Ladies and gentlemen, welcome to the NIBE Q1 results presentation. Today, I am pleased to present Gerteric Lindquist, CEO, and Hans Backman, CFO. Mr. Lindquist and Mr. Backman, please begin.
Thank you very much. Good morning, everyone out there. Good morning. We're going to have the same procedure as before, where I start with some slides and then Hans continues. Prior to that, we'd just like to give you a weather report from Markaryd. It's blue skies and 21, 22 degrees already. We're going to have our annual shareholders' meeting later on today, as most of you know, at 5:00 P.M. There are more than 1,100 people signed up for that event. We just had to acquire a building to be able to host all those. It's an old building that we are refurbishing to produce heat pumps eventually, but for this particular occasion, it'll host our visitors. The setting is just gorgeous.
Also another thing, the previous meeting we had, some of you might recall that we had to have a very abrupt ending to that because we had other things to do. So to end in a more orderly fashion, we would suggest that we continue, let's say, 50-55 minutes, if there would be that many questions, and then we would have to end discussions and questions at that point. Not to be rude, so just to pre-warn you about that. With that said, thank you for calling in, you've all read the report, hopefully. The overall statement that you see is that it's been a decent demand in most of our regions. Of course, there are many hotspots, or whatever you would call that in English, all over the world. It's promising to see that the demand seems to be decent despite that.
Of course, in Europe, it's very obvious that we are having a greater interest for renewable energy. That is very certain also that the overall economy is better. The construction industry is up. In North America, despite everything that we hear, is also carrying on, likewise in Asia. We can't complain really about the setting around us. If we just talk about ourselves for a while, we can say that the growth that we've had is, of course, mainly acquisition driven, we've had an underlying stable organic growth. There's been some hindrance currency-wise and also slightly fewer days the first quarter. When we talk about 60, 61, the 62 versus 60, of course, it becomes fairly crucial to have the exact number of days when you talk about growth.
The result has improved both in numbers and percentage. That is, of course, due to the good growth in itself, but also strict cost control, productivity, not to forget also the work that it's carried out with all the acquired entities not being at the decided or targeted profit level yet. Far this year, we've been able to sign up two acquisitions. We've had one in America or in the U.S., BriskHeat. It's a different kind of heating elements, more like jackets. It's serving primarily the semiconductor industry. Then, of course, we also acquired Alfa Laval's business when it comes to district heating and district cooling, and we're going to come back to that in the slides.
Those are the acquisitions. It is a very steady flow of companies. We just touched upon that because we also have an ongoing board meeting in our company. We said that there are quite a number of companies up for sale. Of course, the economy is such, we are sure is a driver. The family transitions, when the founder is a bit older, he and his wife or she and her husband, they would decide to sell out rather than the kids being reluctant to take over. I think we're going to benefit from that because we have a very, I should say, steady flow and also very interesting discussions regarding all three business areas.
If we look at the Climate Solutions, of course last year, it was a little bit of a weaker trend performance-wise when it comes to margin. We feel now that we are picking up again. Of course, it's always difficult to transmit what's going on in a company to you sitting out there. The guidance we gave when we acquired the Enertech Group and the CCG group was that eventually we need 18-24 months to bring it up at a level that we would like to have it. I think that we are following that standard pretty much. That's behind the performance. Shift in term can be discussed a bit more in detail, perhaps, because district heating and district cooling has been something that we have not totally embraced in the past.
We see now that there is another way of heating in combination with heat pumps. Not necessarily do you have to ship out or send out very hot water from a central incineration plant where the losses in heat are phenomenal. You could rather send out a more moderately temperature or tempered water. Then you boost it up with a heat pump at the very end of the station. Of course, also when you have that district cooling, has also a more efficient way of cooling than perhaps just having a chiller by itself. As already mentioned, the integration efforts are just phenomenal. We must say, very devoted people out there in the businesses respectively.
We are very impressed here in Markaryd with all the work that's going on, which again, I think embraces the model that we have, giving a lot of people the autonomy to do things or to improve things in the companies out there respectively. We're very pleased with that. Having a look at the Element Group, of course, we are steadily above the 10%. Here we've had in U.S., we had some object or particular project orders that have come to an end. That's why the underlying growth is still good. But with that taken away, it shows like almost the growth has stopped, but that is not true. That is why we mentioned that in report. This acquisition of BriskHeat in America, that is taking us into a segment of the market where we haven't really been before.
