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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, welcome to the NIBE Q1 Results presentation. Today, I'm 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.
And we're going to have the same procedure as before where I'll start with some slides and then Hans continues. But prior to that, we just like to give you weather report from Markaryd. It's blue skies and like 21, 22 degrees already. And we're going to have our Annual Shareholders' Meeting later on today, as most of you know, like at 5:00. And that more than 1,100 people signed up for that event, so 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, we'll host our visitors. So the setting is just gorgeous. And there's also another thing and at 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 many that 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. So with that said, thank you for calling in. And you've all read the report, hopefully. And as we -- the overall statement that you see is that it's been a decent demand in most of our regions. And of course, there are many hotspots or whatever you would call that in English all over the world, but it's promising to see that the demand seems to be decent despite that. And 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. And in North America, despite everything that we hear, it's also carrying on. Likewise in Asia. So 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. And we've had an underlying stable organic growth. There has been some hindrance currency wise and also slightly fewer days at the first quarter. And when we talk about 60, 61 and 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. And that is, of course, due to the good growth in itself, but also strict cost control, productivity, and not to forget, also the work that is carrying out -- carried out with all the acquired entities, not being at the sort of decided or targeted profit level yet. So far this year, we've been able to sign up 2 acquisitions. We've had one in America or in the U.S., BriskHeat. It's a different kind of heating element, more like jackets. It's serving primarily the semiconductor industry. And 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 a while. So those are the acquisitions, but it's a very steady flow, both companies. And we just touched upon that because we also have an ongoing Board Meeting in our company, and we said that there are quite a number of companies up for sale, encouraging the economy as such, we are sure, is a driver, with family transitions and the founder is a little 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. And I think we're going to benefit from that because we have a very, as we say, steady flow and also very interesting discussions regarding all 3 business areas. If we look at the Climate Solution, of course, last, year, there was a little bit of a weaker trend performance-wise when it comes to margin. And we feel now that we are picking up again. Of course, it's always difficult to transmit what's going on in the 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 like 18 to 24 months to bring it up at the level that we like to have it, and I think that we are following that standard pretty much. And that's behind the performance. [ City term ] can be discussed in a bit more in detail perhaps because district heating and district cooling has been something that we have not totally embraced in the past, but 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 its central incineration plant, where the losses in heat are phenomenal, but you could rather send out a more moderately temperature -- or temperate water. And then you boost it up with a heat pump at the very end of the station. And of course, also when you have that district cooling, that also a more efficient way of cooling than perhaps just having a chimney by itself. And as already mentioned, the integration efforts are just phenomenal. We must say, very devoted people out there in the businesses, respectively. And 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. So we are very pleased with that. Having a look at the Element group. Of course, we are steady, above -- steadily above the 10%. Here we've had -- in the U.S., we had some object or particular project orders that come to an end. So that's why the underlying growth is still good. But with that taken away, shows like almost the growth has stopped, but that is not true. So that is why we mentioned that in report. And also, this acquisition of BriskHeat in America, that is taking us into a segment to 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. So of course, when demand for this company goes up, we know that the electronic industry, that you may call it in simple terms, that's certainly going up. So 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. And where we have added now the pellet market, producing pellet stoves ourselves. I'm sure that's no secret as we would also look for further acquisitions here, because we see that, particularly in Southern part of Europe, in Mediterranean regions, the wood-burning pellets are used, it's hybrid, we can say, between the regular primary heating source and a more cozy atmosphere source like we have it up here. So we feel that it's very necessary to have pellet stoves in the assortments. And the FPI in America or Canada has also developed satisfyingly so far. And those are the numbers that you've seen earlier on today with a growth of some 11% and of course, when you take them all together, the acquisitions, it's like 9.1%. But again, the organic growth and -- illustrated here by just north of 2% in reality. It's a little bit high due to the currency, as I said before and also due to the fewer working days. So -- and the operating margin is back again above the double digits. Of course, the first quarter is not as strong as we all know, but there is an indication that we are on the right track. And that's also addressing the top line of our reports. And it's a promising start to the year and that's pretty much what you see in front of you. And this, the 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're always the stronger ones. And we see now, of course, that the Q1 this year is substantially better, revenue-wise, than the first quarter last year and the line is having a decent direction. Profit after financial items is 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. And the seasonality seems to be there to stay. And even when we acquire companies elsewhere in the world, they seem to have the same seasonality, at least on this part of the globe, north of the equator. And just a few graphs and pie charts, pretty much following the same path as before with Climate Solution. It's substantially the largest ones, of course. Element is picking up and Stoves is around the 10%. And the next chart is, of course, an illustration of the size that Climate Solution is around 61% and Element is around 30% and Stoves is around 9%. Stoves seems to be very small here, but they also have there very peak here in the second half of the year. And as we look at the group, we are quite pleased with this distribution, where we have now like 38% in Europe. The whole market, as we identify them, Nordic countries 27%; in North America 30%; and others 5%. That gives a robustness to our group that we hadn't had in the past. And we don't like any sector really to outgrow the other, but we rather like to see the pie growing overall. So with that said, I think that I hand over to Hans, and you can go more into details with the figures for the business areas, respectively.
