew by some 12.5%, whereas the last four years have rather been in the range of 16%-20%. Operating margin on 12% is robust, I dare to say, but of course, slightly lower where we have been before.
Nevertheless, we had a fairly decent organic growth throughout the year. Looking back since 2015, we have basically been able to double in sales maintaining a decent profit level, which gives us a very good platform going forward showing that it is possible to also eventually work towards our SEK 40 billion targets. Balance sheet, just quickly to leave some room later for your questions. There is not so much to say. I mean, SEK 37 billion in total assets. Intangible assets is, of course, the single largest item there. It is a consequence of our acquisitions. We do the impairment tests according to all rules and regulations can defend the value quite nicely. On the liability side, equity is quite strong. It has increased by SEK 10 billion since 2016, of which SEK 3 billion came from a rights issue we made in 2016.
Then, of course, on the long-term liabilities, non-interesting and also the short-term ones, they have increased by some SEK 840 million following the introduction of IFRS 16. Cash flow has been strong. Cash flow before change in working capital came in at slightly above SEK 3.4 billion, compared to slightly below SEK 2.7 billion of last year. Thanks to a better management of working capital, the change there was slightly below SEK 500 million, ending up then at the SEK 2.958 billion, as you see there. Whereas the change in working capital last year was a negative SEK 764 million. Cash flow has been very good and allowed us to continue to invest in our operations.
After having been investing below depreciation for several years, we increased our investment program as from last year, well, 2018 that is, then continued it in 2019, leaving then up to an operating cash flow of around SEK 1.9 billion for the full year. We just continue with some key financial figures, the depreciations that I referred to, you can see here on the second line. I think it's important to note that as from 2019, we of course have depreciations for leasing included there as a result of the IFRS 16, that amounts to SEK 240 million. On a like-for-like basis, the depreciation according to that for our fixed assets is just below SEK 800 to be compared to the SEK 691, SEK 640, so forth.
We have a strong cash position, good relation to interest bearing liabilities to equity and net debt to EBITDA that has come down a notch there as well, leaving us with an equity assets ratio of around 47%, which is quite stable for our continued growth, not least through acquisitions. I think the only key parameters that might stick out and have come down over the years a little bit are return on capital employed and return on equity, being both a consequence of the acquisitions we've made, but also the rights emission that we made. We see that quite clearly between 2015 and 2016, where return on equity went from 18% being close to our target of 20% down to 14.9%.
Apart from that, the other key numbers are decent, I dare to say, which also is seen on the very last picture here in terms of numbers, the working capital. I mean, it's an area that we continuously address and look at. If we don't look at the year for 2015, which was affected by an accounting change, you can say. You see that we were at 19.6 in 2016. We brought it down, started an initiative, but came into a bit of a squeeze there where we didn't have components to fully deliver what was possible to deliver in 2017. Then the relation came up again to the 19.6. Quite frankly, we were a bit overstaffed at that time.
This year, I think we have a fairly decent level of 18.1%, and is in the ballpark of where I think we will be, even if we're continuously looking at reducing that slightly going forward. The last picture here is more a summary of the development on our key parameters ever since we were listed. By that, I hand over to you, Gerteric .
I mean, thank you. I think this graph is quite illustrative. Of course, it's better to have some cash in hand rather than trying to borrow when you need money. Of course, we are not totally proud of having a return on equity, not its trending level, but rather in the 13%, 14%. We also know that we have a fairly decent vault of money that we can use for acquisitions. I just wanted to reiterate, the current intermediate target that you mentioned, Hans, and the SEK 40 billion. When we set that target, just relatively recent, people said, "Okay, is that possible?" When we look at the next graph here, we feel that we're getting closer and closer already. Of course, we've seen that, we double take every four, three, four, three, seven, and five years.
Seeing now that we have exceeded the 25, we don't see the 40 billion yet, but we're fairly confident that we will be able to ride there. Just to confirm that nothing has changed as far as our targets are concerned. Our target, and that we're not driving all our business entities in a positive way. Of course, with an equity ratio of some almost 50%, it's difficult to have a return on equity of 20%. It's going to be used in a wise way. Having said that, some 35 minutes on the history, we'd like to invite you for questions, and we'll do our best to answer them. Please go ahead.
Thank you, speakers. Ladies and gentlemen, if you do wish to ask a question, please press zero and then one on your telephone keypad now. If you wish to withdraw your question, you may do so by pressing zero and then two to cancel. First question is from the line of Erica Johansson from SEB. Please go ahead, your line's open.
