Ladies and gentlemen, welcome to the NIBE Q3 results presentation. Today, I'm pleased to present Gerteric Lindquist, CEO, and Hans Backman, CFO. Mr. Lindquist and Mr. Backman, please begin.
Thank you.
Thank you.
Good morning.
Good morning.
It's Eric here, and as usual, I think I'm going to start, and then Hans is going to kick in a little bit later on. We have some slides to show you. It's a gorgeous morning here in Markaryd. The sun is shining after several days of very gray fall weather. It's a nice frame of presenting reports. The environment as such, the business environment, if we just have a very quick look at that, it's been pretty good demand, but we all know that we are surrounded with several issues regarding the political situation and also the increasing trade barriers. It's not our style really to complain about those things. It's up to us to maneuver around them or combat them. There are so many things, of course, that happened during a year.
We have the raw material prices, we have unexpected salary increases in so-called low-cost countries. Of course, we have changes in product mixes and the weather. All those things are conditions that we just have to deal with, because the long-term target for us is the sustainable and profitable growth. I think that today we've been describing a pretty impressive growth in our own world anyway, and we're going to have a look at that. We've been talking about the organic growth in the past, though, at an average of 10%, and it's not so easy to arrive there when inflation is virtually nil. We are now at a situation or a position where we've had a very good, solid organic growth for several quarters.
Lately, we've also had some help of the currency because of the Swedish weak currency, that is the prime reason. That is, as we believe, something that is enhanced by the way people reason anymore. We are going more sustainable, like it or not. I think we all observe the difficulties we are having in nature and weather and such, and that is influencing all of us more or less, we can say. When we talk about the results, of course, the operating result is up quite a bit. The margin is slightly up as well, and all that is due to the growth and the cost control and also the productivity development. We've also acquired some five companies during this period, the first nine months, and it's a steady flow of candidates standing, and that we are investigating.
As we've said before, like 30%-35% would potentially turn into a signed contract. You can imagine that we've had quite a number of discussions when we closed five acquisitions during the first nine months. That is not a burden. That is just stating the fact, that's how it is. We're well-known in the market for being interested to grow our three business areas. We are very pleased that it's not only us talking to the people, they are coming to us, and we feel that our structure, our design, our industrial vision and passion is pretty much appreciated by a number of companies out there. If we were to walk into the different business areas, of course, last year, we had some weakened result due to larger acquisitions.
Now we can say that those integration efforts, they are really bearing fruit, and we are continuously improving the performance, both margin-wise and, of course, growth-wise. Now we have also stepped into the district heating business or the district cooling. Not that it's been a severe fight with that kind of heating or cooling system, but rather than fighting it, we said we're going to join them. Of course, there's a big move to be able to take over the Alfa Laval district heating division and to broaden that in the years to come. The Rhoss acquisition, we put our toe in the water earlier, or last year, actually, and now we're daring enough to buy the remaining shares. That, of course, kicks in as of January 1st.
That, again, is really broadening our commercial scope, as we've been discussing and talking about and writing about in our reports, and now we are there. We can say that on the Climate Solutions side, as far as the product array, it's there now. It's just for us now to continue to grow the residential business, of course, both with heat pumps and with the district heating, and also to grow their commercial business now with Rhoss as one of the corner pillars. We've also been promising, or not promising only to the external world, but also internally, we say that we typically would give a company coming in, not necessarily at the right level of a margin. Give them 18 or 24 months to bring it up to a desired level, at least 10.
I think with the two large acquisitions that we've been talking about, the EMIN Group and the CCG Group, I think that we have demonstrated that we can keep that mission alive. When we talk about the Element, of course, it's an impressive stable margin, as you say. We also know that the third quarter, as Hans going to come into, is coming in slightly lower than we've been used to, and Hans is going to talk about that and then why. That's how this being in every market segment, we can say, on the Element side. We have now arrived at a level of being very large in all sectors. In some sectors, have a better margin, and some sectors have a lower margin. Of course, it goes up and down.