Yes. Thank you, Eric, I will do so. But before we look into the 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. And that's a consequence of 2 things and 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. And so our -- most of our loans in a way. So -- and we have currency then drawn in U.S. dollars, euros to match the acquisitions that we've made. And that leads to the second reason that we have currency effect in there when we -- well, as a result of us reporting them in Swedish currency. So it's currency and interest rates that have had that effect. Then jumping into Climate Solutions. As Eric mentioned, it's a stable and strong performance. In a way, they have come back with the business area. Sales were just below SEK 3 billion for the first quarter, a growth there of some 6%, including a negative currency effect. So really the underlying organic growth has been higher than that. And we've had a very good growth, I would say, in Europe, and 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 are better this year at compensating ourselves with the price increases, which started at the last part of last year. So we came back there from 9.7% in operating margin to above 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. But it's a nice return given the integration that we had of CCG and Enertech last year, 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 1/3 of our business. But 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, but that's also a combination then of this project business that Eric mentioned and the negative currency effect. So adjusting for that, we've seen a quite decent growth in Europe and rather flat, you can say, in North America. And we've been able to deliver their 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 strive for so long during the past years. So a solid performance from the Element business area. And this is also a matter of the business area being so well-distributed geographically, it seems 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's not a huge pickup. We can end roughly at the same level of last year. But also here, there is a slight negative currency effect pulling us down somewhat. But the North American business headed by FPI, so to speak, has shown a nice growth, whereas Europe has been rather stable. So here, we've landed at an operating margin of 8.6%, basically the same as last year. And it's not so long ago actually that Q1 and Q2 were more or less breakeven. So 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 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, you can -- mark on total assets and total liabilities and equity. It's partly a consequence of currency, but -- I mean, a function of us growing the movements that have been there on intangible assets and so forth. It's really a consequence of the acquisitions that were made, maybe BriskHeat and some smaller add-ons. So it's a very stable balance sheet, and we can actually jump to the cash flow statement. And 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 that. We have deliberately been building more inventory here. Then you can, of course, always question how much should you build? But 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. So we have been deliberately been building inventories in selected units to meet the demand out there. But of course, that costs on the operating cash, you can say, which then basically came out at a 0 there or minus 40. And the rest is, I mean, a function of the acquisitions we've made, some financing activities that we've had and also here we have some exchange rates differences. And to just take a look at some key financial numbers. We have continuously -- or 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. And net debt is basically at the same level as at the beginning of the year despite the acquisitions. So really, the reason for the slight increase there is, of course, the acquisition. But it's far below the 2.5 that the bonds people like, so to speak. And the equity assets ratio is very stable at around 45%, 46%, and it came up after the rights omission we made at the latter part of 2016. Working capital has improved slightly, despite the build-up in inventory. I mean, 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 build-up in inventory. But as a matter of fact, we have been addressing both DSO and DPO and been able to improve both of those. So the DSOs have been brought down and the DPO's up, which has given us this slight improvement, you can say. And then overall on the last key financial numbers. They are very stable in a way. The return capital employed is up slightly from last year. Return on equity as well. Of course, that has come down following the rights omission that we made. And we are in a good position to make an acquisition there. Net profit per share has increased and as has equity per share. And 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.