Hi, this is Erica Johansson. Thanks for taking my question. First, I have a quick question on the operating cash flow. It's strong for the full year, but in the fourth quarter, it tends to be a bit higher if I've done my calculations right. Could you give a little bit of color on this?
Well, that is very much related to the seasonality we have in our business. Q1 and Q2 are, and I think you saw that in one of the pictures that Gerteric showed before, are not as strong as the latter part of the year. Really Q4 is always our strongest quarter for the full year. I think it's a typical pattern that we have seen over the last years.
Yeah. Is it something in the Q4 2019 that comes to be even stronger in Q4? I think. Was it something particular this quarter that you want to highlight? I mean, inventories came down like this.
There's nothing sticking out really that I'm aware of. I'm starting to think now when you put the question, of course.
All right.
Yeah. No, there shouldn't be anything out of the normal there.
Okay. Next question is about NIBE Element. It's exciting that you have a lot of projects going on there to meet demand for electric and hybrid vehicles, but you are also talking about higher costs connected to development of new products to these areas. Are we seeing those higher costs in the numbers already, or will they increase ahead, pushing profitability?
You see part of those numbers in the figures already. I mean, the automotive manufacturers, these are new products. Of course, we had to start. Everyone is very eager to get the products out. I guess we all, as private consumers, recognize the uncertainty, as we mentioned before. There's a race you can call it now among manufacturers to come out with the new products. Of course, as soon as you sign a contract, you start. That's quite a bit of pressure on us to fulfill the timetables that these large corporations are sort of, I shouldn't say perhaps dictating, but have chiseled out in stone.
We're going to make our utmost, of course, to fulfill that. We start right away. As soon as we sign a contract, we start very quickly to address them and hire engineers and, yeah, whatever is required to fulfill the demands. It's high pressure in our laboratories and on our engineering squads in general.
Yeah. When have you hired more people throughout 2019, or did that start recently?
No, they had started, and I wouldn't exclude that there are going to be more people on board. I think you shouldn't look at that so dramatically. We have started already in 2019.
All right. Okay, thanks. My last question is about Climate Solutions and the commercial business in the U.S. Could you give us an update of how this is progressing, growth-wise and profit-wise?
Well, I think that it's with the Climate Control Group. We've had a decent growth, but it's not phenomenal. We are still working on that. Of course, on the heat pump side, it's fine. On the chiller, on the ventilation side, it's still relatively small compared to our big, giant competitors. There, we are looking for additional acquisitions to have a fully-fledged assortment.
Okay. Is that what needs to happen, some additional acquisitions for you to feel more comfortable with?
Well, I think that you saw what we did now in Europe. You put your toe in the water. Like we acquired Rhoss in Italy, a couple of years ago. Then by doing that, you get more knowledge about the market, and then we felt, boy, there's a chance that you can team up with ÜNTES. ÜNTES, as an example, wasn't a company that we were so acquainted with until we bought, should I say, Rhoss. The same thing in America now, in the U.S. market. Of course, we have the people in Oklahoma, and then we got in touch with the Tempeff people in Canada, and they were acquired. It's a puzzle that we constantly are laying.
Okay. You said that you felt okay about the performance, but not more. Does that mean that you have a profitability level at group level for those operations, or are they still below?
Yeah, of course. I think Hans mentioned that.
Yeah.
They are not doing as, of course, a 13.9. I think that we have to also understand that the commercial side, they will not be at that level. I think that there should be look for slightly lower margin in general, because that's where the industry is. I think the residential market has a slightly higher performance level.
Yeah. Sure. Okay. Thank you very much for taking my questions.
Absolutely.
Next question is from the line of Fredrik Moregard from Pareto Securities. Please go ahead. Your line is open.
Hi. Good morning, everybody. Actually, just one question on my part on the Dutch market for Climate Solutions. There was another Swedish building product company talking about some hesitation among property developers in the Netherlands. I was hoping you could give us some comments on that as well, if you've seen anything like that.
Yeah. Well, I don't know how recent you read that, but I think that they've also had hesitation on the NOx values there. I think that they have agreed now that a part of the solution is going to be to reduce speeds on motorways down to 100 km. It might sound strange, but they look at this from a broader perspective, and that's the conclusion that they've come to, and they have done that. From our knowledge, the market is heading in the right direction again. The overall drive is, of course, that they have decided on the government level that they're going to discontinue gas in the newly built properties.
