Ladies and gentlemen, welcome to the NIBE Q2 result presentation. Today I'm pleased to present Gerteric Lindquist, CEO, and Hans Backman, CFO. Mr. Lindquist and Mr. Backman, please begin.
Thank you. Thank you very much. Good morning and good afternoon, wherever you are in the world. It's Gerteric and Hans here, and we like to split it up like we've done the last few years when we present the reports, taking 20-minutes, 22- minutes. We hope that we could cover all the issues within an hour, because there are several issues to cater for during the rest of the day. Once again, very welcome to this presentation. It's a gorgeous day in Sweden. It's like an extended vacation in a way, although we are, of course, in the offices. Actually, we've been in the offices here in Markaryd and Sösdala, where the NIBE Element all the time. Of course, we keep distance and we keep the cleanliness as before, and, of course, even more so now with the hand washing and stuff like that.
I think, or we think it's good for discipline and morale and productivity to remain in the offices and the production facilities where that is possible. Coming back to the report, we mentioned that it's a continuous stable development. Of course, no one can say that we are not affected by the COVID-19. Of course, everyone is affected one way or another, psychologically or very physically. The whole society is going through or has been going through perhaps a drama. Very few of us have ever experienced such a period like we've been through and are going through. Perhaps we are a little bit too comfortable in many instances, but we are very pleased to see, I think all of us, that things are going in the right direction. We've been, of course, fortunate also to be in the sustainable business.
We have not suffered too much. Of course, it has hit us, but it's been fended off, as we say, in a decent fashion. The growth, of course, if you look at that, of course it's been hit ourselves. We've been hitting ourselves, of course, as well. We've been able to defend our margins fairly well. I think that we also like to, once again, underline how important it is that we have this decentralized business model. It's virtually impossible to sit here or any head office, if we call it, to dictate, now you have to do that, now you have to do that. We've been practicing over the last 30, 35 years that the autonomous model is very, very strong.
Could perhaps be overstaffed in good times a little bit, has a phenomenal strength in tougher times, which we are going through and have been through the last four or five months. We're very pleased to see that the model is working. On top of that, of course, we are also geographically, let's say, fortunately positioned. We are strong in the DACH countries. We are strong in the Nordic countries. Had we been head office in Italy or France, for instance, would have been more difficult where companies have been forced to close down in a totally different degree than we've been forced to. Results, of course, that the frugal attitude, it's very much helping us there. That cost control, focus on productivity, we never diminish those efforts. We're pleased to see that the result is keeping up fairly well.
We've also been able to acquire a number of companies. Of course, we started the majority of those discussions prior to the outbreak, but we've been able to at least complete them. The last one just here in July. Having a look at the figures, you've seen that already. Of course, the growth the first six months, Hans going to dwell more on the Q2 eventually. If you took the first six months that we typically talk about, the growth is of course 6%, but the acquisitions are 7.4%, meaning that we are suffering a little bit from the situation around us. Nevertheless, we are coming out with an operating margin slightly above the same period last year. If we look specifically at the quarter two, we can say that the growth was very modest, like 2.2%.
Considering that the acquisition was 9.7, the organic decline is 7.5. We're going to talk about that in a little while here. Whereas Climate Solutions has been able to keep up fairly well, and Element and Stoves have been hit harder by the outbreak. If we look at the graphs, net sales and profit after financial items, they pretty much follow the usual pattern where you see that the first two quarters typically in a year, they are a little bit more modest. Then, of course, Q3 and Q4 typically kick in with larger sales. That's also where we generate most profits. That's to be seen on the other graph here, where we also have the trend line. If you go back 10 years or 15 years, it's the same pattern, we can say. It's a very, very solid pattern.
Even after all these acquisitions done or carried out during the years, we have the same pattern, meaning that E lement, C limate Solutions, and S toves combined, they seem to have this pattern in Sweden, in the Nordics, in Europe, and North America, and also in Asia. Spending a few words on the Climate Solutions. Again, it's an impressive resilience that they have shown, the companies within the group, and of course, great help there is the sustainability profile. The world is definitely waking up. We've been preaching this message for like 40 years. We spent a lifetime trying to convince the world that heat pumps, for instance, is one category of product that we should walk into. It's taken a long, long time. Nevertheless, we're very pleased to see now that the rest of the world is coming along in a very decent fashion. Five acquisitions.
Of course, most of the acquisitions carried out during the first six months, they are within Climate Solutions. Also the operating margin has, of course, increased, and we've been able to also keep the discipline on a very, very good level. Coming back, I'm so proud, I must say that. Perhaps I shouldn't say it. Someone else should mention that, but I'm so proud of the model that we've chosen and the people out there working so hard, and willingly so hard. It's not like a whip over the shoulders, over the backs of people. It's done voluntarily. They are so proud of their individual companies, and that is so pleasing to see that they are able to keep up. Difficult, of course. No one has been through what they've been through.