The overall picture is that it is a very interesting market that is now emerging in front of us. Coming from the immersion heater, as we once knew the NIBE Element, coming into the resistors, coming into the thin foil elements of the world, we are now seeing that also in this business area, the world is going truly sustainable. Wind, trains, vehicles, electric vehicle, but also the hybrid vehicles. Not only for personal purposes, but also the trucks and the construction equipment, they are all going in that direction. Wherever we go, wherever we see that this change is taking place, there is a place for some kind of a resistor or heating element or a system. It is very interesting to look at that.
Underlying the importance of being truly sustainable, not only on the Climate Solutions that have been so obvious in the past, but the other two are just as much working in the same direction. The acquisitions that we have been able to carry out during the year are also interesting. Of course, Backer Hotwatt in America brought us into a market that has not been so well known or obvious to us, supplying products to the semiconductor industry. That is a very advanced industry with very high quality standards, and it is interesting to be challenged as far as living up to those standards. When we come to this Turkey, Serbia, the EMIN Group that we acquired just recently, that is an interesting part of the Climate Solutions product segment where they produce flexible hoses, fittings, and also those braided hoses that we know since many years, of course.
Now we have that under our belt as well. We also believe that Serbia is a producing, or to produce in Serbia is also very interesting from a cost structure point of view. We all know that in Poland and Czech Republic and the former Eastern countries there, the salaries are rising very rapidly. In Serbia, it is still more competitive when it comes to the salary levels. If we just have a quick look into the stove situation, there of course, it has been a relatively flat market, and one should not really say that we are sorry because we had hot weather. Some of us enjoyed that, but I think everyone also understands that very few of us would walk into a stove store in the middle of the summer to look for a stove.
Given the weather, we are not that totally disappointed in the development. Here again, just like with the other two divisions, of course, we like to broaden the assortment in Southern Europe or Mediterranean Europe. There we can say that the pellet stoves are more commonly used. It is used almost like a primary heat source because their heating season is relatively short. That is something that we have to address. We have started to produce our own, and it is no secret that we are looking for an acquisition in this field to really make our assortment complete. This acquisition in Britain earlier this year, the Evonic Fires. When we first started to look at electric fires for stoves, of course, that is a phenomenon that is not so well known in Sweden because wood is so readily available.
Of course, thinking about all the big cities that we have in the world, in Europe, where you hardly have any access to a chimney, and in big cities where you have restrictions might be, this comes in very handy. That's growing very quickly, and that's also enhancing the electric fires or stoves that we already had since we acquired Stovax in Britain. If we just had a quick look at the figures themselves, the growth is quite healthy as we see here the first nine months. If we were to say that the acquired growth is 6.5%. We easily see that we are above the 10% now with a little bit of a help of the currency. Now we are at a position where we would like to be, of course, on a continuous basis.
The gross margin is slightly down, that is because of our legacy of not necessarily increasing right away, but rather trying to absorb quite a bit of the price increase by also being more rational, trying to meet it with our own methods. We must say that the price increase from our suppliers, raw material or components, they've been, of course, a bit on a surprising side. There's always a possibility for us, of course, to increase prices. That's the easy way out, and we fight a little bit with that. We'd rather try to absorb and some of it on our own. I think we've been commenting upon that before, that to close that gap, of course, we will not allow our gross margin to erode.
It'll be a combination of price increases that are already, of course, working in our favor right now and also enhancing the productivity. Having said that about the gross margin, the operating profit is up some 19%, and the margin is slightly higher than the year before. If we just have a quick look at the third quarter, then we see that there was even more of a growth than the first six, of course, almost 25%. That almost reminds us of the stronger quarters we had several years ago. The gross margin still below last year, so there we have to be patient to give it a quarter or two more to close that gap. The operating profit is up like 20%, which we think is quite healthy.
The margin, of course, mainly due to the element and stoves are a little bit weaker this quarter on the operating margin side. We have lost some 0.6 percentage unit. We're fairly confident that we're going to close that gap, as we've already said. Looking quickly at the distribution or some graphs, we can see this graph, that the pattern that we've had for many years, that's very steady. When the quarter four is typically coming in as the strongest one, that's what we have ahead of us. If you go back years and years, we have the same pattern where we start with the first quarter relatively modest, then the revenue continues to grow. It's the same thing on the profit side or on the operating result side, if we have a quick look at that.