Yes, that's right.
That was a quick walk-through leaving the room for questions or if you would like to add something, Eric?
No, I think we open up for the Q&A since we have abbreviated everything here now. So it's up to you out there to put you questions, please...
[Operator Instructions] The first question comes from the line of Olof Larshammar from DNB Markets.
Firstly, if we can start off with the impact of the higher oil price. And you're mentioning increased 10% in environmental-friendly heating solutions, et cetera. But what's 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 the [ norms ] for the -- in 2018 and 2019?
Okay. If I should take that question very quickly, I think that we've demonstrated the last 2 years that we can have a decent margin despite relatively low oil prices. That has always been a debate, but I say always, always, since we got listed, if the oil prices come down, will we then be able to make -- or remain profitable? And 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 extreme level, as I'd say, like 18 months ago where it touched like USD 40 or even below USD 40. Now it's up touching up to $80 again. So that in combination with an increasing awareness or the climate change, without being fundamentalist in any way, I think that we all recognize a change in weather, and particularly here in Sweden now, like the 16th of May, we have a weather that we typically had when I was young, which is many, many, many years ago, where we went to school around the 6th or 10th of June, we had Lily of the Valley and the lilacs were out. Now they are already out and you know the old saying that "You should have everything closed between chokecherries and lilacs." They are both out now. So I think that the awareness in general is there. And of course now when the oil prices are increasing, that is true that enhancing that, that's not the way to go. There is a long answer to your question. I -- we believe that, that will have a -- some positive effect. To measure that, is very difficult, but it certainly enhances the road map towards renewable.
My second question is more regarding to pricing and you mentioned that you have compensated more from higher input cost by price hikes. And would you say that -- when was your last price hikes? And are you fully compensating now? Or is it more to come in the coming quarters in terms of pricing?
Yes. That's a very political answer, I'm sure you know that. But 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. So it 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, weapon. So that's why we are perhaps a little bit slow when it comes to price increases. And they -- the magnitude they have sort of, yes, surprised us, you can say. So we've been -- if you put it one way we've been slow. We've been following our tradition perhaps believing in some instances where, Olof, it's just a quarter and then it's going to fall back again. We've been wrong there. So I don't think that we have fully compensated ourselves for the price increases. But that, of course, is a very delicate balance, but I think in that answer, I think you've heard where we are spending.
Yes. Yes. And last question from my side. You mentioned about the North American and the U.S. heat pumps market has come back a bit. But could you just 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 Treaty -- or Treaty -- the agreement. And I think that the market was really surprised that the subsidies with tax advantages were reintroduced. And I think that the reason why they were reintroduced was of course that now we are in parallel where that PV cells or PV panels and also wind turbines. And I think there was really that comparison that made the Congress change their mind. And I think that the market itself was certainly surprised that it was taken out end of '16 and reinstalled beginning of '17 by, if I may call it, the Republican government. So it's taken some time really to convince them, okay, it's back again. It was good in a way to experience, okay, that's the real market. But it was unfair that certain renewable items out there were not taken away from the subsidy list and I think that the politicians realized that. To the private consumer, I think it came as a surprise and I don't think or we don't think that the full effect has been seen yet.
It will be interesting to see what happens during this year. And good luck with Annual Shareholder Meeting.
The next question comes from the line of Max Fryden from Danske Bank.
I just have a question on the Element project orders, if you could quantify how large a negative impact it had? And also remind us when did you start to deliver on this project?
Well, I think that you can -- we can address the change to that altogether, like the 0.6% or whatever it is.
Sorry, can you repeat that last one? The change to -- the entire change was related to the project orders?
Yes.
And the business came onboard when we acquired Heatron in the U.S.
Okay, that's very clear. And then it is one of more structural question on the F-Gas Regulation on the impact where you say you're going to convert the majority of your products to natural refrigerants. And if I'm not mistaken, I believe that some 80-or-so percent of your projects -- sorry, of your products are not the natural refrigerants. Now of course, there's a long time lag here, June 2030, before this is fully implemented, but 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?
