Earnings Call: Q4 2018

Feb 15, 2019

Ladies and gentlemen, welcome to the Nibel Q4 Full Year Results Presentation. Today, I'm pleased to present Gjatarek Lindqvist, CEO and Hans Bachmann, CFO. Mr. Lindqvist, Mr. Bachmann, please begin. Thank you. Thank you, thank you. Good morning, everyone out there or wherever you are situated. Good afternoon. We'd like to present the results in the ordinary way where we start, and we have some slides each year. And then, of course, we're open for questions. So just starting with the business environment for the year, we can say that it's been a very decent overall demand. But we all know that there are political tensions and talk about trade barriers, some already in existence. So of course, we just have to navigate in the waters, you know, filled with those. On the positive side, we can say that the interest rates are still relatively low. And people are becoming more and more aware of the sustainability or the importance of living in a different way. And I think that our product assortment in all three business areas are well positioned for the future because that is really hitting us every day for newspapers, media, whatever you, that we have to act more sustainable. So that's the surrounding. If you just look at our own performance, we can say that it's been a very good organic growth the whole year and, of course, combined with acquisitions. So we're almost hitting the 20% a bit south of 20% all in all for the year. And the operating margin has increased, and that is, of course, due to growth organically, but also that we have, as always, looked at productivity and we have courses with costs. And also that the largest business area, Climate Solutions, of course, they had improved their operating margin, and that is affecting the whole group naturally. And as always, a number of acquisitions that we have carried out. If we just have a quick look at the figures that you all are familiar with now, we rather talk about the year, of course, with the growth in like 18.5 percent coming in like on an operating margin of the 12.6 percent, which puts us sort of in the mid range of the last 5 years. So we've been within 1213 the last 5 years, and I think that's a very solid development. And the last quarter, and Hans is going to dwell more on that when it comes to each business area, it's also slightly better than last year. The growth is then 21.3%, which is quite considerable. Considering that the environment, as we said, has not been in all aspects so positive from the issues that we just talked about. And on the next slide here, I think we demonstrate the pattern that we see every year where the growth is increasing over the year and is very pronounced 2018, 2017. So it was a little bit lesser pronounced, but in the Q1, then it accelerates as the quarters go by. So we have a very strong seasonality, and we have a slide later on where we can show that more precisely. And that is, of course, also affecting the profit of the financial items or the EBIT as well naturally. So same picture here, starting very modestly in the Q1 and then growing gradually over the year. It's a healthy picture. We think that it's a good direction of the line that you see up there. So it's a good 12 month development. If you just quickly look into the business area of Climate Solutions, First, we've had a good organic growth, and it's always important to compare the previous year. And the previous year, of course, was slightly affected by a lesser positive environment in America regarding with the U. S, regarding heat pumps. So that is helping us. But also the overall demand in Europe, particularly for heat pumps, has been very good, we can say. And then we have acquired 2 companies. And in the past, District Heating has been a little bit of a competitor. And rather than compete, we said, okay, let's bring this on board. And that's something we already told you about like in the quarter 2 report. And that is well received in the market. And then we also felt that we might as well go ahead and acquire the majority of Ross rather than being a minority owner. So now we own Ross since 1st January this year 100%. And that, of course, is going to be the platform or one of the platforms for the commercial business with chillers and air handling units. And last year, with 2 major entities coming in as acquisitions, of course, we have spent quite some time in integrating those companies, and we also write about it that our model is fairly successful by enhancing procurement and production experiences and eventually also R and D experiences. And of course, the organic growth is always a driver of improved operating margin. And then Hans is going to come back to more specific figures, but we can just look at the growth there from SEK 12,000,000,000 to SEK 14 point 2,000,000 last year, with the operating margin going from SEK 13.3 billion to SEK 13.8 billion. And of course, we've been up to 15% in the past some years. And that also has to do with when the company comes in. And sometimes, we have acquired companies, very profitable ones and they fall, and that is, of course, the seasonality also enhancing their margin that particular year. But we are certainly on our way back on the margin side of Climate Solutions. So let me quickly swing over to Element. There we have a very impressive, we like to say, continued organic growth. Of course, here we are a sub supplier, always under pressure price wise. And the operating margin is somewhat lower. And that is, of course, due to the fact that we are located in countries now that used to be low cost so called low cost countries. And there we're seeing huge increases in salary, more politically driven. And that again sort of emphasizes how important it is to increase productivity wherever you are. And in some countries in Eastern Europe, as we used to call it, like Poland and Czech Republic, been dramatic salary increases on the labor side and also in Mexico. And we just have to cope with that. So we just mentioned that. It's something that our shareholders and investors should be aware of. Of course, we're going to cope with that, and you see a slightly higher investment rate than the old for the group, and that is, of course, to combat that. And we also mentioned some projects in 2017 that brought the margin up to 11, percent, and perhaps that was a little bit almost too good. So that should be mentioned also when you compare these the figures this year with the previous year. But we have parked ourselves about the 10% line and we have been striving for that for so many years. And of course, it's a totally different group of companies now covering, we can say, the world without eating element of various kinds. And of course, we're selling under a also here, a sustainable level, a sustainability level. And we noticed that the market when it comes to hybrid