Even profit after finances, you can see that even steeper when it comes to the increase. I think that also filling us with some certainty, if there is such, when it comes to forecasting the result for the full year. We say that we are fairly confident or positively, cautiously positive for the rest of the year. I think that statement is, of course, coming from only having six weeks to the year-end with that typical graph as a backbone. Geographically, we can first look at how it's distributed between our different business areas, and it's pretty steady. Climate Solutions typically will be about 60%, Element just about at 29%, and stoves at 9%.
This picture, of course, typically will change a little bit when it comes to year-end because stoves, we have the strongest quarter ahead of us when it comes to that division. On the operating profit side, it's fairly similar as before, where Climate Solutions is between 2/3 and 70%, and the two others are making up the rest. Again, we assume that stoves going to kick out that 6% a little bit before the year is over. All in all, the balance is kept fairly well between the three business areas. If we look at the geographical split, we were just commenting upon that before we started the conference here.
That is when you look at the picture and the people around the table here are pretty much the same as were like five or 10 years ago, and we say, okay, that's a healthy picture we see or pie chart that we see ahead of us. The Nordic countries being our home market as we identify that. A solid 25%, 26% where we have a very good foothold. The rest of Europe, some 38%, 39%. In North America, just a few years back, we were hardly present in North America. Now it's about 31%. Also others primarily, of course, represented by the Element group, also in Asia quite a bit. We think that we have arrived now at a geographical distribution that's quite healthy. That is also demonstrating a robustness when it comes to result and revenue generation.
If there are difficulties in one sector or one segment in the world, we can also swing over to another one. We don't foresee that everything's just going to collapse, but of course, there might be instances in one country, in one region, and hopefully then we can compensate that in other regions. All in all, that is demonstrating a very healthy backbone of NIBE. I'm going to invite you, Hans, to comment upon in more detail where we are.
Okay. Thank you, Eric. I will jump into Climate Solutions immediately here. As you've seen there or see on the chart, we've had very good growth there of almost 18% during the first nine months, with the currency playing a very small role, so to speak, during the first half. It's a healthy organic growth below the numbers. Of course, this is driven a lot by the construction of single-family homes. It's the government decision to, in one way or another, support renewable products like the tax credit in the U.S., but also the political decisions in Norway and the Netherlands to phase out fossil fuel for heating homes. Also this general trend that we mentioned a couple of times about an increased awareness and interest in renewable products. The growth comes from many countries.
Very pleasing to see is, of course, that the growth in the operating profit has been above the growth in the sales. There we have increased it by 24.4%, leading to an operating margin then that is up from 12.5%-13.2%. The one item sticking out is the gross margin that has come down slightly, and that is what Eric mentioned before. It's a matter of raw material price increases, where we have not been quick enough in a way to compensate for those. We're trying to take care of them ourselves, so to speak. We've also seen a mix change in products selling more commercial, which don't have quite the same operating margin as the ones going to the residential side. There is also some currency effect.
The cost control has been strong, the SG&A side has been favorable to us, leading to this result. In the third quarter, the sales have been even stronger, actually, up 25%, and the growth in the operating profit has exceeded that with 28.3%. There has been a stronger help of currency in the third quarter. Nevertheless, we have also improved internally, so to speak. The gross margin has slightly picked up again, and the SG&A have been continuously kept under control, leading then to this operating margin which is up to 15.7% from the 15.3%. A quite good third quarter.
The sales split we've been working on, Eric just commented upon it as well, coming from a Nordic region where we had 85% of sales not too long ago, to now having a very nice split between the Nordic countries in the traditional home market, the mainland Europe, and then North America. Switching to the Elements business area, there's been an overall good demand here as well, stable and growing, but with significant variations per segment. We've grown over 23%, where 15% has come from acquisitions, leaving the rest to an organic growth, then helped slightly by currency. Here, the gross margin has been stable up to the first nine months, and we have increased our operating profit there with some 14.9%.
