NIBE Industrier AB (publ)

Ladies and gentlemen, welcome to the NEVA Q2 report. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions via the telephone line. May I now hand you over to Eric Lindquist, CEO, and Hans Bachmann, CFO. Please go ahead.

Thank you very much. Good morning or good afternoon or good evening, wherever you are in the world. Hello, everyone. Hans here as well. Very nice to have you on board. And we're going to follow the usual procedure by going through numbers and a few comments. And then we have the M&A session. And today, as usual, we have another gathering with the TV set around noon. So we have just about an hour to go through all this. So if we just start with some general comments, And, of course, you read the headline. We believe it's a fairly strong first half year. And since climate solution is so dominating, we can say that within most market segments, it's been a very good growth. And also within the segments with an element that's related, it has been a very good growth. And, of course, on the stove side, it's very much the wood burning that's been showing the best growth since Pellets stoves has been hindered by tremendous price increases coming down on pellets, for instance. And to cope with the coming, as we see it, growth, we are engaged in a pretty massive investment program, both here in Sweden and elsewhere in the world. And it's also pleasing to note that after the pandemic and despite all the wars in the world, we've been able to increase the, accelerate the acquisition again, or the acquisition rate data. And the first six months here now, if we include some weeks into July, we've been able to sign four draw deadlines. And we're gonna come back to that. And Of course, it's been a growth, and it's also come along with a pretty healthy margin increase in operating margin. And the acquisition that we talked about, they are economically distributed. Of course, on the scope side, we had that acquisition that we made at the beginning of the year with Miles Industries. Again, in British Columbia, meaning now that we have three companies fairly close to one another, which is facilitating the traveling, because when we go there, it's one stop in Vancouver, and then you can visit all three companies. And then, of course, on the climate solution side, we have a fairly large acquisition in our world anyway, with the Climate for Life Group that we've been, of course, talking to for many years, and now finally there's an opportunity to bring the company on board. And then we have another company on the Stoke side, which is in Portugal, where we have not been acquiring any company in the past, and that's Alzheimer's, which we believe is going to give us a good platform for further growth into the pedestal business. And then finally, we acquired the Ceramics Island Limited in July on the element side, which is a consequence, you can say, of the electrification, where the LED lamps are fairly cold and you have to have something that's heating up the headlights. And that's interesting to see how the automotive is changing, not only the engines going electrical, but also all the equipment in the car is to be changed. If you have a quick look at the figures, you've seen them, the growth is considerable. And there again, I know through Hans that you've been requesting, you know, how much was the divestment of shoulders? And I think around three and a half percent. I think Hans is going to come back to that. So the growth that you see here is 27.6, should pass again then if the development order details some north of 30%. But the growth in operating margin is perhaps more interesting to look at. It doesn't look as dramatic here, but considering that we had one off event last year and during the first six months, and we've been very clear here when it comes to how that is described, saying that the growth, of course, 43.5%, but in reality it's like 50%, or just north of that, due to the runoff events during the first quarter, 118, the first six months, 118 million. And it's also the same thing with the operating margin, of course, 15.3 is, as I recall, is the highest ever they've had. And comparing that to the 13.6, of course, last year, doesn't seem problematic, but that is actually to be compared to 15%. if we exclude those one-off events. And we prefer, as we always do, you know, to talk, like, on the running year, like the six months and the nine months and so forth. But we also know that you out there are very interested in looking at the individual culture. And we are a bit stubborn there, always commenting on the full period. Because when you run a manufacturing business, that's how we reason. We reason over a rolling 12-month period typically with investments and so forth. So that's why we are sticking to that. Nevertheless, the cost is such, of course, again, that it has the growth of some 22.6%. And the margin, again, is quite substantial at 15.6%. And if you recall, it was like 15.3, so it's been an improvement there. And there again, we shouldn't compare the 15.6 with the 16.2, but rather 13.8 as of last year. So the figures are quite pleasing, but of course, again, climate solution is overshadowing some shortcomings in the other two, which we're going to come back to in a little while here. Just looking at the typically dropped with the bars here coming up, and it seems like to be a healthy development over the last nine quarters. And if you look at the profit off the financial items, of course, there again, Q1 and Q2, 22, they stick out because Q1 is a little bit weaker than usual, and that is again burdened by the write-offs in russia there or yeah in russia because of the uh the closure of our operations and then q2 comes out a little bit better last year due to the um that is selling shoot the shares and in june of 232 million so looking at the typical pie chart time the solution is like two-thirds now the total sales element is a quarter and so is like 10 percent And due to the difference in margins, of course, the distribution of operating profit has been more pronounced for climate solution now, almost when it's like, you know, 80% and the other two 14 and 7% respectively. The pie chart describing the geographical distribution is slightly different because North America is coming up and having some 27% in the Nordic countries around the same in Europe, excluding the Nordic countries some 47%. So I don't think there's too much to be mentioned there. Thomas, you're using again, a few comments, don't go. And everything is driven by sustainability. And of course, that's why we invest as we do. New attractive