Earnings Call: Q4 2019

Feb 13, 2020

Ladies and gentlemen, welcome to the NEBA year end before 2019 Q4. Today, I am pleased to present Geert Erik Lindqvist, CEO and Hans Beckman, CFO. Mr. Lindqvist and Mr. Beckman, please begin. Good morning, everyone. Good morning. And thank you for calling in. We're going to have the same procedure as before, as we call it. So Hans and I are going to present the report in brief, and then we're going to have an open session. And we believe that we should be ready about moving, So we give it an hour. And if I start, Hans, same procedure as previously, The headline recorded is a robust full year in the 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. But we're also exposed to, as you know, the regular consumer goods, and that has been a lesser positive situation. And 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. So we believe that after all, we are coming out with a fairly decent result to judge ourselves considering the conditions that we live in. Of course, interest rate has been another issue, particularly during the 1st part of the year, and people were worried about the interest rates going up. But that has now, of course, that concern has diminished and now it's spread on the other side. So 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 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 with a market that has not been so favorable in all aspects. And when it comes to acquisitions, of course, there was a criticism we heard during the 1st 2 or 3 quarters that we weren't active that we had for both of the entire companies. And we've said all along, there's no reduction, there's no slowdown whatsoever. It's just that it takes 2 to tango. And sometimes, we have to wait the quarter or 2 before acquisitions go through. And now we've had a number just in the last 3 or 4 months. And it's the same rate of discussions going on as before, so nothing has changed there. And if we just look at the figures themselves, we are, of course, comparing ourselves during Q4 with a very strong Q4 'eighteen. 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 1st quarters. It's lagging a little bit, and that is mainly due to Stokes and Element lagging behind there in previous quarters. But other than that, we see that we continue to grow even during the first the Q4. And for the full year, we passed the SEK 25,000,000,000, which we are pleased to see coming out with a margin overall around 12%, and that is like 6 0.6 percent of 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 kind of help with other sounds that's after all in our books fairly decent. When you look at the graphs on the coming slides here, we see that the growth is very much following the previous path where the full line there is 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. But nevertheless, we believe that that's more that we compare ourselves to a very strong quarter previous year. If you just look very quickly into the business areas, of course, the business has been very positive for Media Climate Solutions, continued stable growth, the sustainability discussions and our way of nagging many more that is influencing all of us. And we are right in the middle of that market, that thinking with our products. And that is, of course, giving us a stir. And on top of that, we've now been able to acquire a number of companies. ROS was more like the remaining part of the shares earlier in the year. And then Oontes came on the premium in the fall and also the TIKI group in Serbia. And just a few days ago, we were able to acquire 51% on NARCAN holding in the Netherlands, which is in a cost of Inotec's imports of heat pumps since many years. And 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 e comm segment as it stands now. But on the downside, we can, of course, also see and say here that the Swedish market, the heat pumps, new construction has gone down, whereas the refurbishment market is very prosperous. But to note is that the new construction went down considerably, particularly during the next 6 months, but we've been able to compensate that, at least partly with the refurbishment market. We have 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 will be a focus for us in the coming quarters. And we, of course, also talked a lot about And as a summary there, we look at Climate Solutions coming in with the 16 €400,000,000 and the operating margin slightly above the previous year, the 13.8. So all in all, Climate Solutions has performed relatively strong, we believe. And 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, pension, 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. But that has not been enough to support the margin that we had in previous year. What we can say about this is there 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. And I think that's due to the broad hurricanes that we have now and also our presence in the market in both Europe, North America and Asia. So overall, we believe that the demand has maybe been as strong and resilient again as it is right now. And of course, the acquisition of the Thermex in California earlier this year is also a step in that direction that will improve again our assortment That 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 if I make one of the industry like the 5 gs now coming about, then you see the demand is coming up fairly quickly. And that's something that we have not really been aware of before. When it's lacking, well, it was sort of a generation of products that went out of not business, but there was a slackening demand. And that was, again, not following the economy overall. So that's something that's going to balance, we believe, the business area as such. The operating margin, of course, that is we would have liked to see that remain on the 10% to 10.2%. We've taken a hit there. And the reasons mentioned already, the cost, of course, that we have occurred in R and D because the automotive industry, for instance, is very positive on long term, but it's been a little bit tough short term with people or customers being at a Chesapeake and should I buy an electric vehicle or should I buy a hybrid one. But we are certain that, that's going to come back to demand for vehicles, and we have seen ourselves