Again, a very good indicator of our, or the world economy, we can say, because here we service machines that are used to produce semiconductors. Of course, when demand for this company goes up, we know that the electronic industry, if we may call it in simpler terms, that's certainly going up. It's a very interesting barometer, you can say, for business in the electronic industry. Quick look at the stove business. It's also very solid. There we have added now the pellet market, producing pellet stoves ourselves. I'm sure that's no secret that we would also look for further acquisitions here, because we see that particularly in the southern part of Europe and Mediterranean regions, wood-burning pellets are used as a hybrid, we can say, between a regular primary heating source and a more cozy atmosphere source like we have it up here.
We feel that's very necessary to have pellet stoves in the assortments. The FPI in America or Canada has also developed satisfyingly so far. Those are the numbers that you've seen earlier on today, with a growth of some 11%. Of course, when you take them all together, the acquisitions, it's like 9.1%. But again, the organic growth then illustrated here by just north of 2%, in reality is a little higher due to the currency I said before, and also due to the fewer working days. The operating margin is back again above the double digits. Of course, the first quarter is not as strong as we all know, but that's an indication that we are on the right track.
That's also addressing the top line of our report saying that it's a promising start to the year, and that's pretty much what you see in chronology. This graph here, of course, is more illustrative, saying that quarter by quarter, we continue to increase. Of course, the fourth quarter and the third quarter, they are always the stronger ones. We see now, of course, that the Q1 this year is substantially better revenue-wise than the first quarter last year. The line is having a decent direction. Profit after financial items, it's also following the same pattern. Of course, volume during the second half of the year is really adding a lot of profitability to the group. The seasonality seems to be there to stay.
Even when we acquire companies elsewhere in the world, they seem to have the same seasonality, at least on this part of the globe, in the north of the equator. Just a few graphs or pie charts, pretty much following the same path as before. The NIBE Climate Solutions is substantially the largest ones, of course. NIBE Element is picking up and Stoves around 10%. The next chart is, of course, an illustration of the size that NIBE Climate Solutions is around 61%, and NIBE Element is around 30%, and Stoves is around 9%. Stoves seems to be very small here, but they also have their very peak during the second half of the year. If we look at the group, we are quite pleased with this distribution, where we have now 38% in Europe, the home market as we identify them. Nordic countries, 27%.
North America 3rd, and the others 5%. That gives a robustness to our group that we haven't had in the past. We don't like any sector really to outgrow the other, but we rather like to see the pie growing overall. With that said, I think that I hand over to Hans, and you can go more into details with the figures within business areas respectively.
Yes. Thank you, Eric. I will do so. Before we look into the NIBE Climate Solutions business area, I thought I'd just mention the financial net that you all have seen in the report as well, where there was a drop, so to speak, in those numbers, that's a consequence of two things, I think they're mentioned in the report as well. It's one, that the interest rates have somewhat climbed up. As you might know, the bonds that we have, for example, are at not fixed interest rates, but variable, so are most of our loans in a way. We have currency then drawn in U.S. dollars, EUR to match the acquisitions that we've made. That leads to the second reason that we have currency effects in there when we Well, as a result of us reporting them in SEK.
It's currency and interest rates that have had that effect. Jumping into NIBE Climate Solutions. As Eric mentioned, it's a stable and strong performance. In a way, they have come back, the business area. Sales were just below SEK 3 billion for Q1, a growth there of some 6%, including a negative currency effect. Really the underlying organic growth has been higher than that, we've had a very good growth, I would say, in Europe, a quite decent one in North America as well. What still is affecting us in this area to some extent is the material price increase that has been an issue in a way in the industry for the most part of last year and also continued into this. Whereas we're better this year at compensating ourselves with price increases, which started at the latter part of last year.
We came back there from 9.7% in operating margin to about 10%, 10.4%, and as Eric mentioned, it's really a seasonality in the business, so the performance will of course come then in Q3 and Q4 being the stronger ones. It's a nice return given the integration that we had of CCG and Enertech last year, and which is going on this year. In terms of distribution of sales, it's a fairly similar picture to what you have seen before. Of course, following our acquisitions in the U.S. the last couple of years, that is now basically a third of our business. We're still very strong, of course, in the Nordic region being our home market and mainland Europe. Element has a very solid underlying performance.