What we did have in the first quarter or first half year, actually, of last year was these one-off projects that we have mentioned a couple of times. So that could explain the reason there for the operating margins coming down slightly. That also leads us into the third quarter, which has had an effect on the margin, of course, for the first nine months as well. The quarter as such was lower than last year. We did grow sales quite substantially by some 30%, which half basically came from acquisitions. The rest was a very good organic growth, but also helped, so to speak, by currency. What we see here is a shift in product mix influencing us, moving slightly or increasing the volume business and having some less sales in systems where the margin is typically higher.
There has also been less sales or a reduction to the semiconductor industry in the same way that Atlas Copco talked about in their report some weeks ago. Automotive has slightly been down. So it is this mix change, but it is in a way a coincidence that all of these things occur in one quarter. It is of course also coupled with what Eric said initially there with wage and salary increases, and especially the eastern countries where we have a lot of production, and also here raw material price increases and some customs and tariffs, even if we do not try to complain about this. That as an explanation. It is a mixed change and a bit of a coincidental effect, everything coming into the third quarter.
This is again, which we have mentioned several times, the business area which is the most global one and with the largest split between different geographies, where we have come also from the Nordics moving into Europe, North America, but where the Asian business is taking a larger and larger portion. Last but not least, we have our stoves business area, stable, moving a bit sideways in terms of growth. 1.1% coming from the Evonic Fires acquisition that I have mentioned, a very nice add-on that fits the business very well. The rest being organic growth, helped by currency, you can say. In this business area, the gross margin is stable and the business area such is very stable and runs in a good fashion.
What we have seen as an effect of the very long, warm period that we have had is that demand has not kicked in quite as it typically does when the weather is a bit colder. We still have an organization that is tailored to slightly larger volumes in a way. So that has led to the operating margin then coming down from the 9.8% to the 8.2%. In the third quarter, the stoves business grew by some 8.8%, where you see the larger effect there of the Evonic Fires. You can see this was also helped by currency, the organic growth, but again with a stable gross margin, and keeping the operating margin above 10%.
The distribution of sales here, again, much of a European business, but thanks to the FPI acquisition that we made some time ago in Canada, we have a very good base for the North American business. Jumping into balance sheet, I would say that there is one item that might be sticking out there, and that is the non-financial current assets, which of course means mainly the inventory and the receivables. They have increased from the beginning of the year, and that is, of course, a logical consequence of us growing so much. At the same time, we have been building inventories in order to meet the demand, and we were especially aware of the situation that we were in about a year ago when we were not able to meet the demand and were lacking products, raw material, and to some extent, even personnel.
This year, we have deliberately been both staffing up and also producing more products to have on stock now for this season. That also involves securing some raw material components because there has been such a surge in demand from various industries. That's really the reason for the increase in the non-financial current assets. On the liability side of the balance sheet, there's not so much to comment. It's, of course, pleasing to see that the equity has increased substantially, a result of us generating a healthy profit. Of course, the build-up in inventory and the increase in receivables does have an effect on the working capital. The cash flow itself from operations has increased by over 20%. Right now it's sitting, so to speak, in inventory, and waiting to be sold in a way.
Of course, that has kicked in and started already in Q3. We typically build inventory during Q1 and Q2. The investments have basically been kept on the same level and below depreciation. If we just look at some key financial numbers there, I think it's pleasing to see that the interest-bearing liabilities in relation to equity have constantly come down now for some time, as well as the net debt in relation to EBITDA. Of course, we have a quite strong balance sheet with an equity assets ratio now about 46%, which much comes from the rights emission we did in 2016, which makes us ready for continued acquisitions, I would say.
Just very quickly looking at the working capital, including cash, it's basically on the same level as before, excluding that portion, we have an increase coming again then from the inventories and the receivables, which we are now working on reducing then for the remainder of the year. Summing up and looking at the last key financial numbers, I think we have seen a very good development to basically all of them. Return on capital employed has increased, return on equity, net profit per share, and equity per share. All in all, I would say it's been a good quarter, a good first nine months with a healthy balance sheet. By that, I'm done with my part.