products, everyone is talking about the new refrigerants and not only that, also a broader assortment within all three categories of heat pumps that we supply, and which is very significant for the improvements in our supply chain. That's been commented upon now the last seven or eight courses, and we see now clear signs of improvements, of course. And we will even predict now that during the second half of the year, we're going to come back to a more normal situation. Of course, I know that there's been a lot of, or we know there's been a lot of writings about the demand in the heat pump market in Europe. And we mainly believe that is depending on subsidies or support from different governments coming to an end and how should they structure the new ones. We are firmly believing that they will be in place during the later part of the year. And we also dare to mention that it's been such a chaotic increase in demand. And the worst thing that could happen in our industry when it comes to heat pumps would be 40 products coming out and not being serviced correctly. So although we don't necessarily like that the market has a slower pace, a summer slower pace, but I think at the same time for the customer, plus the customer point of view, we think that is almost necessary. And acquisition again, of course, the Climate for Life in Netherlands, it's a fairly large acquisition. It's last year, some 220 million euros. And that is, of course, an assortment that is sort of complimentary to our loan, the smaller buildings. And it's also... strengthening our market position, of course, not only where they are now, but also for us to be able to tag along and sell that assortment in other sales channels that we already have established outside Climate for Life's immediate sales channels. And the growth is healthy, as we say, in the 11th, to 15.9 almost, and then operating profit that is, of course, substantially higher from the 18.16 or really like 1.7 to exclude the runoff events. And then operating margin that is relatively high in our books, 18.2, and to be compared to 14.2 really a year ago. Again, it excludes that. Just a little bit of a a puzzle when you had those big runoff events in our own world, because sometimes you almost forget it. Of course, we had a decrease there and an increase there. That's why we try to be very clear on this. And of course, the second quarter can seem even better when it comes to margin, and Hans is going to come back to that and read by it here. Looking at the stoves, there we see that it's been a softer market for particularly wood pellets and also gas-fired products in Europe. That's a very small part. That's really Britain only. Whereas the man in North America, that is back on pre-pandemic levels. But wood is growing considerably in Europe. And again, demonstrating, we believe, that people are concerned about the the security and also the reliability on other energy sources. You can say one would like to have a backup product and then wood burning comes in. We continue to spend quite a bit on reducing the depositance because we know that it's a soft stock that we have. We have to come up with a solution there and We believe that being one of the market leaders is our duty to really pronounce that task and to come up with a solution that's good for the environment necessarily, but also causing or getting the customers comfort. Again, that's quite considerably and you've seen in the report that we just opened up a new factory in Britain. We're quite pleased to see that they don't only open up factories in so-called low-cost countries, but also start to invest or dare to invest in old industrialized countries like Britain, for instance, in this case. And operating profit has improved, but at the same time, the margin has remained at the same level. And there, of course, we've spent quite a bit in R&D and also... we had to take some costs when it comes to adjusting the organization in North America. And there again, the two acquisitions, so of course, so CYMA, that gives us a platform for the coming, we believe, pellet stove expansion, the continued pellet stove expansion, and also the Mines Industries in Canada, Again, reinforcing our market position, not only in Canada, but particularly in the U.S. Well, those figures, they speak for themselves. Of course, the operating profit is up considerably, but the operating margin is on the same level as I explained just recently. On the element side, there we have been able now to become less dependent on the biotech sector, but still, when that is really coming down, of course, that is hindering us. What we did not expect in this segment, and that happened already before last year, was when America, or the president and his administration, put restrictions on the export to China within the semiconductor industry. I think that's the most dominating negative factor that we've had and we've been able to compensate for that white goods going down but coupling that with the semiconductor softer market that's been hitting our of course margins as you as you've seen but nevertheless that is to come back and because now factors are shooting up elsewhere in the world but of course they're going to be a little while before they're up and running and before they are to be equipped with machinery where we are taking on supplies for those machinery manufacturers. But across the acquisitions, as I said earlier, we have Ceramics Ireland that's coming on board, and that's, again, a company directed to the electrification part of the world, where particularly the automotive industry is not serviced by this company, when the old combustion engine is not vivid anymore and we need heating and things and headlights, as I said before. And there you see the results, slightly weaker than the last year, and of course the operating margin has taken a hit when we had those two segments going down and getting softer for us. And looking at the, did I say, the rest in more detail, I think I hand over as we typically do here to Hans. And after that, we come back trying to answer your questions that you have after this presentation. Please, Hans. All right, thank you, Eric. Yeah, I'll try to be quick here, although we'll do some deep diving, in a way, into the numbers. Just one more comment on the group. And for the second quarter, the divested portion there of sales amounted to 3.4% for those of you asking for that number, since we're also punishing ourselves, including that in the growth rate. So I think it's fair to state that, of course, as well. And jumping into climate solutions, I mean, Within Climate Solutions, we