Nevertheless, they are catering for this situation in a very, very professional, still very personal and human way. If we just look at the first six months here, of course, we've had a growth in sales, very modestly, of course, on the organic side, Hans is going to dwell a bit more on that. Nevertheless, we've been able during the first six months to grow. The first, second quarter is, of course, hit a little bit by the virus situation with a decline organically of, I think it's a little bit less than 3%. Nevertheless, we have a very, very resilient business area. When it comes to Element, of course, that's where everything started.
That's when we really became aware of the fact that the virus had hit us in Asia, because there we had to close some factories, and eventually it came to Europe and then to North America. Some markets have been, or market segments have been hit very, very hard. Even here, the sustainability profile in some areas have been helping us, and also the semiconductor industry that is becoming a vital part of Element anymore, that has also prospered, of course, during these first six months. Operating margin, of course, has gone down, but still, we've been able to keep it on an acceptable level. It's important, we believe, that you keep a good balance between keeping the cost under control, but also thinking about the future. You can't panic. Panic is disastrous.
You have to be very balanced when you talk about how you cut down cost and how you monitor things for the future. I think that that's been done in a very professional, still here as well, in a very human way. Of course, the second quarter was a little bit dramatic for Element, where you had an organic decline of almost 15%. There again, we see how important it is to have acquisitions coming in, also to have a spread geographically of our operations, as well as working with so many different segments of the economy. That's all in all in a very short fashion on the Element side. Looking at Stoves, of course, that's also been a roller coaster. We don't have that many units producing on the Stoves side.
Already during the first quarter, we noticed that we were hit fairly strong, and definitely during April and May. June came back relatively decently again. There, of course, we had to close the factories in Britain and Portlaoise for some weeks also in Canada. Having five, in reality, larger production units, of course, that is very, very cumbersome and painful. Nevertheless, we've been able to compensate. Margin has gone down, as you will see. Even the first quarter was hit, and during the period now, the last quarter, the decline was almost 20%, or 18.5% organically. To be able to present figures like this, again, very proud to note that we have management and board that are capable of keeping up, presenting results, keeping everything in good order, believing in the future, being human, but still very strict.
That's all in all from my side when it comes to the results. A few pie charts before Hans dig into more precise figures here. Of course, Climate Solutions is slightly higher percentage of sales due to their lesser decline, particularly during the second quarter. Now representing, I think, 65% of sales, and of course, even more so when it comes to the operating profit. It's a little bit beyond now three quarters of our operating profit. Of course, that will change typically when we come into the second quarter when Stoves will typically have a stronger period. Their weakest part is, of course, the first six months. Geographically, hasn't happened that much. We are in other countries, a little bit less than a quarter. Europe, a bit above 42%, and the rest of the world, slightly about a third of our revenue.
It's a healthy spread. Of course, we can always argue that other markets in North America and Europe should be higher. If anything is to be said, of course, that will grow over time. We will certainly not abandon where we are. We have a good stronghold, and we feel that Europe is really moving along now when it comes to the sustainability side. North America, they were hit a little bit later when it comes to closing down and stuff like that. We also hope that the economy, as we see now in Europe, or the economies, will open up gradually. That's why we dare to say that we are still cautiously optimistic about the future. Hans, I hand over to you with that.
All right. Thank you, Gerteric. Just like last time, I will take you through the three business areas and then the balance sheet and some key figures before we open up for the Q&A session. Again, Climate Solutions has continued in a stable manner, you can say, where sustainability really has been the forerunner in this respect. From a regional point of view, mainland Europe has really picked up, and especially the DACH countries, with Germany improving quite substantially compared to previous years. Nordics have, at the same time, remained fairly stable, whereas North America has been a bit weaker. In terms of sales, we reached SEK 8.3 billion, up from SEK 7.6 billion. A total growth of 9.5%.
As Gerteric mentioned, we have several acquisitions in there, so the organic growth itself in the first half was around 3%, where we still were helped to some extent by currency. Of course, the gross margin, due to the juggling that we had to do a little bit in some factories to keep the supply chain going, took a little hit there. That has gone down from 34.8% - 33.4%. Was well compensated for a good cost control within the SG&A area. This, together with well-timed acquisitions, made us end up with an operating margin of 12.4%, actually up from 11.9% from last year. The second quarter as such was, of course, more hit by the ongoing pandemic. The overall growth was 7%, but with acquisitions being 9.7% of that, we did see a decline of some 3%.