cars, wind turbines and trains and those category of products, I mean, that is truly also moving in the sustainability direction. Few comments about the perhaps I forgot to mention the acquisition there of Briskit and Ennen Group on the Element side. And Briskit, of course, puts us in a totally different category of products in the semiconductor industry, where we supply those heating mats or heating jackets for the suppliers sort of manufacturing of these products. At the Ameren Group, that is again a sub supplier that we feel is going to enhance our system delivery possibilities, producing like braided hoses and flexible hoses And particularly in the HVAC industry, it's a big category or important category of products. So with that said, Stokes, of course, we've had a more modest growth on the stokes side. We all remember the warm summer in Europe, but that has affected us. But nevertheless, we kept our market shares and even enhanced them. So we although we've been losing a little bit on the operating margin side, we are fairly comfortable that we are going to continue and we are able to bring that up again in the coming years. And the thing is, of course, that we are spending quite some time and quite some money now on R and D to even enhance, particularly the wood burning products to reduce the particles and also marketing to train our, should I say, dealers to be more loyal to us rather than participating in many shows. We have quite costly education, for instance, where we gather all our loyal dealers, which we think is you get more for each bank crown or a pound or whatever currency we are talking about. And one interesting strategic acquisition is the one in Britain, CK Pires. And a few years ago, we thought, well, if that is phenomena, they're going to prevail. And absolutely, CK5 is really charging ahead like some other competitors. And that's particularly a product for larger cities where you don't have chimneys. And that is not just like a TV screen. Those are physical products that are very, very real in the flame picture. And also, you have the possibility to add some heating features to those soaps. So that's the picture of the growth from 2.2 to 2 point 4 almost. The operating margin, as I explained, is slightly lower due to the reasons that I just mentioned. And to also mention where we landed for the full year, We have this graph and I think this graph is very important. We're going to come back to an even more detailed one in a little while. Of course, we set the target for $20,000,000,000 when we came out of 2013, where we had just passed 10. What many thought many people observed is thought that they will be too aggressive of a target. We've been very transparent with our targets, not necessarily quarter by quarter, but certainly once we have passed every set targets. So that we allowed ourselves 5 to or 4 to 7 years, and now we crossed the line after 5 years. So just north of the $22,000,000,000 And you can see that's been a solid growth for some 25 years. I think there's one exception, and I think that's the 2,008 where you can see a contraction of possibly 2,009. And that has naturally also affected the profit line. It almost has almost the same structure or picture or graph as you see here. There have been some money set aside in 2,005. And of course, 2,008 was also then affected by Lehman Brothers. But it's been a very, very solid development. And if you look at that in a more detailed fashion, we can say that the seasonality that I just talked about previously looks like this. So we can say that the Q1, as you say, is about very clearly the tiniest in turnover. And as the year progresses, the 4th quarter always comes out as the strongest one. And it's kind of interesting to look at this graph because whenever we acquire a company more or less in Europe or North America, the same pattern occurs. And of course, that is due to the 3 business areas where we're in, they have obviously the same pattern. And it's even more pronounced, we can say, when it comes to the profitability where you see on this picture here. So they are sort of shadowing each other. And beforehand comes in just a few pictures of how sales is distributed between the business areas, very solid, Climate Solutions, just north of 62 here And the 2 others just about as before Element, of course, has had a good growth on our 28%. And when we talk about the operating profit, the distribution there is slightly good advantages on Climate Solutions since their margin is slightly higher than the other 2. So the picture is fairly, fairly stable looking at it year after year. The change, of course, for our group is this graph here, the pie chart, where now the Nordic countries is about just a little bit better than the quarter and the rest of Europe, south of 40, North America, 30% and outside, 5%. So that gives, as we have mentioned several times before, a very robust structure of our company. The sales distributed over so many countries and continents, if something slackens in one country, it very often is compensated somewhere else. And Sweden, some 30 years ago representing like 85%, it's now just 15%. And that is, of course, not that we have outsourced anything, that we have grown more abroad. So 30 years ago, the turnover here in Sweden was some $250,000,000 and now it's like $2,750,000,000 So we have not left our home base. But the Nordic countries we view is our home market. And then, of course, we like to grow even more outside these $25,000,000 as a customer base. So I think I stop there, Hans, for you to come in. All right. Thank you, Erik. So I will take you through the business areas and then come to the balance sheet and some key numbers before we open up for the Q and A session. If we start looking at the income statement and for Climate Solutions, as Eric stated, we have had a very good organic growth there during the year, and it's been an overall good demand. In Europe, some countries sticking out, although they're not so big, which means that the impact on the group is relative, but still a very good development in countries like the Netherlands, Norway, having had political decisions to really promote environmentally friendly and sustainable heating solutions. But then, of course, a major contributor has been North America coming back very strongly during the year. And the growth that you see there for the full year of 18.6 percent is, to a large extent, organic. Due to the weakening Swedish currency, we, of course, have a help in that respect as well, but the majority of that growth is actually true organic growth. And that also goes for the quarter itself, as you can see where the growth was even 20.7%. So all in all, over the 2 year well, from 2017 to 2018, we've increased sales by some SEK 2,200,000,000 and the operating profit by some SEK 370,000,000 dollars and then coming up from the 