very well positioned there with our different companies exposed to the vehicle industry in Europe. And 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. And we tried to combat that, but it's not done in 1 quarter. To automate and to rubberize, that generator 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 stopes, that's been a relatively flat market as well. And also on top of that, there's been a debate or there is a debate about emissions both in North America and Europe. In North America, new regulations, they're going to come into existence in May this year. Our assortment is, of course, fully off at par. And 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 status 2022, but nevertheless, it's a debate going on. And we have taken a self imposed model 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. So the broad arrangement that we have with pellets, with gas, with electric stokes and then, of course, the good burning ones. We're going to continue to buy that, and we see that's the main reason why we are strengthening our position in market and have the full range and we have had the full presence. So looking at the figures, we see that Stolt is still the only business there that's been able to position itself above 10% ever since we launched our group for the software change. Now it's a thin margin, we can say. And of course, despite the fact that we have an organic growth at least over SEK 100,000,000 over previous year, we still suffer operating profit that's below previous year. And we are taking quite a bit of our cost when it comes to R and D marketing. And it's and some instances we've also felt like there's been a price competition out there when the market has been softer. Just a few drafts before Hans is coming in. It's one you've seen so many times before, the tiny company 93, hardly visible in this graph, some CHF 300,000,000 internal and now we've had, I guess, CHF 25,000,000,000. And 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 steady uptick. But of course, you can see there that compared to 2018, it's a lesser margin to the previous year. And just a few words about seasonality. You can also see here that it's the 3rd Q4 when our sales typically would come in. And it's very consistent. It's very constant year after year. But the Q1 is relatively weak, then it comes up to 46%, 47%, and then it goes even further. So it's relatively easy to follow us when it comes to the seasonality. Even if they acquire companies during the year, the pattern is pretty much the same. And it's even more pronounced, as you all know, sitting out there when it comes to our profitability, how the 3rd Q4 really are the ones where we make money. And at last, 3 pie charts. Here, with the distribution and net sales, Climate Solutions typically around the $63,000,000 $64,000,000 and if you rather around $27,000,000 $10,000,000 for the full year. And when it comes to operating profit, of course, my debt to EBITDA in the Solutions having a higher or better margin, they represent a little bit better than 70% of the total group's operating profit. And the final pie chart here on the geographical spread, pretty much just before where the whole market, as we call it, the Nordic countries now represents 25% healthy percent, the rest of Europe some 40 percent, North America 30 percent and other continents 5 percent. So we can foresee that it will possibly grow slightly more on other continents or the others there. But overall, we see that's a very stable and robust, you can call it, distribution of sales. So with that answer, I'll let you comment on a few other things. All right. Thank you, Eric. So I will continue then with taking a slightly deeper look at Climate Solutions. As Eric mentioned, it's been a continued solid growth and performance of that business area. And most markets have actually performed quite well. And Sweden, as Eric mentioned, has been stable and grew initially more, flattened out some, but where when the newbuilds were reduced, but has been on a high level. North America has also continued quite well. The Netherlands has continued to grow. And finally, Germany is starting to move, although it's not quite there where we, of course, want it to be. So the overall organic growth has been quite good throughout the year, although the last quarter was somewhat weaker. And of course, 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. So I guess it remains to be seen in Q1 here if there was any spillover effect into the area. In Q4, anyway, the sales amounted to 4.6%, the growth there of 10.7%. Of course, there is a health of currency in there, but a a fairly decent organic growth after all, an improved gross margin and then landing on the same operating margin for as last year. And for the full year, we were able to grow by 15.3%, coming in at 16.4 percent, whereas the operating profit actually grew by 16.1%. So that's quite pleasing to see that we were able to increase that more than sales. And this despite that we still have some larger units in there that we mentioned before, like the Sun Controls Group in the U. S, the Emitec Group, the ROTH 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 4 percentage units from last year. And 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 NIBOR was listed, Pharma Solutions has, with the exception of the 2 initial years there in 'ninety seven and 'ninety eight, been well above the 10% operating margin. The one bar there that is lower is in 2,007 when we had the overall financial crisis. And the reason for being slightly lower these 3 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 are working on improving their profitability. Within Element, as Eric mentioned, there's been a softer demand for sure in several segments. And 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 VIN, whereas consumer related areas have been weaker. And as Eric mentioned, the automotive industry is continuously very interesting, but it's currently at a crossroads where there's a lot of hesitation in the business. And 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 1,850,000,000 in sales in the 4th quarter, up 13.3%. Acquisitions drove that to close to 8%, then a large portion of currency helped that. But 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. So