In the second quarter, the positive effects of the Swedish krona had basically ceased to come in. It's the organic decline that we see there. Nevertheless, again, a good cost control in the quarter made us reach an operating margin of 13.6%, up from 13% from last year. In terms of geographical spread, there have been a few movements in the sense that we see in the numbers now that mainland Europe is picking up. A year ago, they made up 42% of that pie chart and are now up to 47%, whereas North America has declined somewhat. The Nordics have gained a little. Still the performance here in Europe with both Nordic and mainland Europe is a driver currently. Within NIBE Element, the picture is much more diverse than within Climate Solutions and with great variations between segments.
Sustainability related products and segments, as well as semiconductor products, have developed well, whereas most of the other ones have seen a less favorable trend, you can say. This has not only been a consequence of the pandemic. We saw signs of this both in the fourth quarter of 2019 as well as the first quarter of this year. There has been an acceleration, of course, in the second quarter of this year. In terms of sales, NIBE Element came in just below SEK 3.6 billion, up from SEK 3.4 billion, so a growth of 3.8%. That was really helped by well-timed acquisitions bringing on board a good portion there. The organic decline was some 7% for the first six months. Nevertheless, actions within both manufacturing and on the SG&A side have been taken to compensate for this.
We have been able to maintain a good gross margin and decrease our overhead costs, and landing there on operating margin, which has been reasonable after all for the first half year, 8.3% compared to 9.3% for the same period of last year. In the second quarter, the hit was definitely stronger. We ended up with sales at SEK 1.66 billion, down from SEK 1.72 billion, a decline of close to 15%. Where, again, the well-timed acquisitions compensated well for this, leading us to be able to perform a decent result for the quarter as well, with an operating margin of 7%. In terms of geographical split, there have not been so much movement in this area. As we mentioned so many times before, it is the most global area, and it's very good with this geographical spread balancing out the differences that there may be.
Similar to Elements, Stoves has also been experiencing a challenging business environment for some time. We've been seeing a negative organic growth actually both in Q1 and Q2, where, of course, Q2 has been the worst. At the same time, as we mentioned early on there, Gerteric said it's really a rollercoaster ride. January and February started out quite well, also the first half year ended quite well in the sense that June was a strong month. There clearly is an underlying demand for our stoves. This demand then, in combination with a good cost control, has generated a reasonable result. Sales declined by 10%. We've not seen any acquisition in this area for a little while. We did take a hit there, but we're able to end the first half year with an operating margin of 3.4%.
It's not so long ago that this was the level that we were at, since Stoves is the business area that really thrives on the second half of the year. In the second quarter as such, isolated, there was a decline of 18.5%, most of it just being pure organic decline and not much of a compensation there from currency. The gross margin took a slight hit, coming in at 27%, down from 34.6%. We basically just broke even. I think as Gerteric mentioned, thanks to our business model, where responsibility is taken far out in the organization by managing directors who are true managing directors, we came in better than we at first suspected, actually. In terms of geographical spread, it's fairly similar to previous periods, Nordic regions being around 30%, mainland Europe 45%, and then the rest being North America.
We have regained some in the Nordic areas, specifically you can say, that has probably been a consequence of business being open and people have spending a lot of time and also money on investing in their own homes and mansions. Taking a quick look at the balance sheet on the total assets side, there has not been so many movements since the last quarter. Needless to say, the intangible assets have increased as an inevitable consequence of us acquiring companies. I think pleasing to see there are the financial current assets at SEK 4.1 billion, which are basically untouched from the beginning of the year. We have been generating fairly good amounts of money and have a stable financial position. On the equity side, there have not been so many movements either.
As precautionary measures, you can say, we have taken up a couple of credit facilities. One which has been used to replace two bonds that were due, so to speak, during the pandemic, which we were actually able to replace at better terms than the bonds have been running at. The other credit facilities are simply undrawn, so it was taken there just as I mentioned, for precautionary measures. Looking at the cash flow, it has actually been strong during the first half year as well. We've generated almost exactly as much as last year, but have had a very large change, you can say, in working capital, which is a consequence of two things. We have been addressing the working capital level within the group for quite some time, and that has slowly but surely started to pay off.
There's a trend in the right direction there for quite some time. The other effect is, of course, that it has been a bit difficult to predict the demands for the second quarter, which has led us to reduce production and also stocking and inventory. The demand hasn't come in as slightly better than we have suspected. Of course, there's been a very positive effect on working capital. Now it's also a matter for us, of course, to be able to deliver going forward. All in all, we've been able to generate some operating cash flow of SEK 950 million, which is twice as much compared to last year, despite the fact that the investment in current operations has been the same. It's a good effect from this working capital reduction. Just looking at a few key financial numbers.