That is, of course, in itself, driving the market. There are subsidies being introduced for the renovation market. It's a bold move in the Dutch market from the government side. I think that there were, of course, as you say, irritation on the stalling situation for a moment there. To our knowledge, that has been cured.
Okay. That sounds very good. The Dutch market is still, you're driving penetration of heat pumps in the market. Could you discuss your exposure to retrofit versus new build in the market as well?
I think that we can say that the new build is, of course, the market where there is an immediate need for heat pumps. That is difficult to connect a house to gas anymore. It's either district heating or heat pumps. Renovation or refurbishment, there you can still use condensing boilers. Now, of course, the refurbishment market will be helped as of this year with further subsidies. I don't think we're going to disclose our balance between refurbishment and new construction. As in all markets, the new construction is typically driving the market. In this particular case, they've also given time limits from when the gas will be totally cut off. That is, of course, also influencing the refurbishment market positively. Okay.
Okay. Thank you. Just a final question on this topic. Any ballpark number of how much of the European exposure in Climate Solutions relates to the Dutch market?
I think that we have to pass that on if we are not in line. We don't release those. Not that we don't want to tell you, but it's too much competitive point of view, and our competitors are also listening in.
Okay. Sure. That's fair enough. Thank you for your answers.
Thank you.
Next question is from Carl Ragnerstam from Nordea. Please go ahead. Your line is open.
Hi, it's Carl here from Nordea. First of all, you previously mentioned price increases within Climate Solutions. I wonder if you have implemented further price increases recently.
No. You mean like in quarter four? What's the question?
For instance, for quarter four, yes.
No.
Okay, perfect. Also regarding the German market, we obviously read about it in the media, et cetera. Can you share your view of what's happening there with energy efficiency, carbon neutral buildings, et cetera, and how this has impacted the heat pump market in Q4 2019, if early adopters have started to convert, and how it will impact 2020? Also on that, if you can, there are, of course, many techniques, but for instance, there are hybrid pumps and so on. Have you reflected on expanding into that niche?
Okay. To start with, we've been waiting for some positive activities from the government. I think that they are, in the new program, fairly aggressive when it comes to helping or assisting heat pumps, we must say, as far as subsidies are concerned. We should also understand that, of course, we have big giants on the gas side, and of course, they would like to have hybrid solutions, which there is also a possibility for. We have not, being a small player in the gas industry at this stage, any thoughts of entering the gas market. We feel that we should continue our line being very persistent on heat pumps as they stand, but reach their efficiency or increase their efficiency, among other things, and making them even more green with other refrigerants and so forth.
The overall picture from our perspective is that the German market looks better now than it ever has done, because now it's stated that even the nuclear power closure that they decided after the ocean, or that was not a wise decision. Now they're coming back trying to compensate for that. The overall picture from our perspective is that it's positive, but we have no intention to walk into intermediate hybrid solution gas and heat pumps. It's a different story with heat pumps and the PV cells.
Okay, perfect. Regarding, you mentioned greener refrigerants. How is it going with your conversion in order to meet the new standards and the more stricter standards coming 10 years?
Well, I think that we are well into that process. Now I shouldn't disclose too much, but you could come to the show in Stockholm now in April or late March. There you'll see our assortment and our thoughts around the refrigerants. I think we are well advanced into that.
Okay, perfect. That was fine.
I don't like to take anything away from the marketing department by explaining everything here now, but it'll be released in a couple of months.
Okay, perfect. The final one for me, the organic growth in Climate Solutions, if you adjust for FX, it's obviously softening a bit. Can you comment whether you are gaining market shares both in Europe and in the Nordics?
Yeah
How you perform compared to peers?
Well, we feel that we are very strong in the market where we are, like in the Dutch countries, like in the Netherlands, like in the Nordics, like in East Europe. Of course, we are relatively small in the Latin countries. Where we are present, we certainly feel that our market share is increasing, not by dramatic amounts, but we feel that our position is very strong. That fills us with a lot of, what should I say, positivism for the future. We also have to broaden ourselves in the Latin part of the world or the Mediterranean part, in Italy, Spain, and not at least France, where we could be much stronger.
Okay. Thank you.
Next question is from Marcela Klang of Handelsbanken. Please go ahead. Your line is open.