Seemingly, they have dropped some in growth there. That's also a combination then of this project business that Eric mentioned and a negative currency effect. Adjusted for that, we've seen a quite decent growth in Europe and rather flat, you can say, in North America. We've been able to deliver there a profit of SEK 154 million, up more than SEK 10 million from last year, giving us this operating margin of 10.4%, being above 10%, which we strived for so long during the past years. A solid performance from the Element business area. This is also a matter of the business area being so well-distributed geographically seen, where we have a nice spread between the Nordic countries, mainland Europe, North America, and also a fairly large portion of what we call Others here, which basically is Asia and Australia.
In terms of stoves, it is continuously a stable performance. The business is in a way moving sideways in terms of sales. There is not a huge pickup. We came in roughly at the same level of last year. Also here, there is a slight negative currency effect pulling us down somewhat. The North American business, headed by FPI, so to speak, has shown a nice growth, whereas Europe has been rather stable. Here we've landed at an operating margin of 8.6%, basically the same as last year. It's not so long ago, actually, that Q1 and Q2 were more or less break even. This is a decent performance for sure, and this is really the business area where everything happens in the latter part of the year.
In terms of the distribution of sales, it is the FPI acquisition in Canada that has given us the chunk there in North America and reduced the dependency on the Nordics and Europe, although those together, of course, are the main part of our business. The balance sheet is not so much to mention about that. We're past the SEK 30 billion mark on total assets and total liabilities and equity. It's partly a consequence of currency. A function of us growing. The movements that have been there on intangible assets and so forth is really a consequence of the acquisitions that were made, mainly BriskHeat and some smaller add-ons. It's a very stable balance sheet, and we can actually jump to the cash flow statement. Here we've generated some SEK 60 million more than the comparable period of last year.
We do, however, have a larger negative change in working capital, which of course, disturbs me as a CFO, but it's also a function of the market, you can say. We have deliberately been building more inventory here. You can, of course, always question how much should you build. There was, in the latter part of last year, a lack of material, and we couldn't, in all cases, meet the demand that was out there due to missing parts. We have deliberately been building inventories in selected units to meet the demand out there. Of course, that costs on the operating cash, you can say, which then basically came out at a zero there or SEK -40. The rest is a function of the acquisitions we've made, some financing activities that we've had, and also here we have some exchange rate differences.
To just take a look at some key financial numbers, we have continuously, and we are continuously investing in our operations and have been increasing that to some extent. Last year we were at SEK 103 million level. It's up now to SEK 152 million. It's a consequence of us investing in new machines. We are investing in some factory buildings and so forth. Overall, we've been able to bring down the interest-bearing liabilities continuously now over a period. The net debt is basically at the same level as at the beginning of the year despite the acquisitions. Really the reason for the slight increase there is, of course, the acquisition. That is far below the 2.5 that the bonds people like, so to speak.
The equity assets ratio is very stable at around 45%, 46%, and it came up after the rights emission we made the latter part of 2016. Working capital has improved slightly despite the buildup in inventory. There is a difference there compared to last year from 20% to 19%, but of course it's up since the beginning of the year due to the buildup in inventory. As a matter of fact, we have been addressing both DSO and DPO and been able to improve both of those. The DSOs have been brought down and the DPOs up, which has given us this slight improvement, you can say. Overall on the last key financial numbers, they are very stable in a way. The return on capital employed is up slightly from last year, return on equity as well.
Of course, that has come down following the rights emission that we made, and we're in a good position to make an acquisition there. Net profit per share has increased, and as has equity per share. The last one, I don't think we typically comment upon the closing day share price. That is always moving, and we're focusing on the business, of course, try to have a good share price.
Yeah, that's great.
That was a quick walkthrough, leaving room for questions or if you would like to add something, Eric.
I think that we open up for the Q&A, since we have abbreviated everything here now. I'll see out there to put your questions, please.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. The first question comes from the line of Olof Larshammar from DNB Markets. Please go ahead.
Hi, Hans and Eric. Thank you for taking my questions. Firstly, if we could start off with the impact of higher oil price. You are mentioning increased focus on environmentally friendly heating solutions, et cetera, what is your thought about the oil price has accelerated quite fast in the last quarters? Do you think that that could have a positive impact on demand for NIBE in 2018 and 2019?