13.3 percent in operating margin to the 13.8 percent. The one area that might be sticking out there where you might have a question is the gross margin, which is have come down from 37.2 percent to the 35.3 Now that is a result, of course, of acquisitions coming on board having a different structure. And when we take on board acquisitions, they don't always have the same profitability as we do. So we give them the 18 to 24 months to get up there. There's also a mix effect in there. But then also, we've had and we've mentioned it several times, a material increase during the year, which we have not been able to fully compensate for. And even if we have raised prices now, there is, of course, the time lag before it hits the P and L, not at least due to the FIFO method in accounting, you can say. But overall, a very strong and good performance of our biggest business area. And with the spread in geographies, we also have a stability there if one market is weaker than the other. It could be compensated for by stronger development in another area. Now this year, basically, all areas have been strong. But last year, when North America was a little bit weaker, we had a very good compensating factor in Europe. But here, we have about onethree in North America, Europe and the Nordics. If we switch to the next page and look at the development of the operating margin over the years, we have basically since well, we have since 2019 been about 10% and basically since then also been on an upward journey, you can say, stabilizing the business area well above the target for the group there. There's been a slight decline, you can say, here the last 2 years, but that is really an effect of taking on board rather large companies, which we then are working very hard with to, of course, get them up to the same level that we have within the group. And that's what you see in this year that, as a result, we have come back again. And the one drop there in the middle is, of course, the effect after the Lehman Brothers crash, you can say. If we head on to NIVE Element, it's been an overall impressive organic growth also in this business area. And this is the truly global one, you can say, where we are present in basically every part of the world and in a fairly tough market condition given that we are a sub supplier, but that there also are competitors in each corner, you can say. And with the global business, there are, of course, also issues with trade barriers due to political issues that Eric mentioned. And right now in the world also we have this issue you can say with of personnel and as a result, increase in salary costs or wage costs in several countries, which we, of course, have to fight on a day to day basis. Nevertheless, we have been able to grow the business area here with 24% over the year, increasing it from the CHF 5,100,000,000 to CHF 6,300,000,000, so an increase of CHF 1,200,000,000 dollars and with the profit that has also come along very nicely. The drop from the 11% operating margin to the 10.2% is to a large extent related to the one off projects that we've had that are no longer on board. But of course, there's also an element of these personnel issues here, lack of personnel and increases that Eric mentioned before. In terms of the true organic growth, we've also here had health of the currency, of course, but the majority has again been very nice organic growth. The last quarter was no exception. It has continued to grow very nicely, and we came in there at an operating margin of 8.2% compared to 8.9%. So basically in line with our expectations. In terms of sales per geography, this is the business area that has been the most global for the longest time with a spread that is more even across the globe compared to the other ones, although we have made several steps in the right direction also for Climate Solutions and Stokes. But here, we have now as much as 12% being basically in Asia, you can say, but also some other pockets in the world, Nordics being some 17, Europe a third, North America slightly more, but a very good balance there between over the globe. And looking at the operating margin for this business area from the year we were listed in 97% up until today, we have now over the last 3 years been above 10%, which we have been striving for quite some time. The major step was taken in 2,005 really when we took a restructuring reserve, which is, of course, the reason for the bar going in a negative direction there. But since then, we have restructured and worked out synergies more than the years before when we started the acquisition phase of that business area. So with 3 years in a row being above 10%, we're quite proud of that and also determined to keep it at that level. Last but not least, we have our stoves business area, which has had a stable performance in a somewhat tough market. Eric mentioned the weather. And of course, this is also an area where we compete with other completely other types of products or travels or whatever it may be that the end customer chooses to buy. So here it's a matter of also being in fashion, so to speak, have attractive products. And that's why we have allowed ourselves to continue to spend money on R and D and marketing, which has brought the operating margin down slightly. The gross margin is basically stable. In the Q4, it was definitely stable. It was up a little, but over the year, it's been stable. So the difference then down to the operating margin is that we allow ourselves to continue to invest in the business. And even if it's been stable, we've actually had some organic growth in here as well during the year. The major not the majority well, the majority, yes, but there is a combination of currency and organic growth in there, of course, as for all the other ones. And here, it's a little bit more weight to the currency. But beneath that, there is an underlying true organic growth. And we added on the very interesting company, CK Fires, with electric stoves, which clearly is a coming area. In terms of sales per geography, I mentioned it before, we have taken steps here to also here become more evenly spread. And it's basically the same picture as before when we brought on FPI in Canada serving the North American markets. So that's about a 5th of the business coming or being made over there, a third in the Nordics and the rest in Mainland Europe. I mentioned that it is another stable year for Stokes, and this is the business area where we, ever since the listing in 'ninety seven, have been above 10%. And it's there's an extremely diverse picture in the industry for stoves. Some companies, if they're niche oriented, they could make a bit more, but many being below. So having this stability of 10%, we're quite proud of and, of course, also determined to both keep and improve. And summarizing the group in terms of income statement, we have this