Ladies and gentlemen, welcome to the NIBE Q4 and full year results presentation. Today, I'm pleased to present Gerteric Lindquist, CEO, and Hans Backman, CFO. Mr. Lindquist, Mr. Backman, please begin.
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. We have some slides each here, and then, of course, we're open for questions. 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. Of course, we just have to navigate in the waters filled of those. On the positive side, we can say that the interest rates are still relatively low. People are becoming more and more aware of the sustainability or the importance of living in a different way.
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 through newspapers, media, what have you, that we have to act more sustainable. 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. Of course, combined with acquisitions, almost hitting the 20%, a bit south of odd 20%, all in all for the year. The operating margin has increased, that is, of course, due to growth organically, but also that we have, as always, looked at productivity and we're cautious with costs. Also that the largest business area, Climate Solutions, of course, they have improved their operating margin. That is affecting the whole group naturally.
As always, the number of acquisitions that we have carried out. If you just have a quick look at the figures that you all are familiar with now. We rather talk about a year, of course, with growth of 18.5%, coming in on an operating margin of 12.6%, which puts us sort of in the mid-range of the last five years. We've been within 12% and 13% the last five years, and I think that's a very solid development. 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.
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 it's very pronounced, 2018, 2017, it was a little bit lesser pronounced, but the first quarter, then it accelerates as the quarters go by. We have a very strong seasonality, and we have a slide later on where we can show that more precisely. That is, of course, also affecting the profit of the financial items or the EBIT as well, naturally. It's the same picture here, starting very modestly in the first quarter, 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. It's a good 12-month development.
If you just quickly look into the business area of Climate Solutions, of course, we've had a good organic growth, and it's always important to compare the previous year. The previous year, of course, was slightly affected by a lesser positive environment in America regarding the U.S. regarding heat pumps. That is helping us. Also the overall demand in Europe, particularly for heat pumps, has been very good, we can say. We've acquired two companies. 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." That's something we already told you about, like in the quarter two report. That is well-received in the market. We also felt that we might as well go ahead and acquire the majority of Rhoss rather than being a minority owner.
Now we own Rhoss since January 1st this year, 100%. That, of course, is going to be the platform or one of the platforms for the commercial business with chillers and air handling units. Last year, with the two major entities coming in as acquisitions, of course, we've 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&D experiences. Of course, the organic growth is always a driver of improved operating margin. Hans is going to come back to more specific figures, but we can just look at the growth there from SEK 12 billion 2017 to SEK 14.2 billion last year, with the operating margin going from 13.3% to 13.8%.
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. Sometimes we acquire companies, very profitable ones, and they fold. That is, of course, due to seasonality also enhancing the margin that particular year. We are certainly on our way back on the margin side of Climate Solutions. 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. That is, of course, due to the fact that we are located in countries now that used to be so-called low-cost countries. There we're seeing huge increases in salary, more politically driven.
That, again, sort of emphasizes how important it is to increase productivity wherever you are. 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. We just have to cope with that. We just mention that as 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 for the group. That is, of course, to combat that. We also mentioned some projects in 2017 that brought the margin up to 11%, and perhaps that was a little bit almost too good. That should be mentioned also when you compare these, the figures this year with the previous year.
We have parked ourselves about the 10% line, and we've been striving for that for so many years. Of course, it's a totally different group of companies now, covering, we can say, the world with our heating elements of various kinds. Of course, we're selling, also here, a sustainable level, a sustainability level. We notice that the market, when it comes to hybrid cars, wind turbines, and trains, and those category of products, that is truly also moving in the sustainability direction. A few comments about the, perhaps I forgot to mention the acquisition there of BriskHeat and the EMIN Group on the Element side. BriskHeat, 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 that have manufactured these products.
The EMIN Group, that is again, a sub-supplier that we feel is going to enhance our system delivery possibilities, producing braided hoses and flexible hoses. Particularly in the HVAC industry, it's a big category or important category of products. With that said, Stoves. Of course, we've had a more modest growth on the Stove side. We all remember the warm summer in Europe, and that has affected us. Nevertheless, we kept our market shares and even enhanced them. 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. The thing is, of course, that we are spending quite some time and quite some money now on R&D to even enhance, particularly the wood-burning products, to reduce the particles.