Okay. If I should take that question very quickly, I think that we have demonstrated the last two years that we can have a decent margin despite relatively low oil prices. That has always been a debate. When I say always since we got listed. If the oil prices come down, will you then be able to make or remain profitable? I think that we have demonstrated that we can remain on a decent level even when the oil prices are low, and it came down to an extreme level, as I say, like 18 months ago, when it touched like 40, even below USD 40. Now it is up touching the 80 again. That in combination with an increasing awareness of a climate change without being fundamentalists in any way. I think that we all recognize a change in weather
Particularly here in Sweden now, the 16th of May, we have the weather that we typically had when I was young, which is many years ago. When we went to school around the 6th to the 10th of June, we had lily of the valley and the lilacs were out. Now they are already out, and the old saying that you should have everything closed between choke cherries and lilacs, they are both out now. I think that the awareness in general is there. Of course, now when the oil prices are increasing, and that is further enhancing that is not the way to go. There is a long answer to your question. We believe that that will have some positive effect. To measure that is very difficult, but it certainly enhances the roadmap towards renewable.
Yeah. Thank you. My second question is more regarding to pricing. You mentioned that you have compensated more from higher input cost by price hikes. Would you say that, when was your last price hikes? Are you fully compensating now or is it more to come in the coming quarters in terms of pricing?
That's a very political answer, I'm sure you know that. You've been following our company for a long time, and I think you also remember that we always said that we are not really trying to achieve higher margins by increasing prices in a ridiculous way. Might sound a little strange, but we are really trying to hold back. We are trying to increase efficiencies internally before we take that, if I may call it a weapon. That's why we are perhaps a little bit slow when it comes to price increases. The magnitude, they have sort of surprised, as you can say. If you put it one way, we've been slow. We've been following our tradition, perhaps believing in some instances, well, it's just a quarter and then you're going to pull back again. We've been wrong there.
I don't think that we have fully compensated ourselves for the price increases. That, of course, is a very delicate balance. I think in that answer, I think you've heard where we are staying.
Yep. Last question from my side. You mentioned that the North American and the European heat pump market has come back a bit, but could you please elaborate a little bit more what is happening in especially U.S. following the newly launched tax incentives?
Well, I think that the market was surprised with the U.S. withdrawing from the Paris Agreement or the agreement. I think that the market was really surprised that the subsidies or tax advantages were reintroduced. I think the reason why they were reintroduced was, of course, that now we are in parallel with the PV cells or PV panels and also wind turbines. I think that was really that comparison that made the Congress change their mind. I think that the market itself was certainly surprised that it was taken out end of 2016 and reinstalled beginning of 2017 by, if I may call it, a Republican government. It's taken some time really to convince everyone, okay, it's back again.
It was good in a way to experience, okay, that's the real market. It was unfair that certain renewable items out there were not taken away from the subsidy list, I think that the politicians realized that. To the private consumer, I think it came as a surprise, we don't think that the full effect has been seen yet.
Yeah. Well, it will be interesting to see what happens during this year. Good luck with the annual shareholder meeting.
Thank you.
Thank you very much.
Thank you.
The next question comes from the line of Max Mitteregger from Danske Bank. Please go ahead.
Yes, hi. Good day. I just have a question on the Element project orders. If you could quantify how large a negative impact had, and also remind us when did you start to deliver on these projects?
Well, I think that we can address the change to that altogether, like the 0.6 or whatever it is.
Sorry, could you repeat that last one?
The entire change was related to the project orders.
Yeah.
Okay.
The business came on board when we acquired Heatron in the U.S.
Okay, that's very clear. This one, a more structural question on the F-gas Regulation and the impact, where you say you're going to convert the majority of your products to natural refrigerants. If I'm not mistaken, I believe that some 80 or so % of your products are not on natural refrigerants. Of course, there's a long time lag here until 2030 before this is fully implemented. Could you just maybe talk a little bit around if this requires any larger investments from your side in terms of production equipment or change in the manufacturing process that we should be aware of?
I think that we are dependent on the component manufacturers here. The natural refrigerants, I'm sure you're aware of the desire or the aim by the politicians in Europe, of course, by 2030, they would like to be totally down to one, like the index of one. Like the Global Warming Potential would be preferably down to one. Now we read 2018, and there are two routes that we could choose. There are some intermediate refrigerants, and that would qualify for another five or eight years. At the very end, 2030, there are very few refrigerants today available, other than the propane, that would sustain the requirements for the politicians. Whereas we have started with propane many years ago, and we still have two families of propane on the source there inside, and we have very good experiences.