we landed in the operating margin on a level of 8.4% versus 8.2% of last year. So also here, we grew profitability slightly more than sales, which was pleasing to see. But for the full year as such, it has been a challenging year for sure. And the overall result did not come in as expected. I mean, we came in at 622, down from 6 50 of last year and we're just below 9% on the operating margin side, whereas we were slightly above $10,000,000 last year. And of course, we've had to combat the wage costs and increases in several low cost countries, and we continuously address those questions, of course. So 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 split. And there have been very few movements within that compared to previous years. When looking at the operating margin from 97% to the end of this year, we've had a steady climb since restructuring The reserve was taken there, as you can see, in 2,005, up to a level where we came in about 10% for the 2016, 2017 2018. And for those of you who 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. And given the movements or what's happening on the market this year, it came down now slightly. But 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. And with these mild winters and weathers that we've seen, they have not either really helped sales, but 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 full quarter since we were helped by currency when converting the our North American and British operations into the Swedish krona. Then nevertheless, gross margin was fairly stable, and we came in there with a very decent result. And as you can see there, we have a strong seasonality in this business where we earned most of the money in this Q4. The SEK 142,000,000 in relation to the SEK 252,000,000 for the full year speak for themselves. And then for the full year, euros 2,500,000,000 in sales, very thin but still existing organic growth behind that. But then, of course, not being satisfied quite where we ended up on the operating profits level being slightly below last year. But on the other hand, pleased to see that we did manage to maintain the an operating margin above 10%. The geographical split is also similar to last year. Nordic, roughly onethree and then the rest of Europe, slightly less than 50%. And then thanks to the acquisition of FTIs and Wesbach, the good foothold in North America there, it's on 23%. And then just the operating margin over these last or over the all these years since the lifting. As Eric mentioned, it's the only business area that has constantly been above the 10%. So therefore, it was, as I guess, very pleasing to see that we've just managed it this year as well. And summing up, 2019 from an 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 4 years have rather been in the range of 16% to slightly above 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. And looking back since 2015, we have basically been able to double in sales and maintaining a decent profit level, which gives us a very good platform going forward and showing that it is possible to also eventually work towards our SEK 40,000,000,000 targets. Balance sheet, just quickly to leave some room later for your questions. There's not so much to say. I mean, dollars 37,000,000,000 in total assets. Entangible assets is, of course, the single largest item there. It's a consequence of our acquisitions. We do the impairment tests according to all rules and regulations and can defend the value quite nicely. On the liability side, equity is quite strong. It's increased by SEK 10,000,000,000 since 2015, of which SEK 3 came from a rights emission we made in 2016. And then of course, on the long term liabilities, non interesting and also the short term ones, they have increased by some SEK840,000,000 following the introduction of IFRS 16. Cash flow has been strong. Cash flow before change in working capital came in at slightly above SEK 3,400,000,000 compared to slightly below SEK 2,700,000,000 of last year. And thanks to a better management of working capital, the change there was slightly below €500,000,000 and the net debt at €2,958,000,000 as you see there, whereas the change in working capital last year was a negative SEK764 billion. So 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 and well, 2018, that is, and then continued it in 2019, leaving then up to an operating cash flow of around SEK 1,900,000,000 for the full year. If we just continue with some key financial figures, the depreciation 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, had depreciations for leasing included there as a result of the IFRS 16, and that amounts to EUR 240,000,000. So on a like for like basis, the depreciation according to plan for our fixed assets is just below EUR 800,000,000 to be compared to the 691, 640 and 40. And we had a strong cash position, good relation to interest bearing liabilities, equity and net debt to EBITDA that has come down a notch there as well, even as with an equity asset ratio of around 47%, which is quite stable for our continued growth, I believe, through acquisitions. I think the only key parameters that might stick out and have come down over the years a little bit, our 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. And you see that quite clearly between 2015 and '16 where return on equity went from 18% being close to our target of 20% down to 14.9 percent. But apart from that, the other key numbers are decent, I dare to say, which also you've 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. And 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. And then the relation came up again to the 19.6%. But quite frankly, we were a bit overstocked at that time. And this year, I think rather 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. And then the last picture here is more a summary of the development on our key parameters ever since we were listed. And by that, I hand over to you, Ira. No, Ira. I mean, thank you. Yes, I think this graph is quite illustrative that, of course, you started to have some cash on hand rather than trying to borrow when you need money. So of course, we are not totally proud of having a return on equity in other 20 11, not rather than the 13, 14. But we also know that we have