Also marketing to train our, should I say, dealers to be more loyal to us. Rather than participating in many shows, we have a quite costly education, for instance, where we gather all our loyal dealers, which we think you get more for each spent crown or pound or whatever currency we are talking about. One interesting strategic acquisition is the one in Britain, CK Fires. A few years ago, we thought, well, is that a phenomenon? They're going to prevail? Absolutely, CK Fires is really charging ahead like some other competitors. That's particularly a product for larger cities where you don't have chimneys. That is not just like a TV screen. Those are physical products that are very, very real in the flame picture.
Also, you have the possibility to add some heating features to those stoves. So that's the picture of the growth from 2002 - 2004 almost. Operating margin, as explained, is slightly lower due to the reasons that I just mentioned. 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 SEK 20 billion when we came out of 2013, where we had just passed SEK 10 billion. Of course, many people or observers thought that that would 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 target, so that we allowed ourselves four to seven years, and now we crossed the line after five years. Just north of SEK 22 billion. 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 2008, where you can see a contraction, or possibly 2009. That has naturally also affected the profit line. It has almost the same structure or picture or graph as you see here. There's been some money set aside, 2005, and of course, 2008 was also then affected by Lehman Brothers. It's been a very solid development.
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. We can say that the first quarter, as you see, is by very clearly the tiniest in turnover, and as the year progresses, the fourth quarter always comes out as the strongest one. 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. Of course, that is due to the three business areas where we're in, they have obviously the same pattern. It's even more pronounced, we can say, when it comes to the profitability where you see on this picture here. They are sort of shadowing each other.
Before Hans comes in, just a few pictures of how sales is distributed between the business areas, very solid. Climate Solutions, just north of 60%, t hat 's 62% here. The two others, just about as before. Element, of course, has had a good growth, now 28%. When we talk about the operating profit, the distribution there is slightly to the advantage of Climate Solutions since their margin is slightly higher than the other two. The picture is 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 a quarter. The rest of Europe, south of 40%, North America, 30%, and outside, 5%.
That gives, as we have mentioned several times before, a very robust structure of our company, with sales distributed over so many countries and continents. If something slackens in one country, very often it is compensated somewhere else. Sweden, some 30 years ago, representing like 85%, is now just 15%. That is, of course, not that we have outsourced anything, that we have grown more abroad. 30 years ago, the turnover here in Sweden was some SEK 250 million, and now it's like SEK 2.75 billion. We have not left our home base. The Nordic countries we view as our home market, and then, of course, we like to grow even more outside these 25 million as a customer base. I think I stop there, Hans, for you to come in.
All right. Thank you, Eric. 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&A session. If we start looking at the income statement for Climate Solutions, as Eric stated, we have had a very good organic growth there during the year, and it has been an overall good demand. In Europe, some countries sticking out, although they are 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. Of course, a major contributor has been North America coming back very strongly during the year. The growth that you see there for the full year of 18.6% is to a large extent organic.
Due to the weakening Swedish currency, we will of course have a help in that respect as well, but the majority of that growth is actually true organic growth. That also goes for the quarter itself, as you can see where the growth was even 20.7%. All in all, from 2017 - 2018, we have increased sales by some SEK 2.2 billion, and the operating profit by some SEK 370 million. Coming up from the 13.3% in operating margin to the 13.8%. The one area that might be sticking out there, where you might have a question, is the gross margin, which has come down from 37.2% to the 35.3%.