chart showing the development from 2014 to '18. And since then, when we launched the target of reaching $20,000,000,000 we have, in fact, doubled in size and slightly more than so. And of course, the last year has helped with a very good organic growth for the whole group as such. And combining this strong growth with a very stable margin, of course, gives me as Finance Director a confidence in the business and the goals that we have going forward. And Eric will dwell upon that a bit more later in the presentation. In terms of balance sheet, that has not quite doubled since 2014, which, of course, is good. The equity has, which, of course, is very good. But really, this reflects the development of the business and the growth in proportion to how we take on board companies and grow with our existing companies organically. The one largest asset item on the income statement on the balance sheet is the intangible assets, of course, which is a result of acquiring companies. But that is, of course, impairment tested according to all rules and regulations every year with a very good headroom. On the liability side, there's not so much to comment. The one step that we took, which sticks out a bit, is the equity between 2015 and 2016 when we made the rights emission. But even without that, we would have had a very nice development of the equity. And as you will see a bit later on in our key numbers, we have a very good equity assets ratio. A quick look at the cash flow as well. The cash flow from the operating activities before change in working capital is actually up some €350,000,000 compared to 2017. Then we've had a more negative development, you can say, or change in working capital than we had last year. And I think there are two reasons for that. Last year, we were delivering basically each and every product that we could deliver because we were not fully staffed, didn't have all the components and products on board to meet the demand, which led to a natural reduction of the inventory to an extent that was, in a way, too low. So in order to avoid that, we built up inventory and stock and capacity this year to be able to deliver out and meet the demand. And we've taken down the inventory very nicely during Q4. And if you remember the numbers from the Q3 conference we had, the change in working capital, which was much higher at the time. So we've done a good job there. Still more can be done, of course, to generate even more operating cash flow, But we know where the money sits, so to speak. And we've also allowed ourselves to invest more in the current operations this year, about $100,000,000 or $80,000,000 more than the depreciations. And the prior years, we've actually had investments slightly below depreciations. So seen over time, I think we're basically on par there. But we are investing to meet demand going forward. And then just highlighting some key financial figures on the next page. Yes, we have a lot of cash sitting there, the unappropriated liquid assets, as you see, 3.5%, 3.6%. And those of you who know us know that we it's the way we are structured in a way. We have a lot of money sitting on the balance sheet there in cash. And it's also a result of us growing quickly, not yet having a cash pool, you can say, in North America. But of course, we take home the money and use it for acquisitions or amortizing loans. Interest bearing liabilities have come down very nicely as a relation to equity from 120% in 2014 and consequently coming down 98%, 70%, 70.1% there and 60%. Net debt is also well below the rating level, you can say, of 2.5%, where the bond takers would like to see us not come above. And then the equity assets ratio being close to 50%. And of course, you can say that is perhaps on the high side. And again, it's a result of the right submission we made in 2016, which took a jump there of some 7 percentage units, which makes us in a very good position for further acquisitions. Just continuing with some more key financial numbers. Return on capital employed, we've been able to increase up to 13% from having been around 12%, 11.5%, 12% the previous years. Return on equity is still below our target of 20%. It's also, of course, influenced by the rights submission, but also due to the large acquisitions that we've made. But it has come up nicely, and we've not given up on our target. But it's a constant fight. And as we typically say, we never give up. So we're working on that as well. Net profit per share has improved over the years being now at 4.11 percent as well as the equity per share. Capital working capital again, I don't think I need to comment upon it. I mentioned it before. It's a little on the high side. We're working on it, and it's still a reasonable number, and we're still generating good portion of cash. And the last picture before I hand over again to Eric. We really have the receipt of our development here since our stock listing in 1997, where you can see the bottom two lines there, the operating margin, the net margin have been basically above the 10% on a slightly upward journey over the years. During the time that we also have taken acquisitions on board having had a weaker margin, but where we consequently work on bringing them up to our level, utilizing the synergy possibilities that are in the group. Return on equity, I mentioned, being affected by larger acquisitions and also, of course, strong balance sheet, you can say. And then an equity asset ratio that is very strong, which makes it possible for us to continue our growth journey. And by that, I think I hand over to you to maybe mention a few words about that, Eric. Yes. Well, I mean, I think you can comment both on that. Until very recently, we had a current intermediate target of some $20,000,000,000 and now we passed it. So now the what we used to mention the next intermediate target, that's the now the current target. And I think we like to mention this because this is more our forecasting for the future rather than going into each quarter saying now we're going to be growth or so and so or things going to be so difficult. We believe that we are in a voyage or in a path very solidly towards the 40,000,000 dollars And of course, it's a long term approach that we are taking as a company, as investors, management to be very transparent, but naturally unable to promise each individual year where we're going to arrive. Some of you might say, okay, now we're coming out with the same forecast as the previous years. That's true to a point. Of course, we feel that we are positioned correctly in the market. We said it before. And hence mentioned here, we have a capacity of acquiring fairly large entities anymore. And our internal program for becoming more efficient and in launching that into new companies coming aboard, that is giving us the robustness and strength. So when we say we are cautiously optimistic, I