essentially decent goals and money that we can use for acquisitions. We just wanted to reiterate the current intermediate target that you mentioned, Hans, and the SEK 40,000,000,000. And when we set that target, just relatively recent, people said, okay, is that possible? And when we look at the next graph here, we feel that we're getting closer and close already. And so of course, we've seen that we double paid every 4, 3, 4, 3, 7 5 years. Feeling now that we have exceeded the SEK 25,000,000,000, we don't see the SEK 40,000,000,000 yet, but we are fairly confident that we'll be able to ride there just to confirm that nothing has changed as far as our targets are concerned about target, and that's very much driving all our business entities in a positive way. And of course, with an equity ratio of some almost 50%, we think it is a return in equity of 20%. But it's going to be used in a wise way. So having said by 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 First question is from the line of Prah Johansen from SEB. Please go ahead. Your line is open. Yes. Hi. This is Prah Johansen. Thanks for taking my questions. So first, I have a quick question on the operating cash flow. It's strong for the full year, but in the Q4, it tends to be a bit higher if I've done my calculations right. So 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 Eric showed before, are not as strong as the latter part of the year. And really, Q4 is always our strongest quarter for the full year. So I think it's a typical pattern that we have seen over the last years. Yes. But is it something in the Q4 2019? It tends to be even stronger in Q4, I think. So was it something particular this quarter that you want to highlight? I mean inventories came down like this soon. There's nothing sticking out really, that's I'm aware of. Starting to think now when you put the question, of course, but yes, that should be anything out of the normal there. Okay. Next question is about Eleman. It's exciting that you have a lot of projects going on there to meet demand for and hybrid vehicles, but you're also talking about higher costs connected to development of new products to those areas. Are we doing those higher costs in the numbers already? Or will they increase ahead pushing cost? You see part of those numbers in the figures already. I mean, automotive manufacturers, they are these are new products. Of course, we had to start everyone is very eager to get the product out. I guess, we all as private consumers recognize the uncertainty, as we mentioned before. And there's a way you can go to now among manufacturers to come out with the new products. So of course, as soon as you sign a contract, you start. And that's quite a bit of pressure on us to fulfill the timetables that they these large corporations are sort of, I shouldn't say, perhaps dictating, but have chiseled out in stone. And we're going to make our utmost, of course, to fulfill that. And so we start right away. As soon as we sign a contract, we start very quickly to address them and hire engineers and yes, whatever is required to fulfill the demands. But high pressure in our laboratories and on our hydrogen Hinge walls in general. Yes. And when did you have you hired more people throughout 2019? Or did that start recently? No. They have started, and I wouldn't exclude that they're going to be more people on board as the but I think you shouldn't look at that so dramatically. But we have started already year 'nineteen. All right. Okay. And then 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 like phenomenal. So we are still working on that. And 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. So there, we're 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 you saw what we did now in Europe. You put your toe in the water, like we acquired ROS partly in Italy like a couple of years ago. And then by doing that, you get more knowledge about the market. And then we said, Board, they to chance they can team up with Oontis. Oontis wasn't, as an example, wasn't a company that we were so acquainted with. Until we bought, should I say, ROS, the same thing in America now with the U. S. Market. Of course, we have the people in Oklahoma, and then we got in touch with the Tempe people in Canada, and they were supplied. So it's a puzzle that we constantly are laying. Okay. And you said that you were 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? Yes. Of course, I think Hans mentioned that, that they are now at the close of 13.9. Percent. And I think that we have to also understand that the commercial side, they will not be at that level. I think that they actually 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. Yes, sure. Okay. Thank you very much for taking my questions. Next question is from the line of Cedric Moragold 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 Resolutions. 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. Yes. Well, I don't know how recent you read that. But I think that I've also had some hesitation on the NOx values there. And I think that they have agreed now that part a part of solution is going to be to reduce speeds on motorways down to 100 kilometers. It might sound strange, but I look at this from a broader perspective. And that's the conclusion that they come to, and they have done that. So from our knowledge, the market is heading in the right direction again. The overall drivers, of course, that they have decided on the government level that they're going to discontinue gas in the newly built properties. And that is, of course, in itself driving the market. And then there are subsidies being introduced for the renovation market. So that's a bold move in the Dutch market from the government side. And I think that they were, of course, as you say, irritation on the stall utilization for a moment there. But to our knowledge, that has been cured. Okay. That sounds very good. And I mean, 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? Well, I think that we can say that the newbuild is, of course, the market there. There is an immediate need for pumps and for heat pumps. And that is difficult to connect the house to gas anymore. It's either just a heating or heat pumps. Renovation or refurbishment, there you can still use condensing boilers. So but now, of course, the refurbishment not as well as the help as of this year with further subsidies. So I don't think we're going to disclose our balance between refurbishment and new construction. But as in all markets, it's the new construction is typically driving the market. But in this particular case, they've also given time limits from when the gas will be totally cut off. And that is, of course, also influencing the refurbishment market positively, okay? Okay. Okay. 