That is a result, of course, of acquisitions coming on board, having a different structure. When we take on board acquisitions, they don't always have the same profitability as we do, so we give them the 18 - 24 months to get up there. There's also a mix effect in there. Also we've had, we've mentioned it several times, a material cost increase during the year, which we've not been able to fully compensate for. Even if we have raised prices now, there is, of course, the time lag before it hits the P&L, not at least due to the FIFO method in accounting, you can say. Overall, a very strong and good performance of our biggest business area. 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. This year, basically all areas have been strong, Last year, when North America was a bit weaker, we had a very good compensating factor in Europe. Here we have about one-third 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 since 1999 been about 10%, 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 two 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. That's what you see in this year, that as a result, we have come back again. 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 NIBE Element, it's been an overall impressive organic growth also in this business area. This is the truly global one, you can say, where we are present in basically every part of the world.
In a fairly tough market condition, given that we are a sub-supplier, that there also are competitors in each corner, you can say. With the global business, there are of course, also issues with trade barriers due to political issues that Eric mentioned. Right now in the world also, we have this issue, you can say, with lack 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 SEK 5.1 billion to SEK 6.3 billion. An increase of SEK 1.2 billion, with a 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. 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 help of the currency, of course, but the majority has again been a 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% compares 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 Stoves. 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. A very good balance there over the globe. Looking at the operating margin for this business area from the year we were listed in 1997 up until today, we have now over the last three years been above 10%, which we have been striving for quite some time.
The major step was taken in 2005, really, when we took a restructuring reserve, which is, of course, the reason for the bar going in a negative direction there. Since then, we have restructured and worked out synergies more than the years before when we started the acquisition phase of that business area. With three 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 completely other types of products or travels or whatever it may be that the end customer chooses to buy.
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&D and marketing, which has brought the operating margin down slightly. The gross margin is basically stable. In the fourth quarter, it was definitely stable. It was up a little, but over the year it's been stable. The difference then down to the operating margin is that we allow ourselves to continue to invest in the business. Even if it's been stable, we've actually had some organic growth in here as well during the year. The majority, yes, 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.
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. It is basically the same picture as before when we brought on FPI in Canada serving the North American market. That is about a fifth 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 stoves, and this is the business area where we, ever since the listing in 1997, have been above 10%. There is an extremely diverse picture in the industry for stoves. Some companies, if they are niche-oriented, they could make a bit more, but many being below.
Having this stability of 10%, we are quite proud of and, of course, also determined to both keep and improve. Summarizing the group in terms of income statements, we have this chart showing the development from 2014 - 2018. Since then, when we launched the target of reaching SEK 20 billion, we have in fact doubled in size and slightly more than so. Of course, the last year has helped with a very good organic growth for the whole group as such. 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. Eric will dwell upon that a bit more later in the presentation. In terms of balance sheets, that has not quite doubled since 2014, which of course is good.
The equity has, which of course is very good. This really 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 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 is 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. Even without that, we would have had a very nice development of the equity. 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 SEK 350 million compared to 2017. We have had a more negative development, you can say, or change in working capital than we had last year. 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. 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. We have taken down the inventory very nicely during Q4.
If you remember the numbers from the Q3 conference we had, the change in working capital was much higher at the time. We've done a good job there. Still, more can be done, of course, to generate even more operating cash flow. We know where the money sits, so to speak. We've also allowed ourselves to invest more in the current operations this year, about SEK 100 million or SEK 80 million more than the depreciations. The prior years, we've actually had investments slightly below depreciations. Seen over time, I think we're basically on par there. We are investing to meet demand going forward. 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, SEK 3.5 million, SEK 3.6 million.
Those of you who know us know that the way we are structured, in a way, we have a lot of money sitting on the balance sheet there in cash. It's also a result of us growing quickly, not yet having a cash pool, you could say, in North America. 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%, 70.1%, and 60%. Net debt is also well below the rating level, you can say, of 2.5x, where the bond takers would like to see us not come above. The equity assets ratio being close to 50%.
Of course, you can say that is perhaps on the high side, and again, it's a result of the rights emission 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 emission, but also due to the large acquisitions that we've made. It has come up nicely, and we've not given up on our target. It's a constant fight, and as we typically say, we never give up, we're working on that as well.