mean, that is reflecting our behavior now and since 25, 30 years back. Of course, we have to combat difficult situations if they are to come, but we also have to benefit from good conditions if they are there. But the robustness, again, internally, we believe, going to carry us all the way up to the $40,000,000,000 dollars And we have a picture or a graph. I think that's quite illustrative that when we mentioned the double sales, 93%, very few people thought that would be possible because it had taken us some 40 years to arrive at the level we were then. And even internally, we said, is that possible? And then we clearly said that we had to do it in a different way. We had to acquire companies. We had to grow more methodically, organically. And it took us 4 years to arrive. And that's the story we had to double the sales. That's the story we told the stock market. We launched ourselves and the stock had changed to Stockholm. And I guess some people might have had some doubt and that took us 3 years to double and then 4 years and then 3 years and 7 years and 5 years. I think that's the background that you should view NIVEA at. What they've said and Hans mentioned that we never surrender, I like that saying. And we face difficulties. We don't shy away. And of course, we are tremendously proud of percent in the graph that we have in front of you here. And that's more the forecast that we are giving. We will materialize the $40,000,000 We will make that come true. That will not come easily, we know that, but we have a phenomenal organization around us. I just had a cup of coffee this morning and they said, oh, congratulations to the result. I said, well, it's a joint effort. I'm just Hans and I are just a spokesman for the results. And all the 17,200 people, they should have a great, great thank you from all of us the way they're working all year round, all world around. So that's a profile. It's a DNA profile on Nida you see right in front of you. Of course, we are on top of just a graph, if we switch over to another picture here or slide, because we are larger. And Hans has mentioned that, that we can't create economy scale. Of course, we had international experience. We started with very, very minor experiences some 25 years ago. And it's a good balance within to that sustainable mindset. That's something we've been preaching and living for many, many, many years, and we are financially strong. Hans has showed you the balance sheet. And we have been through some 120 acquisitions. Every acquisition is unique. So we shouldn't just lean back and say we are so good at this. We always have to be on your toes, but knowing that every acquisition is individual, I get that's a strength in itself and also our strong decentralized management structure. I think that pride out in our organization is just phenomenal. So I think that's pretty much what we're going to show. And of course, there's a math behind this that the climate solution would arrive at some 25,000,000,000 still a minor stake in the world market. The element would arrive at some $10,000,000,000 still a fairly big chunk, but we also know that, that market is growing. And on the stove side, we feel that we could be able to arrive at the $5,000,000,000 dollars So that's the equation. And that's not an equation that Hans and I made up just prior to this broadcasting. That's a target that is well distributed, discussed and everyone is putting in their shoulders to run that. So I mean, there was a longer presentation perhaps than usual, but of course, we will allow questions now for some 20 minutes or so to make the picture complete. So please shoot. Thank you. The first question comes from the line of Karl Ragnasdan from Nordea. Please go ahead. Hi, it's Karl here from Nordea. So I have a couple of questions. First on Sweden. You have historically performed really well, of course, but the new single housing outlook seems to be weakening somewhat in 2019, 2020 and so I mean some negative growth. Can you quantify on your Swedish newbuildsmallhousing sales development in Q4 2018? Could you see some weakening there? And also, can you give us some outlook for that specific market for 2019? And also, should do you expect a replacement cycle, which should kick in, in 2019 perhaps to offset the new bill decline? Well, I mean, without being too much into decimals, we can mention that the market in Sweden, heat pumps is slightly more than 50,000 units. I think that's something that's fairly well known. And of course, out of that, I'd say that new construction is perhaps 16%, 17% out of that. So of course, the majority is the refurbishment. And even if those will go down, with some 20% that's forecasted, that, of course, is percentage wise, not nice. But we believe that, that will be compensated by refurbishment because we started many, many years ago selling the exhaust air heat pumps, and they are the ones that you install in new build. And now the boom of renovation really started some 20 years ago. And we believe that they are the ones now to be replaced. So we are fairly confident that, that's going to balance the decrease in new construction. And that's pretty much the same in all countries that you start with heat pumps and new construction, eventually you enter the refurbishment market. Of course, if the market would totally come back, I mean, that would not be nice. But I think that's representing roughly the percentage that I said, that can be overcome. Okay. Thanks. I have a couple of more. I mean, you're trying to establish Climate Solutions on the commercial properties market. What steps are you taking to increase your exposure? And could you do it organically more or just via further acquisitions? Well, I mean, we ideally, we like to sell systems also there. And I think our strength or we believe that our strength is the heat pump side of it. And I think by combining the heat pump with the air handling units, then you would recapture much more energy just like you do in an exhaust air heat pump. So I mean the comparison between the heating models we have in our country here in Sweden prior to, you can say, 1980 was like you had the mechanical ventilation and you had electric boiler and you had a separate water heater. And eventually, we started to ventilate our homes due to health reasons. And now we ventilate the home or house every other hour, making it a perfect condition or setting for an exhaust air heat pump residentially. But we have not come that far in well, we are fairly far ahead when it comes to Sweden. But in many countries, they still open the window when they like to ventilate a meeting room or even a hospital. So there, of course, we see a gigantic market that has to be more refined. And we do not have, as you correctly say, a footprint, but we believe that combining a place in the market with someone that is not perhaps producing