That's what you think. All right. We won't comment on the share price, but just there for your information. I think now we will allow, of course, questions for some 15, 20 minutes. I think it's just for you out there to shoot.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. The first question comes from the line of Predrag [audio distortion] from Nordea. Please go ahead.
Thank you very much. Could you tell us what the FX impact is on the group in the quarter in percentage terms on sales?
Well, as you know.
For Q3 specifically.
Well, we understand the question. We haven't ever specifically answered that, neither when it's a headwind or when it's now tailwind. I think you just have to say that, of course, the true organic growth is far above the currency effect, if you can add that to the fact. We have decided to say that, or to inform that it's our task to meet the course if there are currencies or if there's a headwind, as we say, and tailwind is now. That's up to us really to curtail that as good as you possibly can. That's the only answer we can give there.
Could you tell us about the reasons behind the accelerated growth in Climate Solutions in Q3? I mean, which countries are driving this growth? Does it come specifically from the U.S.? Because it seems it's really taken off now in Q3.
I think it's much better, of course, in the U.S. than last year. It's also, as Hans mentioned here, the substantial growth in Europe and where the politicians also say that now we're going to go in this direction. In Holland or in Norway, as examples, when they say they're going to phase it out, and they decide the year, already that very moment, people start to reconsider what they were going to do prior to that. Same thing with subsidies. If you say that in June next year, subsidy is going to occur, people stop buying and then they start buying June next year. Same thing with what they have stated now in Norway and the Netherlands, for instance. Okay, they're going to phase out oil, and they're going to eventually phase out gas many years ahead of us, or at least in Holland.
That's a clear signal to the customer, if they're ever going to sell my house, how should it be equipped? That's very good. In Sweden, of course, the new construction is slowing down somewhat. We also have a bulk of heat pumps out there that has to be renewed and replaced, not necessarily only when they break down, if they do, but also because they are much more advanced from a control point of view, from a sound point of view, and from a performance point of view with inverters rather than their off and on machines that were sold 15, 20 years ago. I think it's overall, as we try to explain, a decent demand.
Not saying that we always can present the organic growth of this magnitude, I think we are comparing perhaps the quarter in all fairness, last year might not have been the strongest one. I think that's a very quick answer to your question there.
Okay. Many thanks. Finally, you're writing in some point in the report about an information campaign in the U.S. that you say is going to be quite large. What kind of cost is associated with this, and what kind of results do you think this could bring in?
Well, the signal here is that we really like to live without subsidies. Of course, last year, we tried to convince the politicians, and that's not easy for a company in the Markaryd in Sweden to tell politicians in Washington what to do. I think that the avenue that we had chosen at that time, telling that it would be fair if the PV collectors would have the same subsidies as the heat pumps, they listened to that. Not saying that it was only us, of course, there was, if you call it campaign, that turned out successfully. I think that with now three years ahead of us, or three and a half years ahead of us, where the demand most likely going to be relatively good, we think it's wise to invest a bit of that good revenue, and also result naturally into the future.
If the subsidies would not be prolonged, that we have spent money wisely, not only keeping the money here, but also saying, now we're going to try to educate the public as such. Of course, we will not go wild in the sense that we're going to spend all made profit in that, it's more of a statement saying that we are there to stay, and we are there to grow the market. It's a continent, and we have the greatest respect for that. We see how important it is that the public is also trained and informed about the advantages. We've done the same thing in Europe, where we spent a lot of money during the years to convince and to convey the message to the public. That's more the message, rather than saying now we're going to come down in margin.
That's not the message at all. It is that we will not be so greedy, so we're going to utilize these coming three years to a maximum, but rather use the profit made in a wise way.
Okay, thank you very much.
The next question comes from the line of Max Frydén from Danske Bank. Please go ahead.
Yes, thank you. I have a couple of questions. Excuse me. The first one is on Climate Solutions. If you look at Sweden, in discussions before, you mentioned that sort of the replacement market is going to offset new sales and that the market might be flat. Now you see such a substantial increase in sales already here, and if you look at the vast majority, some 40,000 heat pumps or so that were sold 20 years ago. Do you believe that you maybe have misjudged that, and that you can actually see a net positive market growth in Sweden from replacement market?