Net profit per share has improved over the years, being now at SEK 4.11, as well as the equity per share. Working capital, a gain, 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 a good portion of cash. 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 levels, utilizing the synergy possibilities there are in the group. Return on equity, I mentioned, being affected by larger acquisitions and also, of course, strong balance sheet, you can say. An equity asset ratio that is very strong, which makes it possible for us to continue our growth journey. By that, I think I hand over to you to maybe mention a few words about that, Eric.
Well, I think we can comment both on that. Until very recently, we had a current intermediate target of some SEK 20 billion, and now we passed it. Now, what we used to mention the next intermediate target, that's now the current target. 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 of so and so," or, "Things are going to be so difficult." We believe that we are on a voyage or on a path very solidly towards SEK 40 billion. 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." It's true to a point. Of course, we feel that we are positioned correctly in the market. We said it before, Hans mentioned here we have a capacity of acquiring fairly large entities anymore. Our internal program for becoming more efficient and then launching that into new companies coming on board, that has given us the robustness and strength. When we say we are cautiously optimistic, 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. The robustness, again, internally, we believe is going to carry us all the way up to SEK 40 billion.
We have a picture or a graph, I think that's quite illustrative, that when we mentioned to double sales, 1993, very few people thought that would be possible because it had taken us some 40 years to arrive at the level we were then. Even internally, we said, "Is that possible?" W e very clearly said that we had to do it in a different way. We had to acquire companies. We had to grow more methodically, organically. It took us four years to arrive. That's a story we had to double the sales. That's a story we told the stock market. We launched ourselves on the stock exchange in Stockholm, and I guess some people might have had some doubt, it took us three years to double, four years, another three years, seven years, five years.
I think that's the background that you should view NIBE at. What we've said, and Hans mentioned the word that we never surrender. I like that saying. We face difficulties. We don't shy away. Of course, as we are tremendously proud of presenting the graph that you have in front of you here, that's more the forecast that we are giving. We will materialize the SEK 40 billion. 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 results." I said, "Well, it's a joint effort." Hans and I are just the spokesmen for the results.
All the 17,200 people, they should have a great thank you from all of us, the way they're working all year round, all world around. That's a profile. It's a DNA profile of NIBE 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 we can create economy of scale. Of course, we had international experience. We started with very, very minor experiences some 25 years ago, and a good balance, we've been through that. Sustainable mindset, that's something we've been preaching and living for many, many years, and we are financially strong. Hans has showed you the balance sheet. 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. You always have to be on your toes. Knowing that every acquisition is individual, again, that's a strength in itself. Also our strong decentralized management structure. I think that the pride out in our organization is just phenomenal. I think that's pretty much what we're going to show. Of course, there's a math behind this that the Climate Solutions would arrive at some SEK 25 billion, still a minor stake at the world market. The Element would arrive at some SEK 10 billion, still a fairly big chunk, but we also know that that market is growing. On the Stove side, we feel that we could be able to arrive at the SEK 5 billion.
That's the equation, 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 arrive at. I think that was a longer presentation perhaps than usual, Of course, we will allow questions now for some 20 minutes or so to make the picture complete. Please shoot.
Thank you. Ladies and gentlemen, if you do wish to ask an audio question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Once again, please press zero one to register for a question. The first question comes from the line of Carl Ragnerstam from Nordea. Please go ahead.
Hi, it's Carl here from Nordea. 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, I show. I mean, some negative growth. Can you quantify on your Swedish new build small housing sales development in Q4 2018? Could you see some weakening there? Can you give some outlook for that specific market for 2019? Do you expect a replacement cycle which would kick in 2019, perhaps, to offset the new build decline?
Well, I mean, without being too much into decimals, we can mention that the market in Sweden with heat pumps is slightly more than 50,000 units. I think that's something that's fairly well known. Of course, out of that, I'd say that new construction is perhaps 16%-17% out of that. Of course, the majority is the refurbishment. Even if those will go down, with some 20% that's forecasted. That, of course, is percentage-wise not nice, but we believe that'll be compensated by refurbishment because we started, many years ago, selling the exhaust air heat pumps, and they are the ones that you install in a new build. Now the boom of renovation really started some 20 years ago, and we believe that they are the ones now to be replaced. We are fairly confident that they're going to balance the decrease in new construction.