Investments in current operations are basically the same as last year. They are, however, quite larger, you can say, than the depreciations. That's a consequence of what we have communicated earlier as well, that we are investing more and more in operations. We are building a couple of factories, some offices as well. They will, for a period of time, be slightly higher now going forward. Whereas they, over the last years, have been below. With the sales and profit generated during the first half year, the other key financial numbers have developed quite well. Net debt to EBITDA is stable there at 1.7. If you look at one more decimal, it's 1.55. Equity assets ratio is healthy with 45.6.
The working capital, if we switch to the next slide, has come down to 15.6%, excluding cash in bank, which is the way we typically look at it, since that's what our managing directors and their teams can address. I mean, inventory, receivables, payables. Those of you who have been following us for quite some time know that the return on capital and return on equity are not where they used to be and not really where the targets are. It's, of course, a consequence of the rights emission we made some years back and the cash we've generated and that we are sitting on. It's communicating vessels and these items. All in all, I think a very stable result, if we dare to say so ourselves. I think we feel comfortable with where we stand after this very challenging spring. By that, I think we open up for Q&A.
Absolutely. Now you shoot. I am sure you have ammunition out there.
Thank you. Ladies and gentlemen, if you do wish to ask an audio question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two. Once again, zero one to register for a question. There will be a brief pause while questions are being registered. And our first question is from Carl Ragnerstam, Nordea. The floor is yours.
Hi, it's Carl here from Nordea. I have a few questions. First of all, you mentioned that the German market is picking up quite nicely. I wonder if it's possible for you to try to quantify what growth rate you see there currently. Also, it might be a bit difficult, but to what extent the subsidies impacted the growth there?
Okay. Well, I think that the German market, I think that we would like to come back on a total figure for the year eventually, of course. We believe we are running in double-digit growth in Germany. I think that is precise we can be now. Of course, that being the size of the market, that is of course a great help for us. Also being decently present in the market with both NIBE and alpha innotec and now CTC and WATERKOTTE . We have a very strong presence there.
Okay, perfect.
Of course, subsidies, they play a part naturally. When we talk about subsidies, that's very, very strange. We had a strategic meeting here the other day, we got a map over the world, you can say that if you compare how much oil and gas are subsidized, that nothing can compare to how much a heat pump or the electricity prices or whatever you like to call them, how that is assisted. I think that we have to turn our eyes to a more neutral picture. Disregarding the subsidies, we believe that people, in general, are now starting to being truly concerned about what's happening with climate and with, let's say, pollution and tearing apart things that we thought would be natural. Animals are being killed, and nature is tortured in many ways.
We believe that is also a very, very strong factor in favor of the sustainability. Okay?
Okay, perfect. Very helpful. You obviously presented a really strong result for the quarter, but I wonder to what extent less fairs and less traveling had on SG&A and also how much, if it put it like cost savings, is sustainable and how much of that could come back already in Q3 or H2?
Well, that's a heck of a question. The thing is, of course, that to counteract is something you do. If you're a street fighter, you can't say, now I'm going to do this, a month in advance. You can't either hit a month later because then the battle is over. I think that the whole issue, the whole trick, if we may call it that, is to respond immediately when something happens. That's what we've been preaching, both Hans and I here now, that when something occurs, it's too late for us to call them and say, now you have to do something. That has to be instantaneous out there. That's what's happening. Of course, if growth would pick up again in a more decent fashion, of course, they would allow the faucets to be open in a moderate way.
It's a delicate balancing act all the time. That's the whole thing. Our resilience, as we like to call it, that is built on exactly this, that the management out there, they are well aware of their strengths and weaknesses, of course, as well. They know, okay, if demand is going down 5%, how do I counteract? We've been practicing that. It's like, perhaps this is the wrong word, but it's a military maneuver. We train them that if this would happen, what would you do? The same goes down with 5%, 10%, 15%. What kind of measures would you take? That has been put in practice. That's all we can say. Of course, we would have liked to say, now we've been cutting down traveling expenses with so much. A little bit of a secret we have to keep.
I think the most important for you out there as investors or analysts would be to understand that this is not the first time that we've been withstanding things in a fairly decent fashion. We shouldn't brag. We just say that we are proud of how we can counteract. If you follow our path, the last 30 years, we've been able to counteract very quickly. If we start back in the bank crisis, 1992, 1993 in Sweden, of course, then we went down to 5%, and that was the hardest time. IT crisis, we kept on moving. Lehman Brothers, we kept on moving. We were, of course, crucified because we reacted a year in advance. That eventually was, that was good that we reacted so quickly. Now again, we've been able to counteract. It's a pattern. It's a DNA set up in our group.