Well, I think that, as I tried to say before, we are not so negative to this market. A heat pump, just like boilers in the past, that is something you, if it would break down, if you would have a failure, of course you replace that. It is not like a couch or chair that you, in a strange situation, you would not necessarily need to change that. Here, or any kind of piece of furniture, just to make an example, we believe that people are more willing to change the, let's say, the ground source heat pump for other reasons than just a failure. We all know that we can change a compressor fairly easily in a heat pump. There are so many other factors, just like the automotive industry, of course.
Volvo and Mercedes-Benz were fighting years ago about having a car that would last like 23, 24 years, no one wants to have a car that is that old anymore. That is why the Japanese manufacturers, for example, came in and they brought a different thinking. We believe that also with heat pumps, it is a much more advanced vehicle anymore, if I may use the word, where you have the controls, you have the sound, you have all the capabilities anymore of being linked to a system, the smart home. That is the reason why we feel that people are willing to change over. Of course, once you have done this tremendous, as many think, or relatively large investment in a geothermal or ground source heat pump, the drilling is done, the installation is done to change the heat pump itself.
I wouldn't say it is a minor investment, relatively seen, it is a more modest investment, of course. That is why we are fairly positive.
Good to hear. If you take the new build market versus the replacement market, is it possible for you to quantify if you have a larger share, in your view, on new build versus replacement? Is that a valid question that you can answer?
Well, I think that when it comes to new build, of course, there we talk about some, depending on where you read or get the figures, some 12,000, 13,000 homes being erected a year like this. Perhaps district heating would have some 20%-25%, depending on where you build those houses. Let's say that there would be like 10,000 heat pumps there out of some 50,000 a full year. That market represents some 20%. That is pretty much how it is in most countries once you are established. 15%-20% would be new construction, 80%-85% would be replacement. That's the proportion that we feel comfortable with. Even if there would be a drop in this market of, let's say, 25% to make a very negative picture on new construction. That would affect in broader terms, the numbers with some 2,500.
That would be compensated by the other segment, if I may call it the refurbishment market, by growing some 5%-6%. That's proportion that what I'm talking about more in numbers.
Yeah, that's much more clear. Thank you.
Yeah.
Just a question on, or two more questions on the margin. Raw material input costs you mentioned here, still not been able to close the gap, so to speak. A lot of other industrial companies are saying that they're starting to close that bridge in Q3 and expecting it to be sort of neutral or on par in sort of 2019. Could you agree with that statement or are there some other movements here that we need to take into account?
Well, our legacy is not really to increase prices too much. I mean, that might sound naive and a Boy Scout attitude or a Girl Scout attitude, but I think we deal with our suppliers normally in a way that they say, "Well, now we try to improve our productivity and you also have to participate in that change." Now, of course, we've seen increases in price that have been more in a world market level than we've had those, of course, refrigerants increasing tremendously. Of course, our tradition has been fulfilled in a way that we are not too hasty, as they say in some books now. Ho, ho, don't be too hasty. To increase the price, it's relatively easy, but you also have to do things on your own.
We started with saying that, of course, we can close that gap, but it has to be done in a civilized and a business-like manner.
Yeah, I absolutely understand that. Do you believe that that gap has been more closed in Q3 compared to Q2?
First, I understand your question perfectly well.
I know.
That's fine. That weapon or that tool, of course, that we have in our hand at any given moment. We also like to balance the gross profit with the growth. We are on a steady growth pattern, and it's important that we show our customers respect and not say, "Well, always refer to what we have been exposed to," but do that in a needed way. I think that's the best way to explain it to you.
Okay. I'll have to satisfy with that. I'll let someone else in. Thank you.
Thank you. Once again, ladies and gentlemen, if you would like to ask a question, please press 01 on your telephone keypad. The next question comes from the line of [audio distortion] from SEB. Please go ahead.