That's pretty much the same in all countries, that you start with heat pumps in new construction. Eventually, you enter the refurbishment market. Of course, if the market would totally contract, that would not be nice, I think that's representing roughly the percentage that I said. That can be overcome.
Okay, thanks. I have a couple of more. You're trying to establish Climate Solutions on the commercial properties market. What steps are you taking to increase your exposure, could you do it organically more or just via further acquisitions?
Ideally, we like to sell systems also there. I think our strength, or we believe that our strength is the heat pump, the side of it. 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. The comparison between the heating models we have in our country, in Sweden, prior to, you can say 1980, was like you had the mechanical ventilation, you had electric boiler, and you had a separate water heater. Eventually, we started to ventilate our homes due to health reasons. Now we ventilate the home or house every other hour, making it a perfect condition or setting for an exhaust air heat pump residentially. We have not come that far in, well, we're fairly far ahead when it comes to Sweden.
In many countries, they still open the window when they like to ventilate a meeting room or even a hospital. There, of course, we see a gigantic market that has to be more refined. 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, we come in and combine that with our heat pumps. That's the growth pattern that we believe in. If I explained that shortly to you there.
Okay, perfect. The final one from me. In terms of raw materials, did you expect a more flattish situation in 2019? Should we still expect you to continue with the price increases in 2019? 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. I said, our immediate reaction is not always to just push the price increase that's hitting us on to the customers. 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? Of course, then we balance up with the price increase on our side. It's not black and white.
It might sound like a little bit Boy Scout-ish or Girl Scout-ish to act like that. We believe that acting in that fashion, the customer's going to appreciate that we do our very best. Of course, when we feel that now we've taken our portion, then we also have to increase our prices. They are lagging a little bit, but they're coming in very, should I say, in with a great consequence. 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. We are there to monitor whatever changes we get in the same way that we've done in the past. That might be almost a political answer to you, that's exactly the way we react.
Okay. Sorry, just a follow-up on the productivity. Can we expect you to increase CapEx more, allocated to automation as well?
Yeah, that's true.
Yeah.
We also mentioned that we're going to be above, as Hans said, or some years even slightly above the depreciation rate. The increases that we mentioned, of course, when you get prior salary increases of some 15%-18%. You can hardly work 18% faster manually. You have to look at a totally different setup to be robotized, for instance.
Yeah. Okay, thanks.
The next question comes from the line of Max Frydén from Danske. 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, that's something we do not release as to, because, of course, we are relatively small yet. If you were to just broadly get an indication, Rhoss that comes in now has not been consolidated. It's like $70 million. The Oklahoma Boys, they are of course, residential, but primarily commercial. That's another $250 million. I don't think we can be more specific than that. Of course, we have some additional, but that is suggesting that is still a fairly small chunk.
Yeah.
I don't think I'm going to be more precise than that.
Well, big potential.
Yeah.
Yeah. Big potential, I get it. If I take Rhoss as fully commercial and a third of WaterFurnace, 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 won't blackball you for that assumption.
All right. Just mentioning in the report here, strategic investment in the U.S., and these are taking into account significant resources. I just want to understand a little bit, 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. Of course, now the market is reasonably good, and we don't think that we could perhaps even increase the margin. We feel it's fair to try to educate the U.S. market or the North American market, the sum of the profits coming in. 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 Karl Bokvist from ABG Sundal Collier. Please go ahead.
Thank you very much. My first question concerns geographical markets. You mentioned that the 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.
Of course, if we start in the other order, the U.S. is still a very small portion, but we believe that will be also enhanced and improved there. We all know that they are lagging, if I may say. America shouldn't be criticized, but of course, heat pumps is known to a lesser extent in North America. 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 an arm wrestling, the Paris Treaty and stuff like that. On state level, it's very much promoted. There are subsidies and there are utilities. They're very positive to 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 when air conditioning is starting. They can gather more customers.
