Earnings Call: Q2 2020

Aug 19, 2020

Quarterly report

Ladies and gentlemen, welcome to the NIB Q2 Results Presentation. Today, I'm pleased to present Eric Lindqvist, CEO and Hans Backman, CFO. Mr. Lindqvist and Mr. Backman, please begin. Thank you. Thank you very much. Good morning and good afternoon wherever you are in the world. There is Eric and Hans here, and we like to split it up like we've done the last few years, 20%. The reports taking like 20, 22 minutes. And we hope that we could cover all issues within an hour. There's several issues to cater for during the rest of the day. So 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, of course, in the offices and actually, we've been in the offices here in Marcarud and so start over with these elements all the time. And 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. But 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. So coming back to the report, we mentioned that it's a continuous stable development. And of course, no one can say that we are not affected by the COVID-nineteen. Of course, everyone is affected one way or another, psychologically or very physically. And the whole society is going through a or has been going through perhaps a drama. And very few of us have ever experienced such a period like we've been through and are going through. And 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. And we've been, of course, fortunate also to be in a sustainable business. So we have not suffered too much for Chorus that it hit us, but it's been fended off, as we say, in a decent fashion. And the growth, of course, if we look at that, of course, it's been hit ourselves. So we've been hitting ourselves, of course, as well. But we've been able to defend our margins fairly well. And I think that we also like to once again underline how important it is that we have dictate, now you have to do that, now you have to do that. We to dictate now you have to do that, now you have to do that. We've been practicing and practicing and 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, but has a phenomenal spring in tougher times, which we are going through and have been through the last 4 or 5 months. So we are, very pleased to see that the model is working. And on top of that, of course, we are also geographically, to say, fortunately positioned. We are strong in the DACH countries. We are strong in the Nordic countries. And had we been head office in Italy or France, for instance, it 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's the Frugal attitude is very much helping us there, that cost control, focus on productivity. We never diminish those efforts. So we're pleased to see that the result is keeping up fairly well. And 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 and the last one just here in July. Having a look at the figures, I mean, you've seen that already. Of course, the growth, the 1st 6 months has kind of dwell more on the Q2 eventually. But if we took the 1st 6 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. But nevertheless, we are coming out with an operating margin slightly above the same period last year. And if we look specifically at the quarter 2, we can say that the growth was very modest, like 2.2%. And considering that the acquisition was 9.7%, the organic decline is 7.5%. And 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 of the financial items, we pretty much follow the usual pattern where you see that the first two quarters typically in the year, they are a bit more modest. And then, of course, Q3 and Q4 typically kick in with the larger sales, and that's also where we generate most profits. And that's to be seen on the other graph here, where we also have the trend line. And if you go back 10 years or 15 years, it's the same pattern, you can say. It's a very, very solid pattern. And even after all these acquisitions done or carried out during the years, we have the same pattern, meaning that elements, climate solution and solves combined, they seem to have this pattern in Sweden, in the Nordics, in Europe, in 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. And 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 products that we should walk into. It's taking a long, long time. But we have nevertheless, we're very pleased to see now that the rest of the world is coming along in a very decent fashion. Clive acquisitions, of course, most of the acquisitions carried out during the 1st 6 months. They are within Climate Solutions. And also, they've been some operating margin has, of course, increased. And we've been able to also keep the, let's say, the discipline on a very, very good level. Coming back, I'm so proud, I must say that, perhaps I shouldn't say, someone else should mention that, but I'm so proud of the model that you'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. And if we just look at the 1st 6 months here, of course, we've had a growth in sales very marvelously, of course, on the organic side and Hans going to drive a bit more on that. But nevertheless, we've been able during the 1st 6 months to grow. And the first the second quarter is, of course, hit a little bit by the virus situation with a decline organically or I think it's a little bit less than 3%. But 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 this 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. And some markets have been or market segments have been hit very, very hard. But even here, the sustainability profile in some areas have been helping us. And also, the semiconductor industry that is becoming a vital part of the element anymore, that has also prospered, of course, during these 3 or 6 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 costs 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. And I think 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%. But 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. So that's all in all in a very short fashion on the element side. Looking at stopes, of course, it's also been a roller coaster. We don't have that many units producing on the stopes side. And already during