I think we cannot be more precise than that.
Okay, perfect. The final one from me, it might be even more difficult to answer. I'm well aware of your heritage of not lower prices, but I'm a little bit curious to know if you have seen the increased price focus from the end consumers. Also, if you see a risk of a more fierce pricing environment when the replacement market will kick in to an even larger extent, meaning that the installation cost could be or will be just a fraction of the total price, meaning that the consumers might put more focus on the heat pump. If you got my question?
Well, I think that it's a delicate question. If the volume goes up, that's a market phenomenon. If the market goes up or increases, of course, it attracts more operators in that market. That's how it's built up. The better volume you have, the more competitive you are. We haven't seen a price war yet. If the market develops as we hope, we will naturally understand if the prices were to prevail on the same level or even go down slightly. Again, you compensate that with a higher volume. We don't see that this market is going to be over-cluttered with terrible price wars. I think that everyone wants to present a product that's durable, that is lasting over a long time, meeting the customer's expectations.
Also the installation side, we believe that the installers, having perhaps installed 10 or 15 units per year, when they are to install 30 per year, of course, they also get slicker and more efficient in their way of operating. Of course, when volume goes up, I think the customer should benefit from more rational production, from more rational installation, from more rational distribution. I think value for money.
Thank you. Very helpful. All from me.
Thank you.
Our next question is from Marcela Klang, Handelsbanken. The floor is yours.
Hi, congratulations on the strong report. I actually have a question. It's a little bit of follow-up on the previous speaker. In NIBE Climate Solutions' second quarter, you managed to improve your margin up to 13.6 from 13 in organic decline with a gross margin down. How is that even possible? Have you found some slack? Have you changed some processes? Is this some cost savings? Is it something you can keep or more of a temporary nature?
No, I think that, of course, it's important to start with, that we never, ever will damage NIBE's long-term ambitions. We never cut down to the point where it's difficult to come back. We never cut the tendon, because then the runner is invalid for another 8-1 2 weeks. When something occurs, it might be that the worst mistake you can do is say, well, it won't be that difficult. Then you only take out costs for that sort of half situation. I think our reaction is more like, it could possibly be pretty hefty here when it comes to declines, and then you have to react accordingly. Then if something is not as bad as you would've thought in the first instance, then, of course, you can relax a little bit.
When this was hitting us, of course, no one knew how severe this would hit us. Of course, all the measurements that we've been practicing, they were put in place. Climate Solution being clearly the largest business area, they put in place all those measurements, and obviously, our decline was not as large as it could have been. You see the consequences now that we even internally thought that the drop in sales could have been larger than it actually turned out to be. Consequently, we put on the brakes fairly bluntly, and you see the result there. I hope that is helpful for you without putting precise figures on the answer.
Impressive, anyway. A question about the U.S. You mentioned that Europe is moving faster than the U.S. in sustainability. In terms of your presence in the U.S., is your organization in the shape where you want to have it? Is your presence enough? You obviously changed your organization in Germany, are picking the fruits of that right now. What needs to happen in the U.S. for you to have a similar development like in Germany?
Well, I think that if we've changed anything, I don't know. What we've done in Germany recently is, of course, that we have broadened through the acquisition of WATERKOTTE. We have a spearhead now, you can say, for CTC Enertech, the Swedish group in Germany. Of course, the WATERKOTTE is also an asset when it comes to the sizes of products. They are operating in larger capacities KW-wise. We have three entities, you can say, clearly well-positioned in Germany. In America, actually, we did that a little bit sooner. We started with the Enertech 2011, WaterFurnace 2014, and ClimateMaster 2016. There, we already have three entities. On top of that, of course, we also acquired CGC up in Toronto in 2017. In North America, we actually have four entities.
As far as presence and spearheads, I think, looking at years, we were a little bit quicker there. Again, of course, you know American oil prices and gas prices. They follow more the market, whereas in Europe, we have taxes on that, and it's a different ballgame. As far as presence, we don't believe that we need another manufacturer or platform. Now we have to broaden, if possibly, their portfolio of products, but not necessarily in the heat pump industry. We wouldn't need any more entities, if we understand the question correctly.
Yes. The penetration in North America, is it still somewhere around the 10% of new houses with heat pumps compared to more than 50% in Germany?
Yeah. It's one digit without knowing that precisely. Of course, new build is important, but they haven't hit the 10% yet. We are working on that, but still, the sustainability message, we don't like to criticize any country, any continent, but that has caught on to a lesser degree so far in North America than in Europe. Of course, we shouldn't dwell too much on the political issues, but that is well below 10% in North America or in the U.S., if you prefer.