Thank you so much for taking my question, and congratulations on a very solid end to 2019.
Thank you.
One thing I've been wondering about, the latest acquisitions that you made came with margins below the group. Is this the case going forward? Is it difficult to find companies performing as well as NIBE is doing?
Well, I think that if we take Nathan position in Holland, of course, that's a country where alpha innotec doesn't have a subsidiary. We've been looking at Nathan for many years. Ever since we acquired alpha innotec in 2011, it's been an ongoing sort of discussion with the owners there that we would like to come in when they are ready, and they were ready now. They are a complete company that they have drilling capacity. They also provide underfloor heating and with heat pumps. We believe that we together be able to increase the margin there. We're not so concerned about that. When it comes to Tiki, that's a typical, should I say, water heater produced in East Europe, and that has not had a very dominating phase within the Grundfos Group.
The Grundfos Group is a leading manufacturer. I perhaps shouldn't criticize, when you are a smaller entity within a larger entity, there's always a risk that you are a little bit forgotten or neglected. There again, we feel that we have a good possibility to increase that. As far as shortages of the companies, we completely don't see that at all. There are many companies in the market. They're ready to at least open a discussion. Of course, it's a price issue. It's a geographical issue. It should fit on both sides. We have not started to acquire companies with a lower profitability rate.
When we feel that it's an interesting object above what is said, like 4% or 5%, we don't necessarily like to acquire companies at the zero level. Just like with Innotec in the vicinity of Marktredwitz, they were slightly below 5%, and they are developing in a good way. We feel fairly confident we can bring companies up from this level to a double-digit level, but not perhaps from zero to a double-digit level within the 24 months.
When it comes to the acquisitions that will be part of the Climate Solutions business area, is your ambition or is it possible to bring them to the level where you are, somewhere above 13%?
Well, I think when it comes to the commercial assortment, as you said before, I think there we have to be realistic. Of course, we're going to be double digits. When it comes to the residential companies, there's no reason why we shouldn't be able to head that as an average as it is now.
There is a structural difference between residential and commercial?
Yeah, when you sell to the residential area, just to make it very blunt, you sell one piece at a time. Of course, when you are in a commercial situation there's always or very often anyway, a bidding situation. There you don't control the situation in the same way. When you sell to the consumer, the consumer would have a preference for a certain product, just like you buy a car. When you sell commercial equipment, then it's not the final consumer that decides, it's the contractor that decides. Not necessarily do they always pick the best product, if I may say so. I hope I don't criticize any contractor now, but it's more the profile of the project that decides, okay, this price level we're going to have. It's a different structure of business.
Thank you so much for the explanation. Very good answers. That's all from me. Thank you.
Thank you.
Next question is from Karl Bokvist from ABG Sundal Collier. Please go ahead. Your line is open.
Yes. Hello. Thank you, and good day to you both. I was just wondering, is it possible for you to just provide some insight into the, let's say, proportion during the year in terms of underlying cost inflation, raw material headwinds, and growth investments, even though you can't quantify it, but just to get some insight into how these different factors have impacted you during the year?
Okay. Who should answer that? Cost inflation, raw material?
Yeah.
Well, I can start, and then you can pitch in. I think what we've continuously seen, and which I think I addressed slightly in my words around Element, is that the cost inflation in terms of wage increases in low-cost countries has continued. In parts of Eastern Europe where we are, also in Asia, we have seen almost double-digit wage increase. Success during the year. For political reasons in Mexico, it was decided to double the minimum wage there. That's an area where we need to combat that type of cost increase. In terms of raw material, it's been fairly stable during the year, actually. There have been no dramatic changes for neither refrigerants nor steel and copper, as a general statement you can say.
No, it's that the energy prices have gone down.
Yeah.
I think whether that is a defensive mechanism from the providers in oil and gas, when they see now that something is happening in the demand for electricity, they want to stay competitive, we don't really know. Of course, as you said before, gas prices are very low in North America, and oil prices follow, I guess, most of this. We also see that it's lower now. That's, of course, a challenge here in the old world. Heat pumps were always challenged by oil prices per price per barrel and so forth.
I think that has changed dramatically from a year to now. It's another era. The sustainability has really caught such a speed, such a strength, such a force. That is carrying on without really, or not so sensitive to the prices of those fuel prices anymore. It's more a different way of living and a different way of relating to the global situation with the climate change and things like that.