Well, I think that we are sort of 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 1 or like the index of 1 -- like the global warming index would be preferably down to 1. Now we read 2018 and there are 2 routes that we could choose. I mean, there are some intermediate refrigerants that would qualify for another 5 or 8 years, but at the very end, 2030, there are very few refrigerants today available other than the propane that would sustain the requirements for the politicians. So -- whereas we have started with propane many, many years ago and we still have 2 families of propane on the source there inside and we had very good experiences. But it's not so easy as a producer of their compressor, because you have to use a totally different setup or the chemicals inside to allow the ball bearings to be lubricated. And you also have to have a certain electrical wiring not to jeopardize a sudden leakage to make a fire or anything like that. So we, of course, without going too much into details, we are actually having -- working along 2 parallel avenues: one, of course, we are the natural refrigerants, but also with some intermediate solutions. And when we come to the market, we -- which we hope will be within the coming a year or 1.5 years or so, then we, of course, will explain why we have chosen one path or the other. So we are fairly certain that we're going to solve this situation 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 am correctly informed that we talked about the ozone hole around the Arctics. I mean, that is healing again. So that was a very wise decision. Why this decision is a little bit strange, as it's only hitting Europe, whereas there was an agreement on the Freon refrigerants years ago, that was more than agreement all over the world and that put more of an alert to the compressor manufacturers that 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 does not -- or they 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. So 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 a reflection of -- they're going to be reflected in higher prices, but to our judgment, not necessarily shortage.
The next question comes from the line of Emmi Östlund from ABG Sundal Collier.
I just have a few questions on sort of your margins. So first of all, your gross margin was a little bit lower and you touched upon that, but this was mainly due to raw material prices, but is there anything else affecting this? Or basically, can you just argue that this is sort of just because of that?
Well, I think that in general, there are factors, like when we sell to the commercial market on the Climate Solution side, there we typically have a different structure than when you said the residential. And so -- but also, then you talk about larger volumes. So there, you also have a larger -- the lower overhead situation rather than selling one heat pump at a time, you sell perhaps 150 at a time. So the prices are coming down, but of course, the efforts for selling that would be lower. And same thing on the Element side. They, of course -- when you sell a component to a sub-supplier or ask a sub-supplier, then they cry always lack of competition. So there, you also have a lower margin. But you also have a lower overhead. So I think that there are natural explanations to this. The only segment you can say where we do not have them that, if I may call it, segregation, this was in Stoves, because there we always sell to -- the -- trade 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. I think that's an answer to your question.
So did I understand correctly that there were more sort of larger project orders during the quarter and that sort of could have taken a few basis points...
I think that the companies have come onboard, I would say...
Okay. Now I understand. Okay. But I was just thinking -- okay, yes, okay. I think I understand. And then I think you then touched upon my sort of second question, which was basically that your SG&A costs have gone down. So this would then be sort of the effect of sort of these acquisitions and you think that this will be sort of sustainable going forward?
Well, I think that follow each other. When we grow on project orders, the SG&A would come down and then reverse. So they are shadowing each other.
Okay. Great. Well, then that's all for me...
I think there's also one effect there in the SG&A, which is a one-off and last year, we participated in the ISH fair, which always is a costly thing in a way. And this year, we only had -- well, only and only, but we had the more big share in Sweden, which is very important, but less costly.
[Operator Instructions]
All right. It seems like either you're tired or so or we have exhausted all the subjects. So once again, we appreciate all of you calling in and then we're going to return to our Board Meeting. The rest of the members that are sitting there anxiously waiting for us. They want to have, I'm sure, a description of your questions and the atmosphere. And 5:00, if you haven't bought your tickets down to Markaryd yet, there's still a chance to take the -- Christel is shaking her head here, because we're already 1,120, we're sold out.
So we're sold out.
All right. So with that said, thank you very much for calling in. And you have a nice day, a nice spring or fall summer and a nice fall summer. Eventually. Thank you very much.
Thank you. Bye-bye.
Ladies and gentleman, this now concludes our conference call. Thank you all for attending. You may now disconnect.