Then a final question. What is the situation now in terms of demand recovery, both for Climate Solutions and also the second half you mentioned is important for Stoves when the high season starts?
Well, you always put these delicate questions, Marcela. We appreciate that. It's very, of course, delicate. I guess you noticed that we've been opening up a little bit when it comes to giving guidance. When we present the report for the first quarter on May 15th, whenever it was, we said that the start of the second quarter had been at a level that would indicate that we would survive in a decent fashion. We may now say that the second half for the year, we believe that we had a possibility to come out in a decent fashion. We are cautiously positive. I guess that's the indication we are giving. At the same time, we cannot accept a third outbreak of this strange situation. Of course, no one can be really prepared.
The only thing we can be prepared for is to internally have the cost structure, productivity structure in order. If governments decide to close societies or factories, we cannot do anything else but react on the cost side. The guidance you've gotten there for the second half year, I guess that's the best we can give you.
Thank you. Your plan for Stoves for this important season, the second half?
Well, we are very vigorous, trying to visit and trying to do as much as possible. We also indicate that. There are many ideas, and we couldn't have the regular shows that we've had in the past when we invite a lot of VIPs, whatever you call them, here in Markaryd. Rather, we've had that container, as one example, moving around in Sweden, allowing no more than 50 people at a time to arrive there and look at our new product. Similar efforts have been going on in other countries. It's amazing, not only in our company, but in all companies, we've seen so many initiatives coming out of this very unknown, very strange situation. We are full of energy to support Stoves.
We have a tremendous assortment, coming out like we've done now, that is of course in itself giving support that we're on the right track. Even surviving, like a loss of SEK 18 or SEK 17 .5 , whatever Hans mentioned on the organic side, still coming out with a decent result. It's of course spurring the mood in the Stoves business, and we are totally backing it from our side here.
Thank you. That was my last question.
Our next question is from Max Frydén, Danske Bank. The floor is yours.
Thank you so much. First off, congratulations on the strong quarter and the good margin development, especially in these times, you guys. I have two questions, and one is related to margins, another one to demand. We discussed a lot on the margins already, but just in terms of M&A, can you say if the recently added M&A has had a negative, neutral or a positive effect on the margin development in the quarter?
Well, I think that it's pretty neutral. I think they've been keeping up fairly well. Some of them are coming in a little bit below. I think if you read reports like ÜNTES and Therm-X, they've been above and some have been below. I think they're coming in, matching relatively well the underlying results. Without being too precise. Hans, you can comment on that.
No, it's absolutely correct what you're saying, but I think it's fair enough to point out that within Element, the acquisition of the Therm-X group, where the semiconductor business has picked up just at the same time as we acquired the company, has of course helped that business area during this phase.
Yeah. No, I commented more upon the group level.
Yeah. Of course.
Yeah. That is very clear. Helpful. Thank you. Just, let's see if this question goes well. On end market demand, and I'm referring to Climate Solutions in Sweden, in the discussion that you have with the installers, are they seeing signs of increasing demand on replacements as the heat pump stock is now getting older, and the large growth in installments we saw some 20 years ago is now being replaced? I'm just trying to grasp where we are in the Swedish replacement cycle, and any of your input here would be very appreciated.
We believe that we are in a position now, the market is in a position that replacement is to come about. We had a big boom late 1990 and the beginning of the 2000s, then, of course, it's 15, 20, 22 years down the road. It's not like they are wearing out so much as they are so much better, you can say, control-wise. Of course, connectivity is a totally different story. In those years, of course, we had controllers, and we felt that they were pretty much advanced. Now, when everything is connected, you expect to have an app for almost everything, and that's the big difference here. Of course, they're more quiet, they are more efficient, and we are getting into more environmentally friendly refrigerants. All those factors are driving it.
I think that, again, people are aware of the fact that we are a forerunner as a nation if we don't brag too much about that. Sweden is really taking on that challenge, or took on that challenge 20, 25 years ago. Even further, on new construction, we took on the challenge 40 years ago when heat pumps, exhausted heat pumps, became the number one alternative. Of course, there is no, let's say, a question mark when it comes to a customer example, what should I use for the future? The certainty is there. It's either, of course, to replace a district heating unit if that breaks down. If you have an independent villa or house, maybe the only alternative is really a heat pump, another one. They are better, they are more quiet.
By far, they are easy to control, and you can control them via your phone, like everything else, pretty soon.
Yeah. All right. Thanks. Just turning over to the U.S., which you say is seeing a weaker development. I am trying to understand it. You have, according to the IRS, the tax incentives that are for both commercial and residential heat pumps are being slowly reduced as of this year into next year. Is it possible to say if you're seeing an effect from this, if it's even possible to sort out that from the COVID-related turbulence?