It's not so easy as a producer of the compressor, because you have to use a totally different setup of the chemicals inside to allow the ball bearings to be lubricated. You also have to have a certain electrical wiring, not to jeopardize a sudden leakage to make a fire or anything like that. We of course, without going too much into details, we are actually working on two parallel avenues. One, of course, with natural refrigerants, but also with some intermediate solutions. When we come to the market, which we hope will be within the coming year and a half or so, then we, of course, will explain why we have chosen one path or the other.
We are fairly certain that we're going to solve the situation, and in reality, we have no reason to argue that we should come down, just like we came down on the R22 and R11 years ago, that was supposed to hurt the ozone layer. Those refrigerants are gone, and I think if I'm correctly informed, we talked about the ozone hole around the Antarctic. That is healing again. That was a very wise decision. Why this decision is a little bit strange is that it's only hitting Europe, whereas there was an agreement on the Freon refrigerants years ago. That was more of an agreement all over the world, and that put more of an allure to the compressor manufacturer, we have to solve this. They have to be able to use other refrigerants. Here is Europe, where we have no compressor manufacturers.
I'm not saying that we are blaming them, but we can also understand that since America, South America, Asia do not participate here, it's a limited market for them, and they have put priorities on the cooling industry rather than the heat pump industry. We are very confident that we're going to solve this situation, and the constraint now on the supply on the refrigerants, I think that is more reflection on, they're going to be reflected in higher prices, but to our judgment, not necessarily a shortage.
Okay. That's a good clarification. Thank you, Gerteric.
The next question comes from the line of Emmy Östlin from ABG Sundal Collier. Please go ahead.
Hi, Gerteric and Hans. I just have a few questions on your margins. First of all, your gross margin was a little bit lower, and you touched upon that this was mainly due to raw material prices. Is there anything else affecting this, or basically, can you just argue that this is just because of that?
Well, I think that in general, there are factors like when we sell to the commercial market on the NIBE Climate Solutions side, there we typically have a different structure than when you sell to the residential. Also you talk about larger volumes, there you also have a lower overhead situation. Rather than selling one heat pump at a time, you sell perhaps 150 at a time. The prices are coming down, but of course, the efforts for selling there will be lower. The same thing on the NIBE Element side. There, of course, when you sell a component to a sub-supplier or as a sub-supplier, then you're always up for competition. There you also have a lower margin, but you also have a lower overhead. I think there are natural explanations to this.
The only segment you can say where we do not have that, if I may call it segregation, is within stoves. There we always sell to the consumer business directly. There we have no project orders. There you always walk into a store and you buy a stove one at a time. That's why they have a decent gross margin. If that's an answer to your question.
Did I understand correctly that there were more larger project orders during the quarter and that could take in a few basis points?
No, I think that the companies have come on board, I would say.
Okay. Now I understand.
Yeah.
Okay. I was just thinking. Okay. Yeah. Okay. I think I understand. I think you then touched upon my second question, which was basically that your SG&A costs have gone down. This would then be the effect of these acquisitions, and you think that this will be sustainable going forward?
I think they follow each other. When we grow on project orders.
The SG&A would come down and the reverse. They are shadowing each other.
Okay, great. That's all for me.
There is also one effect there in the SG&A, which is a one-off. Last year we participated in the ISH fair, which always is a costly thing in a way. This year we only had, well, only and only, we had the Nordbygg fair in Sweden, which is very important, less costly.
Mm-hmm. Okay. Well, thank you very much for clarifying. I will get back in queue.
Ladies and gentlemen, once again, if you have a question for the speakers, please press zero one on your telephone keypad.
All right. It seems like, either you are tired of us or we have exhausted all the subjects. Once again, we appreciate all of you calling in, we're going to return to our board meeting. The rest of the members are sitting anxiously waiting for us. They would have, I'm sure, a description of your questions and the atmosphere. Five o'clock, if you haven't bought your tickets down to Mallorca yet, there's still a chance to take the, Christel is shaking her head here because we're already 1,126.
We're sold out.
We are sold out. All right. With that said, thank you very much for calling in, and you have a nice day, a nice spring or foresummer, and a nice full summer eventually. Thank you very much.
Thank you. Bye-bye.
Thank you. Ladies and gentlemen, this now concludes our conference call. Thank you all for attending. You may now disconnect.