the Q1, we noticed that we were hit fairly strong indefinitely during April May. And then June came back relatively decently again. And there, of course, we had to close the packers in Britain and partly or some weeks also in Canada and having 5, in reality, larger production units, of course, that is very, very cumbersome and painful. But nevertheless, we've been able to compensate. Core's margin has gone down. As we all see, even the first quarter was hit. And during the period now, the last quarter, the decline was almost 20% or 18.5% organically. So to be able to present figures like this, again, very proud to note that we have managements 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. So that's all in all from my side when comes to the results. And a few pie charts before Hans dig into more precise figures here. Of course, Climate Solutions, a slightly higher percentage of sales due to their lesser decline, particularly during the Q2, now representing like 65% of sales and, of course, even more so when it comes to the operating profit. It's a little bit beyond now threefour of our operating profit. And of course, that will change typically when we come into the 2nd quarter, and stores will typically have a stronger period. Their weakest part is across the 1st 6 months. Geographically, hasn't happened that much. We are in Nordic countries a little bit less than a quarter. Europe, a little bit about 42% and the rest of the world, slightly above onethree of our revenue. So it's a healthy spread. Of course, we can always argue that other markets in North America and Europe should be higher. And if anything is to be said, of course, that will grow all the 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. And North America, they were hit a little bit later when it comes to closing down and stuff like that. But we also hope that the economy, as we see now in Europe or the economies, will open up gradually. So that's why we dare to say that we are still cautiously optimistic about the future. Now Hans, I hand over to you with that. All right. Thank you, Erik. So 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 and A session. So 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 the 8 or came in just above the SEK 8,300,000,000 up from SEK 7,600,000,000, so a total growth of 9.5. But as Eric 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. Then 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. So that has gone down from 34.8 to 33.4. That was well compensated for a good cost control within the SG and A area. And this, together with well timed acquisitions, made us end up with an operating margin of 12.4 percent, so actually up from 11.9 percent from last year. The Q2 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%. And in the second quarter, the positive effects of the Swedish krona had basically ceased to come in. So 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. So a year ago, they made up 42% of that pie chart and are now up to 47%, whereas North America has declined somewhat and the Nordics have gained a little. So still the performance here in Europe with both Nordic and Mainland Europe is a driver currently. Within NIIB elements, 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. But this has not only been a consequence of the pandemic. We saw signs of this both in the Q4 of 'nineteen as well as the Q1 of this year, although there has been an acceleration, of course, in the Q2 of this year. In terms of sales, NIIBA element came in just below $3,600,000,000 up from $3,400,000,000 so a growth of 3.8 percent, but that was really helped by well timed acquisitions bringing on board a good portion there. So the organic decline was some 7% for the 1st 6 months. Nevertheless, actions within both manufacturing and on the SG and A side have been taken to compensate for this. So we've 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 Q2, I mean, the hit was definitely stronger. We ended up with sales at €1,660,000,000 down from €1,720,000,000 you can say, so a decline of close to 15%. But 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 STOW to Element, STOWs 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 and Eric said it, it's really a roller coaster ride. January February started out quite well and also the first half year ended quite well in the sense that June was a strong month. So there clearly is an underlying demand for our stoves. And this demand then in combination with a good cost control has generated a reasonable result. I mean, sales declined by 10%. We've not seen any acquisition in this area for a little while. So I mean, we did take a hit there, but we're able to end the first half year with an operating margin of 3.4%. And it felt so long ago that this was the level that we were at since Stowes is the business area that really thrives on the second half of the year. In the Q2, as such isolated, there was a decline of 18.5%, most of it just being pure organic decline and no not much of a compensation there from currency. So the gross margin took a slight hit coming in at 27%, down from 34.6%, and we basically just broke even. But I think, as Eric 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% percent and then the rest being North America. We have regained some in the Nordic areas, specifically, you can say. And 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 asset 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 4,100,000,000, which are basically untouched from the beginning of the year. So we have been generating fairly good amounts of money and have a stable financial position. And 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 2 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. And the other undrawn or the other credit facilities simply undrawn. So it was taken there just, as I mentioned, precautionary measures. And 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 2 things. Mean, 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. So there is 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 Q2, which has led us to reduce production and also stocking