We believe that it's more like the largest cities have been hit relatively hard with the closures. That's our picture. That the fact that the subsidy is going to go down with some percentage units, that's not the main issue. It's rather that the construction sites have been closed or lost for some weeks and stuff like that.
I'm thinking maybe if you think about it more now, sort of mid to long term, if you're doing anything in your organization to sort of mitigate. You talked about the U.S. being a very strong market for you looking back to two years ago.
Sure.
That was much driven that you had a reinstatement of the tax incentives, if I'm not mistaken, in January 2018. I'm thinking logically there should be a reverse effect now. That's why I'm asking the question.
Yeah, no, we appreciate that. Of course, we are not certain that everything is going to be peachy clean, of course, if subsidies are taken away. As we said, we are doing our utmost is spending quite a bit of money to trying to educate the market, the customers, and installers what the benefit there is. You install a heat pump, not only for heating but for climatizing your home in a very inexpensive, relatively inexpensive way. We hope that is catching on, but no one is really capable of looking into the future there now. We won't be hit. We see what happens when we come into 2022. If something going to be prolonged or, no one knows. The underlying movement is, of course, also in North America, that people are concerned, states are concerned about this change in climate. Like everyone notices that.
Then, of course, we have one picture from the top in many countries without going too much into that. On a federal level, it's one thing, but on a state level, it's something totally different. There, of course, we talk about the subsidies on the state level or federal level. The individual states, they are very supportive when it comes to our product.
Let's see what happens with the political landscape as well. I presume that can impact.
Yeah.
Just a detailed question on Germany. You talked about the penetration rates of new builds, which I've seen is some 50% now with heat pumps. Are you also growing on the replacement market, replacing old oil and gas heat systems in Germany?
Yeah, of course, we are. It's no secret, I guess, that growing that market, there we have a good battle with the German producers because the gas suppliers or gas unit suppliers, they try to use their brand name. It's a battle, both in new construction and replacement. Of course, now we've been in the market where our strength is, of course, that we've been in the NIBE has been in Germany with the brand since 1992 and alpha innotec since 1995. WATERKOTTE, they are the oldest. They've been there for almost as long as NIBE has been producing heat pumps. They are for 40 years.
Yeah.
Of course, there is a decent number of heat pumps under our three brand names in the market. We are fairly optimistic about what's going to happen there. We also know that we have formidable, for want of a word, colleagues with well-known brand names.
Yeah.
We respect them, but we are not frightened.
Right. Okay. Thank you for answering my questions.
You are welcome. Thank you.
Next question is from Douglas Lindahl, Kepler Cheuvreux. The floor is yours.
Hello, Gerteric and Hans. Congratulations from my side as well. A strong performance in a tough quarter. I have two questions. Lots of questions on Climate Solutions margins. Hopefully, this is the final one. I try to be more specific. Going forward, do you see it as likely as EBIT margin for the Climate Solutions business coming in at around 15% in the long term? I obviously realize that future M&A would impact this, but any sort of indication on this would be helpful.
Could you repeat that a little bit? You said 15%. What was that? Once again, please.
Historically, you've had Climate Solutions EBIT margins around 15% if we go back a few years.
Right.
Do you see that as a likely EBIT margin target if we fast-forward a few years? Is that unreasonably high? What is your view on that sort of EBIT margin level? Thank you.
Sometimes when acquisitions come in, without answering your question very precisely to start with, if you look at the WaterFurnace acquisition and also Climate Control Group, when they came in, of course, WaterFurnace and the ClimateMaster, they came in during the fall each year. Of course, also in North America, the fall for the quarter three and four, they are the strongest ones. Both for 2014 and 2016 came in relatively strong. If you consider the rolling 12-month margin, that was a little bit lower. Of course, we try to always aim for a higher margin than we are at. As we've also said that so many times, that if we were to, let's say, stop acquisitions, of course we could, not easily, but we could increase margins in all three sectors. Acquisitions, of course, they are initially a little bit of a burden.
Perhaps the wrong word. A little bit of an effort to bring it up. Typically, some come in at a better margin, but in general, it's a little bit of an uphill battle to bring them up there. I think continuing with the same acquisition rate like we've done in the past, I think that we are rather trying to maintain approximately the levels where we are. Of course, we were within now solidly about 10% on the Stove side, even through acquisitions. On the Element side, the last few years, we've been up around 10% and slightly above, and now we are on the run rate a little bit below. Again, it's important to understand that the growth target we have to combine that with the margin targets. We still believe that the 10% is a decent one.
Of course, we know that Climate Solution, they are well above that for many years. To sit here and say now we're going to aim for 15. With the coming acquisitions, I think that we'd rather look at the average where we have been the last three or four years.