air handling units, and we come in and combine that with our heat pumps. That's the growth pattern that we believe in, if I explain that shortly to you there. Okay. Perfect. And the final one for me. I mean, in terms of raw materials, did you expect a more flattish situation in 2019? And should we still expect you to continue with the price increases in 2019? And if so, where are you going to implement them? Well, the thing is I had a short someone called me this morning, a short interview and I said, our immediate reaction is not always to just push the price increase that's hitting us on to the customers. We like our task is also to monitor that to some extent. We also have to think about our productivity because we like to present product ranges that are competitive, but also gives the consumer a good value. That's why we are lagging a little bit When a price increase hits us, we have to evaluate is that for long term? Can we anticipate more? How much could we combat that internally by redesigning and doing things differently internally? And of course, then we balance up with the price increase on our side. So it's not back and white. And it might sound like a little bit boy scoutish or girl scoutish, we act like that. But we believe that acting in that fashion, the customer is going to appreciate that we do our very best. And of course, when we feel that now we've taken our portion, then we also have to increase our prices. So they are lagging a little bit, but they're coming in very, very, should I say, and with a great consequence. So they it's very difficult to predict how much they're going to increase the 2019. I think that depends on how the economy is developing. And we are there to monitor whatever changes we get in the same way that we've done in the past. I mean, that might be almost a political answer to it, but that's exactly the way we react. Okay. Sorry, just a follow-up on the productivity. Can we expect you to increase CapEx more, I mean, allocated to automation as well? Yes, that's true. Is that right, Jim? Yes. But we also mentioned that we're going to be above, as Hans said, or some years even slightly above the depreciation rate. So and the increases that we mentioned, of course, when you get salary increases of some 15%, 18%, that you can hardly work 18% faster manually, then you have to look at a totally different setup to be robotized, for instance. Okay. Thanks. The next question comes from the line of Max Frieden from Danske Bank. Please go ahead. Yes, hi. Max from Danske. I have a question if you could just help me give the share of Climate Solutions division sales towards commercial and large property customers? Well, we that's something we do not release as to because of course, we are relatively small yet. I mean, you can if you are to just broadly get an indication, I mean, ROS that comes in now has not been consolidated. It's like $70,000,000 And the Oklahoma boys, they are like, of course, residential, but primarily commercial. That's another $250,000,000 And I don't think we can be more specific than that. And then, of course, we have some additional, but that is suggesting that, that is still a fairly small chunk. I don't think I got to be more precise than that. Big potential. Yes. Big potential, I get it. But if I take Ross as fully commercial and onethree of Water Furnace, and I believe it was 80% of Climate Control Group, I get to roughly 20% of the division Climate Solutions and 13% of group. Is that just in the ballpark? We want to backboard you for that assumption. All right. And also just mentioning in the report here, I think, yes, strategic investments in the U. S. And these are taking into account significant resources. And I just want to understand a little bit if I mean, in the next report, are you going to write in the likes of that the margins in Climate Solutions business area has been burdened by strategic investments in the U. S? No. But of course, now the market is reasonably good. And we don't think that we could perhaps even increase the margin, but we feel it's fair to try to educate the U. S. Market or the North American market with some of the profits coming in. So you shouldn't view that in a negative sense. I think that we are rather, again, modest when it comes to perhaps increasing the profitability even further, but rather using some of the margins already produced for that or that we see can be produced for that. Great. Thank you. The next question comes from the line of Kyle Bockst from ABG Sundal Collier. Please go ahead. Thank you very much. And my first question concerns geographical markets. I mean, you mentioned that Netherlands and Norway have been going well. I'm a bit curious on development in perhaps Germany, U. K. And the U. S, if you could talk a bit about that. Yes. Of course, if we start in the other order, I mean, the U. S. Is still a very small portion. But we believe that, that will be also enhanced and improved there. We all know that they are lagging, if I may say. I mean, America shouldn't be criticized, but of course, it's the heat pumps is known to a lesser extent in North America. But I think it's growing even more on a state level. On a federal level, we shouldn't dwell on that, but that's always a arm wrestling, the Treaty and stuff like that. But on state level, it's very much promoted. And there are subsidies and there are like utilities, they are very positive through heat pumps. Utilities for obvious reasons that they can have a more even distribution of electricity rather than just having a peak in the summertime with air conditioning is starting. So they have they can gather more customers. So I think that's where we're standing there. But as I said, when we answered the previous question, we also have to address the market. We have to sort of I mean, educate them and that's I mean, that is, of course, a gigantic task. But that's pretty much what we've been through in Sweden and Europe. And of course, leaving oil and to a large extent, that's been an educational process. But again, assisted by politicians, assisted by utilities and so forth. Swinging back to Europe, Germany, I think they are on a steady pace towards heat pumps. And now clearly more than 50% of homes being erected, they utilize heat pumps. And it's a renovation market that is still needs a little bit of a kick, we believe. And gas is very, very strong. And now when Nord Stream is being built into Germany, of course, gas is not a phenomenon they're going to leave. We hope and believe that electricity will be generated to a larger extent by gas rather than by coal because of their criticism that's in the market right now that Germany and Poland are generating so much CO2. So in Germany, we believe that the steady pace towards growth, not we believe with such political statements as in the Netherlands and Norway, they're going to