in inventory. And then the demand hasn't come in as slightly better than we have suspected. So of course, there has been a very positive effect on working capital. But now it's also a matter for us, of course, to be able to deliver going forward. But all in all, we've been able to generate some operating cash flow of SEK 950,000,000, which is twice as much then compared to last year, despite the fact that the investment in current operations has been the same. So it's a good effect from this working capital reduction. And 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. And 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. So they will, for a period of time, be slightly higher now going forward, whereas they over the last years have been below. In terms of well, 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 to assets ratio is healthy with 45.6. And the working capital, if we switch to the next slide, has come down to 15.6 percent excluding cash and 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. And 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. But it's, of course, a consequence of the rights submission we made some years back and the cash we've generated and that we are sitting on with communicating vessels in these islands. So all in all, I think a very stable result, if we dare to say so ourselves. But I think we feel comfortable with where we stand after this very challenging spring. And by that, I think we open up for Q and A. Absolutely. Now you shoot. I'm sure you have ammunition out there. Thank you. And our first question is from Karl here from Nordea. It's Karl here from Nordea. I have a few questions. First of all, you mentioned that the German market is picking up quite nicely. So I wonder if it's possible for you to sort of try to quantify what growth rate you see there currently. And also if you I mean, 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. And I think that's as precise we can be now. And of course, that's being the size of the market, that is, of course, a great help for us. And also being decently present in the market with both Nide and Alfaenotech and our CTC and data cockpit. So we have a very strong presence there. And of course, subsidies, I mean, they play a part naturally. When we talk about then we got a map over the world. And you can say that if you compare how much oil and gas are subsidized, there's nothing compared to how much a heat pump or electricity prices or whatever you like to call that, how that is assisted. I think that we have to turn our eyes to a more neutral picture. And 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. And I mean, you obviously presented a really strong result for the quarter. But I wonder to what extent less fares and less traveling had on SG and A? And also how much, if you could 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, is that to counteract is something you do, like if you're a street fighter, you can't say, now I'm going to do this like a month in advance. You can't either hit like a month later because then the battle is over. I think that the whole issue, the whole trick, if you may call it that, is to respond immediately when something happens. And 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. There has to be instantaneous out there. And that's what's happening. Of course, if growth would pick up again in a more decent fashion. Of course, they would allow the forces to be open in a moderate way. So it's a delicate balancing act all the time. And 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. But then, okay, if demand is going down 5%, how do I counteract? We've been practicing that. It's like and perhaps it's a wrong word, but it's a military maneuver. We train them that if this would happen, what would you do? Say, go down with 5%, 10%, 15%, how what kind of measures would you take? And that has been put in practice. So that's all we can say. Of course, we wouldn't like to say now we've been cutting down traveling extensively so much. I mean, 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. But if you follow our path the last 30 years, we've been able to counteract very quickly. And we start back in the bank crisis, 'ninety two, 'ninety three in Sweden, because then we went down to 5%. That was the hardest, tough IT crisis, we kept on moving. Lehman Brothers, we kept on moving. We've, of course, crucified because we reacted a year in advance. And that eventually goes, oh, that was good that we reacted so quickly. And now, again, we've been able to counteract. So, it's a pattern. It's a DNA setup in our group. And I think we cannot be more precise than that. Okay, perfect. And the final one for me, it might be even more difficult to answer. I'm well aware of your heritage not lower prices, but I'm a little bit curious to know if you have seen increased price focus from then consumers. And also, if you see a risk of a more fierce pricing environment, when the replacement market will kick into 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? Yes. Well, I think that it's a delicate question. But if the volume goes up, I mean, 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. And the better volume you have, the more competitive you are. And we haven't seen a price war yet. But if the market developed as we hoped, we will naturally understand if the prices were to prevail on the same level or even go down slightly. But then again, you compensate that with a higher volume. And we don't see that this market is going to be over flooded 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 customers' expectations. And also on the installation side, we believe that installers having perhaps installed 10 or 15 units per year when they are to install 30 per year, because they also get slicker and more efficient in their way of operating. So of course, when volume goes up, I think the customer should benefit from more rational production, from more rational installation, from more rational distribution. So I think value for money. Our next question is from Martha Lang, Anders Banken. The floor is yours. Hi. And