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? Yes. That's I think that we have to pass that on if we're not in line. We don't release those. Not that we don't want to tell you, but I mean, it's too much competitive point of view. Our competitors are also listening in Okay. Sure. Fair enough. Thank you for your answers. Thank you. Next question is from Karl Rangestan from Nordea. Please go ahead. Your line is open. Hi, it's Karl here from Nordea. First of all, can you I mean, you previously mentioned price increases within Climate Solutions. And I wonder if you have implemented further price increases recently. No. You mean like in the quarter for what's your question? For instance, for Q4, yes? No, no, no. Okay. Perfect. And also regarding the German market, I mean, we obviously read about it in the media, etcetera. But can you share your view what's happening there with energy efficiency, carbon neutral buildings, etcetera, and how this has impacted the heat pump market in Q4 2019 if early adopters have started to convert? And how I mean, it will impact 2020? And also on that, if you can I mean, 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. And 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. But 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 been 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 building them even more green with other refrigerants and so forth. So 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 of corrosion or that was not the right decision. So now they're coming back trying to compensate for that. So 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. But then it's a different story with heat pumps and the PV cells. Okay. Perfect. And regarding you mentioned green refrigerants. I mean, how is it going with your conversion into I mean, 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. And now I shouldn't disclose much too much, but you could come to the show in Stockholm now in April or late March. There you see our assortment and our thoughts around the refrigerants. So I think we are well advanced into that. Okay. Perfect. That's fine. I don't like to take anything away from the marketing department by explaining everything here now, but it will be released in a couple of months. Okay. Perfect. And the final one for me. I mean, the organic growth in Climate Solutions, if you adjust for FX, I mean, it's obviously softening a bit, but can you comment whether you are gaining market shares both in Europe and in the Nordics or if you yes, 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. But of course, we are relatively small in the Latin countries. So where we are present, we certainly feel that our market share is increasing up by dramatic canals, but we feel that our position is very, very strong. So that fills us with a lot of, which is a positivism for the future. But we also have to broaden our sales in the LatAm part of the world or the Mediterranean part, and Italy, Spain and not at least France, where we could be not stronger. Next question is from Marcella Klein from 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 NIVEA is doing? Well, I think that in this particular if you are if you make an offer in Poland, of course, That's a country where Alfa Inotec doesn't have a subsidiary. And we've been looking at Nautam for many years. Ever since we acquired AltaInotec 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. And they, of course, they are complete and install, you can say, or complete company that they have drilling capacity. They also provide underfloor heating and the heat pumps. So we believe that we together be able to increase the margin there. But 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 Gurenti Group. The Gurenti Group is a lightest manufacturer, and I have a short and criticized. But when you are smaller entities within a larger entity, there's always a risk that you are a little bit forgotten or neglected. So there again, we see that we have a good possibility to increase that. As far as shortages of the companies, we can't see that at all. There are many companies in the market and they're ready to at least open a discussion. But then, of course, it's a price issue, it's a geographical issue, it should fit on both sides. Now we have not started to require companies with a lower profitability rate. But when we see that it's an interesting object above what they said like 4%, 5%. We don't necessarily like to acquire companies at the 0 level. But just like with Enertec in the facility, at market, they were like slightly below 5%, and they are developing very good in a good way. So we feel fairly confident in bringing companies up from this level to a double digit level, but not perhaps from 0 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 we said before, I think there would have to be realistic. Of course, you're going to be double digit. But when it comes to the residential companies, there's no reason why we shouldn't be able to have that as an average as it is now. So there is a structural difference between residential Yes. Because when you sell through the residential area, I mean, just to make it very blunt, you sell 1 piece at a time. But of course, when you are in a commercial situation, there you as always or very often anyway, a bidding situation. So there you don't control the situation in the same way. And when you sell to a consumer, the consumer would have a preference for a certain product just like you buy a car. But when you sell commercial equipment, then it's not the final consumer that decides. It's the contractor that decides. And not necessarily do they always pick the best product, if I may say so. I hope I don't criticize any contractor now. But this was a profile of