Yeah. Hi, Eric and Hans. My first question has to do with the mix effect for Climate Solutions that you mentioned. You mentioned some negative mix effects from your increasing sales of commercial products instead of residential. Is this only related to your recently acquired units, or are you also increasing sales of commercial products organically more than residential?
I think it's similar. Of course, we have not consolidated Rhoss as yet. That is to come in the next quarter. I think what Hans was saying is that when you enter that market, that's more project-driven, but at the same time, it's a corresponding lower cost level on the sales cost side. I think that's more sense to explain the slightly lower gross margin there. It shouldn't really affect the EBIT line.
All right.
I think that's what was said before.
All right. Thank you. I have another question on the Netherlands. We know that it's very positive development there. Could you say something about the magnitude of how much that is helping organic growth for you right now?
Well, we don't really hand out those. Since we mentioned that, okay, it enhanced it, of course, that is an important driver. Still, that market, of course, compared to many other markets, is not that gigantic. We're starting from a relatively small or modest level.
Yeah.
It's a country with some 16, 17 million people.
Of course, the potential is very interesting that when you see that just in a few years time, or whenever that decision came, how quickly the public is reacting. I think right now is more of a hindrance when it comes to installation capacity, and people have to change over installers. They've been used to installing gas boilers for the last 40 years, and now they have to be very professional when it comes to totally different installation methods than previously. You have to reschool, you have to look for people knowledgeable about refrigerants and things like that. It's not only there now, everything is before, but you're going to install that. It's a transition period. We're into that. Very interesting.
Yeah. All right. Thanks for that. My last question, you've already answered, but I'm trying to understand if I've got it right. As I understand it will take a few more quarters before you will be able to compensate for the raw material headwinds you're experiencing in full, if that's correctly understood.
Well, I think you read it fairly correctly, yes.
Yeah. All right. Thank you so much.
Thank you.
The next question comes from the line of [audio distortion] from Handelsbanken. Please go ahead.
Hi. Just a quick question on Element. The mix effect that you were explaining from increased volume sales and less sales from systems, is that a temporary effect or just a Q3 effect?
Yeah. We are represented in every sector, we can say, as before. Just to illustrate, of course, it's selling to, let's say, the train industry, where you equip different carts with our equipment, and that is pausing in between one project or two, and instead you start to increase the white goods sector with heating elements. Of course, you have a difference in margin there as an example. It doesn't mean that the train sector is any lesser. It doesn't mean that the white goods set is going bananas. As Hans said, in this particular quarter, we had some instances of that kind. We are not concerned about that in the long run. That happens, and I think that's why we don't like it too dramatic.
Okay. It wouldn't be any surprise if the product mix came back to the original level the next quarter?
Well, of course. I think we've talked about saying it's a long-term journey here, and we've been, as you know, working very hard to establish the NIBE Element group above the 10% EBIT line.
Yeah.
We are confident that we're going to be able to be there. We also have to register and allow and understand that from quarter to quarter, it could be variances. There weren't that many years ago where no one thought that we ever would be able to establish ourselves as a sub-supplier above the 10% level. There we are, and we are very determined we're going to remain there.
[audio distortion]
Thank you.
The next question comes from the line of Karl Bokvist from ABG. Please go ahead.
Thank you very much. My first question concerns regulation of subsidies. Have you seen any changes in subsidies in any country, either during this quarter or do you expect any changes to come here in the near term, either on the positive or negative side? Thank you.
No, we can't say that we've seen anything during this quarter, no. As far as forecasting, it's fading now for the third time. I think we don't necessarily like subsidies, of course we say in Germany, we'd like a statement from the politicians saying, now we're going to go truly sustainable rather than continue with oil and coal and stuff like that. Just a statement, now we're going to go in that direction, would be tremendously helpful. It's not to say that they're negative in Germany, I think that's the big nation that we're waiting for. We are there, we're well so. We're so well-positioned through our two brands. That's something we would like to hear and see.
At the same time, I think it's moving in our direction in the sense that there is this debate ongoing the whole time of becoming more renewable. Not the least in Germany, it's talking about these diesel Fahrverbot in various cities where they are prohibiting people to take their diesel cars into the town.