abandon it. I think it's going to be more balanced. We would have liked, of course, to see a very stern statement. We believe it's going to be a more subtle way, but a very clear pattern. In Britain, they are lagging behind. I hope I don't defend anyone calling in, but they, of course, gas is very much the phenomena. And we are fighting and they are behind the rest of Europe when it comes to heat pumps. I hope not that they won't be turned against this. We have been talking about it and the climate as such also is relatively mild in Britain. So the market is slowly growing and we would like to see it grow even quicker. But I think now with the political discussions going on, I think that's not on the top priority list for Mrs. May and her colleagues. I think that the Brexit situation has taken away quite a bit of the focus from that. There was some initiatives, some green initiatives, but I think they have been sort of set aside for a while. That was a long answer to your question. No, it's very good. And then a final quick question from Ivan. When it comes to EBIT, I noticed that internal or group costs were positive during the quarter. It's quite a deviation from historical numbers. I was just wondering what's behind that number, the plus 5. Yes. It's a combination of many things you can say. I mean, everything ending up on that line in the income statement relates to nonoperational costs for the business areas, you can say. So it's a combination of the group costs that we have for running the headquarter. It's acquisition costs, it's project costs also, of course. And that's why it comes in as an effect in Q4, both this and last year and every year. We make the adjustments for the anticipated purchase prices that we need to pay going forward for the stakes that we still need to buy in partly acquired companies. And it's when we come into the latter part of the year, when we make the full forecast and the budgets for the next year that we recalculate these values. Okay. That's an ongoing part of the process. Yes. Sure. And so if we should just take a long term average estimate of this, would it still be around perhaps SEK 20,000,000? I know it's hard to predict from quarter to quarter, but if we take a more if we draw take a pencil and simply draw a line to get a sort of a trend? Well, it's very hard to say, but because it really depends on the development of those companies and then the auditors come in and audit those projections that we've had. But during the year, we don't make recalculations there. So there, you can stick to the values that you see in there around the 20. Okay. Thank you. The next question comes from the line of Marcella Klang from Handelsbanken. Please go ahead. Hi, guys. And it's great to be back as your analyst at Handelsbanken. I have a couple of questions myself. So basically, a clarity on the previous In the Q1, since you don't have these adjustments on for anticipated purchase prices, we should expect a normal level of eliminations first, second and the third quarter. Am I right? Yes. That's what I just confirmed to Carl, I think. Well, hope I can. Perfect. Is. Great, great. Then it's clear. Another question. You mentioned that within Climate Solutions, now the 2 major acquisitions from 2016 'seventeen have helped the operating margin. Does it mean that the margins for these previous acquisitions are now in line with the Climate Solutions average? Or is it just developing positively? No. They are not up that where we would like to happen. But of course, we set an immediate target for them like within 24 months, we expect them to be there and they have achieved that. But that's not that's not mean that we have a right of the final target. Because like everything else, when we put the full year targets for growth for the group, it's a pretty long or distant target, I should say. So it's important that you give the companies coming on board a realistic target 18 or 24 months ahead. And then you say, okay, you take that off and now they're in the group, They know how to cooperate with us, and then we set a new target more related to the business area level. Okay. And yes, and if I may, maybe for clarification, the target set for them, is it the 10% that you have officially for your business areas? Or is it maybe closer to 13%, 15%, which is previously the margin for Climate Solutions? Marcelo, you are coming back with your sharp tongue. You've been on maternity leave now and now you're really stressing us here. No, you are correct. Of course, the first immediate target is like a 10% because I think it's proven that you can arrive at 10%. Then of course, above that, you have to have a certain product range, you have to have a certain setup geographically. So that becomes more individual. But of course, I mean, not only 2 or 3 companies can carry the burden of being above 10. All of us companies should be ideally. But we also are reasonable when it comes to a company not having the geographical spread, not the product range necessarily at the moment, but everyone is there to strive for a better margin and a better volume, all right? Yes. So if I understand it correctly, do you still have a little bit to go to reach the 10% target, the first target? I'm telling you, you are so precise. I think I might be back on the board. Thank you. In your experience, you mentioned that every acquisition is In your experience, you mentioned that every acquisition is unique. But in your experience, which steps in the integration process are the most important to keep profitability up? Well, that is to be both distinct, but not an emperor. If you come in as an emperor, as I'm dictating things, you're never going to get any help. That's our experience. That's why we have these decentralized organizations. So you have to come in willing to assist, but not being mediocre, say, okay, it's fine. But saying and that's why we are so clear the targets in our annual reports and our quarterly reports. It's not a secret when someone comes in or enters such as they as a company, they know what kind of behavior we have, just like when we employ people. It's not a secret. I mean, with the media we have now, it's totally known. And that we like to build a relationship. We believe in the management and we've been discussing with the management when we typically would acquire a company. And during that process, we set the targets and then we go. And of course, the handshake is a handshake. If we have a handshake with the management and also with the rest of the employees, That's what sticks to us. So it's confidence on both sides. That's the whole trick. It's attitude, as you say, because the whole snorkel board or whatever you want to call it is there to work in all different areas of production, purchasing, admin. Speaking from impressive experience, it was a very good answer. Moving on to Nidellund. The