congratulations on the strong report. I actually have a question. It's a little bit of follow-up on the previous speaker. In Climate Solutions 2nd quarter, you managed to improve your margin up to 13.6% from 13% percent in organic decline with gross margin down. How is that even possible? Have you found some slack? Have you changed some processes? And is this some risk cost savings? Is it something you can keep or more of a temporary nature? No, I think that of course, we have not it's important to start with that we never ever will damage needless long term ambitions. We never cut down to the point where it's difficult to come back. We never cut the tendon to say, not because then the run is invalid for another 8 to 12 weeks. But when something occurs, it might be that the worst mistake you can do is, well, it won't be that difficult. And 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. And then if something is not as bad as you would have thought in the first instance, then of course, you can relax a little bit. And when this was hitting us, of course, no one knew how severe this would hit us. And of course, all the measurements that we have been practicing, they were put in place. And Climate Solutions 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. And 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. And 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. Then a question about the U. S. You mentioned that Europe is moving faster than the U. S. In sustainability. And 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? Because you obviously changed your organization in Germany, They 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 we've changed anything. I don't know. But what we've done in Germany recently is, of course, that we have broadened through the acquisition of Akerkoste. We have had a spearhead now, you can say, for CTC, Renatek, the Swedish group in Germany. And of course, the Wouterkopf is also an asset that when it comes to the sizes of products, they are operating in larger capacities, kW wise. So we have 3 entities, you can say, clearly well positioned in Germany. In America, actually, we did that a little bit sooner. We started with the Enatec 11, Water Furnace 14 and Climate Solutions 16. So there, we already have like 3 entities. And on top of that, of course, we also acquired CTC up in Toronto in 'seventeen. So in North America, we actually have 4 entities. So as far as presence and spearheads, I think looking at years, we were a little bit quicker there. But again, of course, you know American oil prices and gas prices, they fall more in the market, whereas in Europe, we have taxes on that, and it's a different ballgame. But as far as presence, we don't believe that we need another manufacturer platform. Now we have to broaden possibly their portfolio of products, but not necessarily in the heat pump industry. We wouldn't need any more entities, if I understand or we understand that question correctly. Yes. And the penetration in North America, is it still somewhere around the 10% of new houses pick a heat pump compared to more than 50% in Germany? Yes. It's less it's 1 digit without knowing that precisely. It's of course new build is important, but it hasn'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 it did in Europe. And of course, we shouldn't dwell too much on the political issue, but that is well below 10% in North America or in the U. S, if you don't really see that. And 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 Stoss when the high season starts? Well, I mean, you always put these delicate questions, Marcel. We appreciate that. And 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 Q1, on 15th May or 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 of the year, we believe that we are we had a possibility to come out in a decent fashion. We are cautiously positive. I guess that's the indication we are giving. But at the same time, we cannot second or 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. But if demand if governments decide to close societies or factories, we cannot do anything else but react on the cost side. So the guidance you've gotten there for the second half year, I guess that's the best we can give you. Thank you. And your plan for stoves for this important season in the second half? Well, I mean, 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 really have the regular shows that we've had in the past when we invite a lot of VIPs, whatever you call them here in Markel, it's rather we've had that container as one example, moving around in Sweden, allowing no more than 50 people per time to arrive there and look at our new product. Similar efforts have been going on in other countries. So 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. And we are full of energy to support Stoves. We have a tremendous assortment. And coming out like we've done now, that is, of course, in itself giving support that we're on the right track. And even surviving like a loss of 18% or 17.5%, whatever Hans mentioned on the organic side, still coming out with a decent result is, of course, spurring the mood in the solar business. And we are totally backing it from our side here. Thank you. That was my last question. Our next question is from Max Frieden, 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 and the other one to demand. And we discussed a lot in the margins already. But in terms of M and A, can you say if the recently added M and A has had a negative, neutral or a positive effect on the margin and 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 Oontis and Thermex have been above and some have been below. So I think they are coming in matching relatively well the underlying result. They are not being too precise. Morj, you can comment on that. No, no. I mean, 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 Thermace 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. Yes. So I commented more about the group level. Yes, yes, of course. Yes. That's very clear. Helpful. Thank you. And just let's see if this question goes well. On end market