I think that's where we're standing there. As said, when we answered the previous question, we also have to address the market. We have to sort of educate them, and that is, of course, a gigantic task. That's pretty much what we've been through in Sweden and Europe. Of course, leaving oil to a large extent, that's been an educational process. 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 they're now clearly more than 50% of homes being erected, they utilize heat pumps. It's a renovation market that still needs a little bit of a kick, we believe. Gas is very, very strong. Now with 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 the criticism that's in the market right now that Germany and Poland are generating so much CO2. In Germany, we believe that the steady pace towards a growth, not we believe with such political statements as in the Netherlands and Norway, that they're going to abandon it. I think they're going to be more balanced. We would've liked, of course, to see a very stern statement. We believe they're going to be a more subtle way, but a very clear pattern. In Britain, they are lagging behind. I hope I don't offend anyone calling in, but there, of course, gas is very much the phenomena. 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 us. We have been talking about it and, because the climate as such also is relatively mild in Britain. The market is slowly growing, and we would like to see it grow even quicker. 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 were 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.
It's very good. A final quick question from me then. When it comes to EBIT, I noticed that internal or group costs were positive during the quarter, and it's quite a deviation from historical numbers. I was just wondering what's behind that number, the SEK + 5 million.
Yeah, it's a combination of many things you can say. Everything ending up on that line in the income statement relates to non-operational costs for the business areas, you can say. It's a combination of the group cost 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. It's when we come into the latter part of the year, when we make the full forecasts and the budgets for the next year, that we recalculate these values.
Okay.
That's an ongoing part of the process.
Yeah, sure. If we should just take a long-term average estimate of this, would it still be around perhaps SEK 20 million? I know it's hard to predict from quarter to quarter, but if we take a pencil and simply draw a line together, sort of a trend.
Well, it's very hard to say, because it really depends on the development of those companies and then the auditors come in and audit those projections that we've had. During the year, we don't make recalculations there. There you can stick to the values that you see in there around the SEK 20 million.
Okay. Thank you.
The next question comes from the line of Marcela Klang from Handelsbanken. Please go ahead.
Hi, guys, it's great to be back as your analyst at Handelsbanken. I have a couple of questions myself. Basically, clarity on the previous question. In the first quarter, since you don't have these adjustments for anticipated purchase prices, we should expect a normal level of eliminations first, second, and the third quarter. Am I right?
Yeah. That's what I just confirmed to Karl, I think, or hope I did.
Perfect. Great. It's clear. Another question. You mentioned that within Climate Solutions, now the two major acquisitions from 2016 and 2017 have helped the operating margin. Does it mean that the margins for these previous acquisitions are now in line with the Climate Solutions average, o r is it just developing positively?
No, they are not up that way we would like to have them. Of course, we set an immediate target for them, like within 24 months, we expect them to be there, and they have achieved that. That's not mean that we have arrived at the final target. Like everything else, when we put the four-year targets for growth for the group, it's a pretty long or distant target, I should say. It's important that you give the companies coming on board a realistic target 18 or 24 months ahead. Y ou say, okay, we tick 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.
Yes, 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?
Marcela, you are coming back with your sharp tongue. You've been on maternity leave now, and now you are really stressing us here. 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%. O f course, above that, you have to have a certain product range, you have to have a certain setup geographically. That becomes more individual. Of course, not only two or three companies can carry the burden of being above 10%. All of us companies should be, ideally. We also are reasonable when it comes to a company not having a 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. If I understand it correctly, they still have a little bit to go to reach the 10% target, the first target.
I tell you are so precise.
Thank you.
I think I'd like you back on the board.
Thank you. 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 kick profitability up?
That is to be both distinct, but not an emperor. If you come in as an emperor and start dictating things, you're never going to get any help. That's our experience. That's why we have these decentralized organizations. You have to come in willing to assist, but not being mediocre and say, "Okay, it's fine." Saying, that's why we are so clear on the targets in our annual reports and our quarterly reports. It's not a secret when someone comes in or enters, as you say, as a company, they know what kind of a behavior we have. Just like when we employ people, it's not a secret. With the media we have now, it's totally known. 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. Of course, a 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. It's confidence on both sides. That's the whole trick.