productivity or the profitability was negatively chance of improvement of this in 2019? Or are you happy to stay just slightly above 10%, which basically is above your target? Well, we are never happy to remain, but we always like to improve, you know that. But we also know that as a sub supplier, it's we are always we have to be on our toes. And if we were able to 2017, there were some successful projects that came in. That's something you can't really count on every year. You have to be more on a stable level. And therefore, we have worked so hard and determinedly over these years. So that's really the target for the business area leadership to remain there and concentrate on growth, concentrate on new products. I think that's very important to mention when you say, what are we happy with. The world is going electrical again. It's electrification of the world. You talk about hybrid cars. You talk about the wind turbines. You talk about the trains. And those are products in there that we are very well suited to develop and enter the market with. But we need a good cooperation with the customers out there, like hybrid vehicles or something. It's a totally new phenomenon since like 3 or 5 years. And there we are so well positioned. So I think we have to have an understanding. We have a balance with the R and D costs that we have to put in to qualify ourselves being a sustainable, good partner for these companies producing the products that I just mentioned. So we look we try to look after the margin. But as a sub supplier, I think that the region where we've been the last 3 years, that's where we're going to try to remain. But with many more products coming out, developed together with customers that we didn't necessarily have before and will replace older products. Thank you. And in terms of visibility regarding the large orders with these high margins, what kind of visibility do you normally have? Do you see these coming along a couple of months before they do? Or is it a question of a couple of weeks? Well, it's what should I say? It's when a large customer of ours is bidding a project and then they say, well, we want the project, of course, there is more immediate. And particularly, if it's a customer that is selling some kind of an application more seldom, let's say, perhaps every other year, then they are then they know that we are fairly ready to produce because it's something that had from us previously. If they are bidding in a situation where it's a new product, then we are contacted before. We anticipate you to kick in, let's say, a quarter or 4 months after we get this. Otherwise, it wouldn't work. I hope I give you the correct picture there. Yes. And these type of now I'm squeezing you here, but these type of contacts, you have not seen anything yet regarding 2019 where you are contacted before? I mean, it's not squeezing. We have contacts all the time, but perhaps you should be more open about bigger projects. Perhaps it's a we don't like to have hide and seek here either. So we might at least just stirring the thoughts here around the table, how we should report that. So at least you got that from us today. Thank you. Yes, because obviously it has an impact. A final question from me regarding M and A. Where do you see a need to fill any blank spots today? Obviously, you have a very strong financial situation. But where do you see a need operationally? Well, I think that's, as we said, here on the element side, of course, with the diversity that we have. And if we can shortcut some of the R and D by bringing some very skilled company on board that would be a great benefit wherever they are located. Just mentioning Brushketh again, of course, to develop such a product for the semiconductor industry, that will take us years. And once you have the product developed, that will take you another quite considerable time even to approach the customers because they are used to being supplied with a high quality provider. So I think the technological skill, that's what we asked there on the and systems thinking, that's what we asked on the elements side. And of course, on the climate solution, very obviously, both geographical spread and adding to the commercial side. And on the stope side, we are weak on the wood pellet situation. Whether that is Europe or North America, that would be a great add on rather than producing it ourselves being relatively small like we do now. Thank you so much. Very good answer. I'll get back in line. All right. Should we allow for one more question and then we go for lunch, if that's all right? Thank you. The last question comes from the line of Clara Jonsson from SEB. Please go ahead. Hi. Thank you for taking my question. I'll be quick. Just what visibility do you have on the Element side? I mean, how long does it take for you between you get an order and we actually see in revenue? Yes. I think that everyone all large customers that we have on board, they are forecasting. And ideally, they stand for their forecast at least 6 weeks ahead of us. But then they have the right to change the forecast after 6 weeks. So basically, theoretical, of course, transparency for a number of weeks, a number of months ahead of us. But then it's their markets, and they are not as soon as they see something either increases or decreases, of course, they like to react. And so we can I shouldn't say it's frozen, but 4 to 6 weeks, that's really the disability with substance? But of course, we have guidance beyond that. All right. But I mean, do you have any large do you have many large orders? So you have quite a significant share. There are orders that you know you're going to deliver in the coming year? Or is everything just 4 to 6 weeks? Yes. No, you can there are relatively few of those where you can have like something being produced. We have, of course, customers that we are fairly let's say that we have a demand over, let's say, 500,000 year after year after year, just to talk about numbers. And then you can as we did this year, we can allow ourselves producing some on having them on stock, knowing that they're going to be a bigger demand towards the fall. But at the same time, we do not dare to have too much of inventory if sales would drop because that would have been on our own risk. So our customers do not help us in that sense. We have to look after that ourselves. All right. Thank you. Thank you so much. Thank you. All right. So I think that we're welling a little bit, Hans and I, initially here. We appreciate all the questions. And of course, if we've been answering politically to some extent, we apologize. We can't do a release, everything, but we certainly appreciate the challenging half an hour we have with you out there. So thank you very much. Thank you. Thank you. Thank you. This now concludes our presentation. Thank you all for attending. You may now disconnect.