demand and referring to Climate Solutions in Sweden, In the discussion that you had with the installers, are they seeing signs of increasing demand on replacement as the heat pump stock is now getting older? And the large growth in the storm that we saw from 10 years ago is now being replaced. I'm just trying to sort of grasp where we are in the Swedish replacement cycle, and any of your input here would be very appreciated. No, we believe that we are in a a position now the market is in a position that replacement is to cut about. We had a big boom late 1990 and the beginning of 2000s. And then, of course, it's like 15, 20, 20 2 years down the road. And 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. But now when everything is connected, you expect to have an app for almost everything. And that's the big difference here. Furthermore, clients, they are more efficient, and we are getting into more environmentally friendly refrigerants. So all those factors are driving it. Plus, 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, took on that challenge 20, 25 years ago. And even further, in our new construction, we took on the challenge 40 years ago when heat pumps, exhaust air heat pumps became the number one alternative. And of course, there's no, let's say, question mark when it comes to a customer then what should I use for the future. The certainty is there. It's either, of course, to replace a district heating unit and if that breaks down. But if you have an independent Willow house, the only alternative is really a heat pump, another one. And they are better. They are more quiet. And by far, they are easy to control, and you can control them via phone like everything else, I presume. All right. Thanks. And then just turning over to the U. S, which is seeing as weak development. I'm trying to understand it. So you have, according to the IRS, the tax incentives that are for both commercial residential funds 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 largest cities have been hit relatively hard with the closures. And so that's our picture, that the fact that the subsidies are going to burn down with some percentage units, That's not the main issue. It's rather that the construction sites are going to close. We lost more summer weeks and stuff like that. Because you talked about the U. S. Being a very strong market for you looking back to some 2 years ago. So and that was much rebal that you had a recent statement of the tax incentives, if I'm not mistaken, in January 2018. And so I'm thinking, logically, there should be a reverse effect now. That's why I'm asking the question. Yes. No, we appreciate that. Of course, we are not certain that everything is going to be the PGP and of course, if subsidies were taken away. But as we said, we are doing our utmost to spending quite a bit of money to trying to educate the market, the customers and installers what a benefit there is if you install a heat pump, not only the heating, but for climate climatizing a home in a very inexpensive relatively inexpensive way. And we hope that, that is catching on, but no one is really capable of looking into the future right now. We really want to hit. And we'll see what happens when we come into 2022. Is 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. And then, of course, we have one picture from the top in many countries without going too much into that. But on a federal level, it's one thing, but on a state level, it's something totally different. And there, we talk about the subsidies the state level or the other level, but the individual states are very, very supportive when it comes to our economy. And let's see what happens with the political landscape as well to presume that can impact. Finally, 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 going on the replacement market, replacing old oil and gas systems in Germany? Yes, of course, we are. But there's no secret, I guess, that growing that market is there we have a good battle with the German producers because the gas supplies or gas unit supplies, they try to use their brand name. So it's a battle, also new construction and replacement. But of course, now we've been in the market. Well, our strength is, of course, that we've been in the indeed has been in Germany with the brand since 1992 and Alpenotech since 1995. And last quarter, they are the oldest. They've been there for almost as long as me that's been producing heat pumps, it's for 4 years. So of course, it's a decent number of heat pumps under our 3 brand names the market. So we are fairly optimistic about what's going to happen there. But we also know that we had formidable colleagues with well known brand names. But in respect, we are not frightened. Our next question is from Douglas Lindahl, Kepler Cheuvreux. The floor is yours. Hello, Erik and Hans. Congratulations for myself. Well, strong performance and a tough quarter. I have two questions. Lots of questions on Climate Solutions margins, hopefully this is final one. I'll 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 and A would impact this, but any sort of indication on this would be helpful. Could you repeat that a little bit? So you said 15%. What was that once again, please? Yes. So historically, you've had Climate Solutions EBIT margins around 15% if we go back a few years. Do you see that as a likely EBIT margin target if we fast forward a few years? Or is that unreasonably high? What is your view on that sort of EBIT margin level? Yes. Well, sometimes when acquisitions come in without answering your question, they're decided to start with. If you look at Waterfurnace acquisition and also Climate Control Group, when they came in, of course, Water Furnace and the Climate Matter, they came in during the fall each year. And of course, also in North America, the fall or the quarter 3 and 4, they are the strongest ones. So both 'fourteen and 'sixteen came in relatively strong. And if you consider the rolling 12 month margin, that was a little bit lower. But of course, we try to always aim for a higher margin than we are at. As we've also said that so many times, if