It's attitude.
Yes.
As you say, because the whole smorgasbord, 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 NIBE Element, the productivity or the profitability was negatively affected by the large orders that you had last year and also less favorable product mix. Do you see any chance of improvement of this in 2019, or are you happy to stay just slightly above 10%, which basically is above your target?
We are never happy to remain. We always like to improve, you know that. We also know that as a sub-supplier, we have to be on our toes. 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. There, of course, we have worked so hard and determinedly over these years. 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 trains.
Those are products in there that we are very well-suited to develop and enter the market with. We need a good cooperation with the customers out there. Like hybrid vehicles or something, listen, it's a totally new phenomenon since three to five years. There we are so well-positioned. I think we have to have an understanding. We have a balance with the R&D cost that we have to put in to qualify ourselves being a sustainable, good partner for the companies producing the products that I just mentioned. We try to look after the margin, as a sub-supplier, I think that the region where we've been the last three 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. 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, what should I say? When a large customer of ours is bidding a project, they say, "Well, we won the project." Of course, there is more immediate. Particularly, if it's a customer that is selling some kind of an application more seldom than perhaps every other year. T hey know that we are fairly ready to produce because it's something they've had from us previously. If they are bidding in a situation with a new product, then we are contacted naturally before. Say, "We anticipate you to kick in," let's say, "A quarter or four months after we get this." Otherwise, it wouldn't work. I hope I give you the correct picture there.
Yes. These type of, I'm squeezing you here, but these type of contacts, you have not seen anything yet regarding 2019, where you are contacted before?
No. I mean, it's not squeezing. We have contacts all the time, but perhaps you should be more open about bigger projects. We don't like to have hide and seek here either. At least you're stirring the thoughts here around the table how we should report that. At least you got that from us today.
Thank you. Because obviously it has an impact.
Yeah.
A final question from me regarding M&A, where do you see a need to fill any blank spots today? Obviously, you have a very strong financial situation.
Where do you see a need operationally?
Well, I think that, as we said here, on the Element side, of course, with the diversity that we have, if we can shortcut some of the R&D by bringing some very skilled company on board, that would be a great benefit wherever they are located. Just mentioning BriskHeat again, of course, to develop such a product for the semiconductor industry, that would take us years. Once you have the product developed, that would take you another quite considerable time even to approach the customers, because they are used to being supplied with a high-quality provider. I think the technological skill, that's where we act, and system thinking, that's where we act on the Element side. Of course, on the Climate Solutions, very obviously, both geographical spread and adding to the commercial side.
On the Stove 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 Klara Jonsson from SEB. Please go ahead.
Hi. Thank you for taking my question. I'll be quick. Just a fact, 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 it in revenue?
I think that all large customers that we have on board, they are forecasting. Ideally, they stand for their forecast at least six weeks ahead of us. They have the right to change the forecast after six weeks. There's a theoretical, of course, transparency for a number of weeks, a number of months ahead of us. It's their market, and as soon as they see something either increases or decreases, of course, they like to react. I shouldn't say it's frozen, but four to six weeks, that's really the visibility with substance. Of course, we have guidance beyond that.
All right. I mean, do you have many large orders? You have quite a significant share there are orders that you know you're going to deliver in the coming year, o r is everything just four to six weeks?
No. There are relatively few of those where you can have something being produced. We have, of course, customers that say that we have a demand of, let's say, SEK 500,000 year after year after year, just to talk about numbers. 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. At the same time, we do not dare to have too much inventory if sales would drop, because that would have been on our own risk. Our customers do not help us in that sense. We have to look after that ourselves.
All right. Thank you so much.
Thank you. All right. I think that we're running a little bit. Hans and I literally here, appreciate all the questions. Of course, if we've been answering politically to some extent, we apologize. We can't release everything. We certainly appreciate the challenging half an hour we had with you out there. Thank you very much.
Thank you.
Thank you.
Thank you. This now concludes our presentation. Thank you all for attending. You may now disconnect.