Understood. Going into Element here, the operating margin or also gross margins have been declining for quite some time. Now the operating margin is up, of course, year-over-year. Do you think that this is perhaps the beginning of a new trend for you?
Yeah, well, I think we would like to answer that question very positively. We can say that we've had a number of blows, to us, hard hits that, as Hans mentioned, like railroads, for instance, the maintenance has gone down coinciding with so many other things, the higher costs of labor and so forth. Typically, there are some stable segments, and we are a bit surprised about that. Now it seems like the semiconductor is coming back. We view, as we say also in the reports, the future with fairly bright eyes. We can't dictate the development of the world, but we feel that we are more robust now in all the business areas that we have. Of course, Element is such a broad presence, such a broad assortment of products.
The size that we have now also from a procurement side, of course, that gives us a strength that we didn't have five or six years ago when we were more sliding down to perhaps 5% or 6% or 7% operating margin during a downturn in the economy. We are not pleased to see the 8.9%. There is certainly another robustness in their way of meeting a little sluggish demand.
Two more questions from here. If we go to Climate, you talked about it briefly with your upcoming attendance on the fair here in Stockholm, are there any upcoming product launches or regional markets that you see accelerating that could help growth in the division?
Well, I think we've been mentioning that here, and we've been waiting for Germany, of course, being the largest economy by far in Europe, and that is influencing all companies, I think, what Germany is doing. The program that they're just in the process of launching now, we believe they're going to be a driver. I think that's the most prominent one. The Dutch one is known since before. We also know that Britain is going to get rid of gas in a certain way. That's also coming along, we believe, in a positive way. Those are the immediate changes. Nothing really new in the Nordics.
Okay. My final one here has to do with your acquisition strategy. There's been a lot of acquisitions over time now where you have acquired initially 51%. I'm just curious here, why not 60% or 70% or 80%? I understand you want to reserve some portion for existing management, of course, but just interesting to find out why you have chosen this form of ownership proportion in your acquisitions.
Well, I think that it takes two to tango. It depends so much on ownership structure and the previous owner's time horizons and our knowledge of an industry. Let's say in Turkey, we took 50%. There's no way we would get any more than 50% because the owners, they believe so strongly in this company. We're going to continue like that. From our point of view, it's good because we need more knowledge as well. That's coinciding. In Holland, we were 51%. They said, "Okay, it's always safer in a way to have 51%. They are very positive to remaining on board for a long time. The two owners there that used to have 100%, when we buy perhaps 65%, since we don't like to give any floor for the coming 50% down.
An older owner saying, "Okay, perhaps the performance, if my health is not there the coming years, perhaps I should sell 65% now, at least, so we have some guarantee. I'll be there to drive, but I'm at a certain age now, perhaps I'm not so certain that my power is there and that something could happen to me." Those are three illustrations under three different situations.
Understood. A quick follow-up on that. For example, this year, I think you mentioned that acquisition payments is about, well, more or less SEK 1 billion . Out of this one, how much is for the initial consideration and how much is earn-out payments for previous acquisitions?
Well, I think that there's a bit, since we don't announce the price per acquisition. As a principle, we try to price a company that expands and runs now. Typically, we all have business plans together in all the acquisitions, like three, four, five times. There, of course, we also believe that the performance is going to be better and so the price of the final tranche going to be higher relative, it seems, to the first one. That's how we reason. That's why we don't like necessarily to buy 100%.
Of course, we bought Tiki 100%, but that's an industrial seller. When we talk about physical individuals, we never like to take 100% really there because they have to remain on board with our structure. We don't have a management ready to step in. They have to continue to run the show. Dividing it between new and other acquisitions, I think I will have to pass on that question unless Hans has a Christmas gift here.
No. Well, I can just add that from an accounting point of view, because we typically enter into contracts where we are obliged to buy the company down the road. We make a down payment or a payment for the share that we buy now, then, of course, set aside a liability on the balance sheet for the anticipated tranches going forward. That's the way it works. That's why we consolidate them fully from day one as well, typically.
Good. Perfect. Thank you very much, gentlemen. Have a good lunch.
Thank you. I think that was the last question, right?
Yes. Correct. That was our final question for today.
Thank you very much for calling in. Now we're just going to go out and keep pedaling again. Have a nice day, everyone out there.
Thank you. Bye-bye.
Bye-bye.
That concludes your conference call. Thank you all for attending. You may now disconnect your lines.