we were to, let's say, stop acquisitions, of course, we could not easily, but we could increase margins in all three sectors. But acquisitions, of course, they are initially a little bit of a burden, that's 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. So I think continuing with the same acquisition rate like we've done at the past, I think that we are rather trying to maintain approximately the levels where we are. And of course, we were within now solidly above 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. But again, it's important to understand that the growth target that we have to combine that with the margin targets, still believe that the 10% is a decent one. Of course, we know that Climate Solutions, they are well above that for many, many years. And the recipients 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 3 or 4 years. And 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 I mean, developed as before, you can say. Yes. Thank you. I understand that as well. But the strong performance in the quarter, obviously, with somewhat of a question mark on that, but very impressive nonetheless. On you mentioned M and A there. Can you say something on your pipeline continually? Which countries do you see it's more interesting than others? Are you looking still in Italy, France mainly? And maybe is the U. S. More interesting than ever, given the upcoming elections here? Biden victory could be positive. Thank you. Yes. Well, I mean, as we said, it takes 2 to tango. Of course, we had wish list for each business area. And we can preach and we call and we can write letters, but it takes, again, another part on the other side. And we don't even we have a very strong position in Sweden, and we acquired a Swedish company, which is not so usual anymore, just during the first 6 months. So Europe, of course, and North America, for Stoltz and Climate Solutions, going to be in the coming few years, still where we're trying to grow. Element being broader in presence, of course, there we also see very good potentials in both South America and Asia. And that will naturally come also for the 2 other business areas. But on the Element side, we follow our customers. And they, of course, ask us to be present even on the broader base than we are today. So I guess that's the guidance we can give right now. Please, were there any other questions there? Are we disconnected? No, something must have happened because there's no sound in our telephone here while we're speaking. And we didn't touch any button. No. We just tightened our ties a little. And apologies for the delay. Our next question comes from the line of Carole Borkast of ABG. Please go ahead. Your line is open. Thank you. Hello. And in the aspect of time, I would keep this very brief to just one question. Congratulations on the report, I should also add. So 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 will be able to fully you and other participants in the industry will be able to fully comply with the upcoming gas regulations. Okay. You talk about the ex gas regulations or Yes, exactly. Okay. No, of course, that's a we received that question several times. And of course, we are driving that development very intensely. And we are we try to be a forerunner when it comes to refrigerants, and there are many options there. And we certainly like to be on the safe side. Now the final recommendation is to finally end up like the GWP there at $6.75 or whatever it is. And our target is more ambitious than that. I mean, that's all we can say. And we're also going to see our product launches when we our just as an example, we can say that our experiences are very, very positive when it comes to propane, coal like 290 in the chemical language. And that has a DWP of 3 or 4. So that is a dramatic move. Of course, it's flammable, and you have to really master the way you treat that. But that's the ideal refrigerant. In some applications, it might be difficult for us to use. But we have higher ambitions than the norm itself. The same thing goes with Stokes. Of course, there are these eco design norms and limits. And our aims are always to beat that to say, well, that's one thing, that with our product, it's a little even a little bit better. So that is still holding. Okay. Was there an answer you could accept? Understood. Just interesting to hear on the progress from your side. Yes. I mean, it's absolutely. I mean, we are working very, very hard on that. And it's just to complete a little bit. I mean, it's not only to change the refrigerant. The compressors, they also have to comply with the new refrigerant. Also, you have to when you design the whole cooling circuit, all components have to be sort of mastered by the refrigerant or you have to look at it as a whole unit. So it's testing and testing and testing. And also have like a compression matter of fact is complying or allowing us to use a certain refrigerant because they're 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're testing, say, results over years, over many, many quarters during harsh conditions. Now I turn into an engineer here. But just to give them to put a little bit more meat on the bone. All right? Thank you. Thank you, Karl. Thank you. Thank you. And there are no further questions on the line at this time. So I'll hand back to our speakers for the closing comments. Well, thank you very much for calling in. And poor hands is sitting here. Was so easy for him. There were no questions today on the balance sheet or the liquidity. I mean, it seems like you impressed everyone, everyone. 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. So that's how we would like to perform as a group. No, yes. And I'm very pleased with the way you've been working together or working together with our subsidiaries out there. So thank you once again for calling in. And now we return to other duties. Have a nice afternoon. It's still very sunny and warm here. So we promised not to run out of the office until 7, 7:30. So we have a lot of things to work on here and Now it's the second half. Yes, 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.