If I just add, I think it's also a matter of product mix in the sense that with an add-on of more commercial business, which opens up numerous opportunities for us. We have seen a slightly lower profitability within the commercial segment, whereas the residential that we have been stronger in, so to speak, or which has dominated us previous years, has developed as before, you can say.
Yeah. Thank you. I understand that as well. The strong performance in the quarter obviously puts somewhat of a question mark on that. Very impressive nonetheless. You mentioned M&A there. Can you say something on your pipeline continually? Which countries do you see as more interesting than others? Are you looking still in Italy, France mainly? Maybe is the U.S. more interesting than ever given the upcoming elections here? Biden victory could be positive. Thank you.
As we said, it takes two to tango. Of course, we have a wish list for each business area, and we can preach, and we can call, and we can write letters, but it takes, again, another part on the other side. We have a very strong position in Sweden, and we acquired a Swedish company, which is not so usual anymore, just during the current six months. Europe, of course, and North America for Stoves and Climate Solutions are going to be, in the coming few years, still where we try to grow. Element being broader in presence, of course, there we also see very good potentials in both South America and Asia. That will naturally come also for the two other business areas.
On the Element side, we follow our customers, and they, of course, ask us to be present even on a broader base than we are today. I guess that's the guidance we can give right now.
Very thankful for those answers. Thank you again. That's it for me.
Thank you.
Thank you.
Please. Were there any other questions there? Were we disconnected? Hello? Well, something must have happened because there's nothing. There's no sound in our telephone here while I was speaking.
We didn't touch any button.
No. We just tightened our ties a little.
Apologies for the delay. Our next question comes from the line of Karl Bokvist of ABG. Please go ahead. Your line is open.
Thank you. Hello, and in the aspect of time, I will keep this very brief to just one question. Congratulations on the report, I should also add. In the long term, and looking at the gas side and where you are today, you write a little bit about it in the report, but do you have a view on the progress made to date? Where we might see the technology for the coming years and when you think that you and other participants in the industry will be able to fully comply with the upcoming gas regulations?
Okay. You talk about the F-gas Regulations?
Yes, exactly.
Okay. Got it. Of course, we see that question several times, and of course, we are driving that development very intensely. We try to be a forerunner when it comes to refrigerants, and there are many options there. We'd certainly like to be on the safe side. Now, the recommendation is to finally end up like the GWP there at 675 or whatever it is. Our target is more ambitious than that. I guess that's all we can say. You're also going to see our product launches. Just as an example, we can say that our experiences are very positive when it comes to propane, R290 in the chemical language. That is a GWP of three or four. That is a dramatic move. Of course, it's flammable, and you have to really master the way you treat that.
That's the idea of refrigerants. In some applications, they might be difficult for us to use, but we have higher ambitions than the norm itself. The same thing goes with Stoves. Of course, there are these ecodesign norms and limits, and our aims are always to beat that, to say, well, that's one thing, but with our product, it's a little better. That is still holding. Okay. Was that an answer you could accept or?
Yeah. Understood. Just interesting to hear on the progress from your side.
Yeah, absolutely. We are working very hard on that. Just to complete a little bit, it is not only to change the refrigerant. The compressors, they also have to comply with a new refrigerant. When you design the whole cooling circuit, all components have to be mastered by the refrigerant, or you have to look at it as a whole unit. It is testing, and testing, and testing. Also have compressor manufacturers complying or allowing us to use a certain refrigerant. There, on the heat exchanger side, we do that ourselves and so forth, but on the compressor side, we also need the manufacturer's approval, and they are testing results over years, over many quarters during harsh conditions. Now I have turned into an engineer here. Just to put a little bit more meat on the bones there. All right?
Thank you.
Thank you, Karl.
Thank you.
Thank you. There are no further questions on the line at this time. I'll hand back to our speakers for the closing comments.
Well, thank you very much for calling in. Poor Hans is sitting here. It was so easy for him. There were no questions today on the balance sheet or the liquidity. It seems like you impressed everyone, saying, well, we have cash. We are ready. Right?
Well, it's what we preach to our subsidiaries as well. When they make money, they don't get any nasty visits or questions for that matter. That's how we would like to perform as a group.
No, yeah. I'm very pleased with the way you've been working together. We're all working together with our subsidiaries out there. Thank you once again for calling in. Now we return to other duties. Have a nice afternoon. It's still very sunny and warm here. We promise not to run out of the office until 7:00, 7:30. We have a lot of things to work on here.
Now it's the second half.
Yeah. That's right. Thank you very much.
Thank you.
This now concludes the conference. Thank you all very much for attending. You may now disconnect.