the project that decides, okay, this price level we're going to have. So it's a different structure of business. Next question is from Karl Bucht 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? Who should answer that? You said inflation, cost inflation, raw material? Well, I mean, 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. And in parts of Eastern Europe, where we are, also in Asia, we have seen almost double digit costs well, wage increase during the year. And for political reasons, in Mexico, it was decided to double the minimum wage there. So 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 state can do the same. No, it's that the energy prices, they've gone down. And 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. So they say they want to stay competitive, we don't really know. But of course, as we said before, gas prices are very low in North America and oil price, which follow, I guess, most of this, and then we also see that it's lower now. So that's, of course, a challenge here in the old world. Then heat pumps were always challenged by oil prices per price per barrel and so forth. I think that has changed dramatically from how you use to do it now. It's another era. The sustainability has really caught such a speed, such a strength, such a force. So that is carrying on without really we're 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, I think, etcetera. Understood. And going into element here, the operating margin or also gross margins have been declining for quite some time. But I mean now the operating margin is up year over year. Do you think that this is perhaps the beginning of a new trend for you? Yes. We would like to answer that question very positively. But we can say that we've had a number of blows to us, they're hard hits. As Hans mentioned, like railroads, for instance, the maintenance has gone down, coinciding with so many other things, at higher costs of labor and so forth. Typically, there are some stable segments, and we have the supplies to mount that. Now it seems like the semiconductor is coming back. So we view, as we say, also in the report, the future with fairly bright eyes. I mean, we can't dictate the development of the world, but we feel that we are more robust now with all the business areas that we have. And of course, Element is such a broad presence, such a broad assortment of products. And the size that we have now also from a procurement side, of course, that gives us a strength that we didn't have 5 or 6 years ago, then there's a more sliding down to perhaps 5% or 6% or 7% operating margin during the downturn in economy. We are not pleased to see the 8.9%. But there is certainly another robustness in their way of meeting a little bit sluggish demand. Okay. And 2 more questions from me here. So if we go to climate, is there any you talked about it briefly with your upcoming attendance on the fair here in Stockholm. But are there any upcoming product launches or regional markets that you see accelerating that could help growth in the division? I think we've been mentioning that here. 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. And the program that they are just in the process of launching, 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 they're going to get rid of gas in a certain way. So that's also coming along, we believe, in a positive way. So those are immediate changes, nothing really new in the Nordics. Okay. And 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 why you have chosen this form of ownership proportion in your acquisitions. Well, I think that every if you have a takes 2 to tango, and it depends so much on ownership structure and the previous owner's time horizons and our knowledge of an industry. And let's say in Turkey, we said 50%. And there's no way we would get any more than 15% because the owners, they believe so strongly in this company. So we're going to continue like that. And from our point of view, it's good because we need more knowledge as well. So that's coinciding in Poland with the 51. And they said, okay, it's always safer in a way to have 51. And they are very positive to remaining on board for a long time, the 2 own fare that used to have 100%. When we buy, so that's 65%, since we don't like to give any floor for the coming 50% and only the owner saying, okay, perhaps the performance, if I 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. So those are 3 illustrations of the 3 different situations. Understood. So a quick follow-up on that. For example, this year, I think you mentioned that acquisition payments is about well, more or less SEK 1,000,000,000. So out of this one, how much is from initial consideration? And how much is earn out payments for previous acquisitions? Yes. I think that there is a bit since we don't announce the price per acquisition. But as a principle, we try to price a company that expands and runs now. And typically, we all have business plans together in all the acquisitions like 3, 4, 5 times. And there, of course, we also believe that the performance is going to be better inside of the price, with the final tranche going to be higher relative to the same with the first one. So that's how we reach. And that's why we don't like necessarily to buy 100%. Of course, we bought because they had to remain involved with our structure. We don't have a management ready to step in. They had to continue to run the show. But dividing it between new and other acquisitions, I think that we 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, I mean, because we typically enter into contracts where we are obliged to buy the company down the road. I mean, we make a down payment or a payment for the share that we buy now and then, of course, set aside a liability on the balance sheet for the anticipated tranches going forward. So that's the way it works. And that's why we consolidate them fully from day 1 as well typically. Good. Perfect. Thank you very much, gentlemen. Have a good lunch. Thank you. Thank you. I think we have the last question, right? Yes. Correct. That was our final question for today. Thank you very much for calling in. And now we're just going to route and keep heading again. And I'd say 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.