Yeah.
Hopefully it's just a matter of time.
Okay, thank you. Because from my understanding, there is some subsidies going on in Norway that are about to end next year, unless I'm mistaken. Have you seen anything regarding this?
No. In Norway, they like to replace all their oil-burning boilers, and to our understanding, it's still some 80,000, 90,000 of those out there. I think that once this movement is going, even if the subsidies were to be taken away, now that country is going truly sustainable. I think it's more like Sweden now and more like Switzerland. They are going so quickly also into electric cars, and they are very cautious about nature. I think those oil burners and oil-burning boilers, they're going to be replaced one way or the other.
Okay, thank you. My second last question is, if we look at SG&A to sales, do you foresee that you have a possibility to improve productivity there? You will be able to keep reducing that ratio to sales, so to say?
That's our mission, of course, to increase productivity. Since we've chosen this path of not always moving to the country where you have the lowest salaries, but rather believing that you have to have a presence more or less in every country. We remain in Sweden, where production was sort of doomed years ago. We are here, we are producing in Norway, we are producing in Germany, we are producing East European countries. Of course, it's up to us as a management to always react to cost increases. That's one of our number one priorities, increase productivity, and that's a project that's never finalized. New products coming out, new technologies coming out, that's what we have to use and address. It's a steady, ongoing process. Of course, you're always going to connect NIBE with productivity. It's never forgotten in our group here.
As new companies are coming on board, that's the first thing we do, go in and analyze from a production point of view, how well is the time used in the factory? What can we do about it relatively easy, and how can we invest to become more efficient?
Understood. Okay, sorry.
That's fine. I think that's all. We just wanted to inform that we've been running now for some 57 minutes.
Yeah.
Could we allow for perhaps one more question from someone?
Sure. The last question comes from the line of Anthony [audio distortion] . Please go ahead.
Hi. Good morning, ladies and gentlemen. Thank you very much. A couple of questions really. One relates to the Hello?
We are here.
Sorry.
We just changed our batteries in our hearing aids.
Two questions. One was just on the financing charge in the third quarter.
Was down quite nicely, but the average side rate was also down. I'm just wondering whether there's any benefits of mark-to-markets on derivatives gains on FX or whatever that benefited that quarter and which perhaps we won't see going forward. The second question was just on the tax rate. Third quarter looks to have come in at sort of 20%, which I think is below the sort of 24%-24.5% I thought was guidance for the full year. Again, was that a sort of function of one-offs or was that based on the improving mix in the tax regions, which maybe isn't sustainable therefore going forward?
Yeah, it's Hans here. If we talk about the finance charge, as you mentioned there are two effects in there you can say. One is, of course, FX effects. They come and go in both directions in a way. That has had one impact. The other one is also that we issued a bond here earlier this year replacing another funding, which brought down the financing cost.
Right.
Those are the two factors influencing that number.
Is it possible to quantify the FX impact in that quarter, if possible?
We don't give out those detailed numbers.
Okay, fine. On the tax rate?
The tax rate, yes, they have come down. They have typically been around 23%, now coming down to 20%. That's a consequence of various things. One is we have been profitable in Sweden where we have a fairly low tax rate in comparison to some other countries, so that weighs heavier. Also in the U.S., we are constantly coming down in tax rate there given the changes that have been implemented by the current government to bring down the corporate tax rate. They weighed heavier before the tax cost over there compared to now.
For our sort of modeling, we probably can start to edge that tax assumption into the fourth quarter and perhaps nearer the 20% now. Is that something you'd agree with?
Somewhere around there.
Okay. Many thanks for that.
All right. Thank you, Anthony.
Thank you for all these interesting questions. I really hope that it wasn't too much of a hide and seek, that we try to keep a balance with what we present here and what we supply to all the shareholders. That's why it has to be a balance. We appreciate all your questions, and we like to arm wrestle a little bit with you. We look forward to talking to you again mid-February, if not earlier. Thank you very much, and you have a nice weekend now.
Thank you. Bye-bye.