grew by these 32.7% in total, of which 4.2 was acquired. But then the divested portion and all of it falls into this business area was 5.5%. And that is, of course, the surface washing machine business. So that leaves an organic growth, including currency, of some 33.9%, making us land there then at almost 15.9 billion up from 11.95. And as Eric mentioned, the drivers have been and continuously are the shift towards more sustainable heating solutions in both residential and commercial buildings. And with this better volume that we have been able to achieve, thanks to a less strange supply chain situation, you can say, I mean, that has a good impact on our numbers. So the gross margin has improved by some 3.4 percentage units, and the operating profit has increased from 1.8 to 2.9. But if we do the comparison there, apples to apples, the increase has, of course, been even better. Not the 59.2 that you see, but rather 70%, or slightly above that, landing in basically an all-time high margin of 18.2%. And this at the same time as we continue to invest quite heavily in our facilities for further expansion. If we jump into the second quarter, sales grew by some 27.6%, of which a portion there of 4.9 was acquired and 5.2, minus 5.2, of course, was the divested part, leaving an organic growth including some currency of 27.1%. And in the same way as with the first half year numbers, this has resulted in improved gross margin and, of course, substantially better operating profit than previous year. The increase has not been the 27.7 that you see there, but rather 58.2 if you then again compare apples with apples, reaching an operating margin of almost 19%. In terms of geographical distribution and sales, it's very much the same picture as before. Europe has grown a little bit more, but it's basically the same figure. Jumping into stoves, here we grew by 35%, but of course a lot of that came from the acquisitions of Mines Industries and Pacific Energy over in the British Columbia that Eric mentioned. Without those, the growth, including some currency, was 14%, and with an improved gross margin. And then with an operating profit jumping up from 198 to 266, being an improvement there of some 34.6%, allowing us to maintain the same margin as last year. And this despite the fact that it's the wood part that has been growing and where gas has been the more challenging part, especially in North America. And that's really what we see in the second quarter as well, the impact there on the North American business. I mean, we did grow sales by some 10 plus percent if you exclude the acquisitions, and we maintained a reasonable gross margin. But with an impact there from the companies over in Canada, we had an effect on the operating margin there. So there's been a shift in product mix, you can say, leading them to an increase in operating margin in absolute terms, but not in terms of operating margin. But also here we have continued with a very ambitious R&D program, and especially on the particle side that Eric mentioned. The geographical distribution of sales had as a consequence of this shifted a little. The North American activities, well, including the acquisitions have of course increased, If you were to exclude those, it's the European business that has increased slightly. And this also as a result of the product becoming a complementary heating source to other heating systems in the house, rather than being this decorative product, you can say that it has been before. We quickly then move ahead to need element within the element business. Sales grew by some 16% and a small portion there was acquired. Main drivers, as Eric mentioned, have been segments with a sustainability profile, whereas then the consumer goods business and especially the semiconductor business has suffered and the latter especially due to political decisions in North America. In summary, sales came up from 5.1 billion to almost six. Cost margin was slightly weakened since the semiconductor business especially is a good profit business for us, you can say. And we came in there with a margin of just below 9%. We have, as you all know, a target to be at least about And in the second quarter, this was also pronounced. You can say that the effect of not having the semiconductor business on board as usual had an effect there leading to a slightly lower operating margin compared to previous years. But it's also fair to say that we consider the semiconductor business or the weakening temporary thing that it's going to come back, but it takes, of course, time to adjust to political decisions. Yeah, I think we move ahead to open up for the questions eventually. But just a few more slides first, of course. Niba Element is our most global business and there have been no major shifts there in terms of the sales per geography. A quick look at the balance sheet. Again, this is more a consequence of our ongoing business than any other major changes. When Climate for Life comes on board now and some of the other acquisitions, that will of course have an effect on the balance sheet. The one item that sticks out here are the non-financial current assets. and that equals very much inventory, and I will address that in a minute when talking about the working capital. On the liabilities and equity side, the equity part especially is increasing due to the profits that we are achieving, leaving us with a very stable balance sheet. A quick look at the cash flow analysis. We have been able to increase our operating cash flow by some 30 plus percent. And there's still a negative impact from the change in working capital, but it's much less than last year. And of course, this is a consequence of us now being able to get more components involved and manufacture products and get them out the door. But we are also during the first half year, and especially in Q2, building inventory for the sales that are to come now after the summer break. And as you see, we're also continuously investing in our current operations. And there we have several activities ongoing as have been mentioned before. A few key financial figures. I mean, we don't need to address the investments again. I just mentioned them, but we have a good portion of cash sitting in our books. The interest-bearing liabilities to equity have decreased. Net debt to NPA have remained stable. And we've been able to increase our equity assets ratio even more. But then just quickly looking at the working capital, I mean, it has come down, as you can see. If we exclude the cash and bank part, it's come down from 23.1 to 22.3% of the balance sheet. uh which is a move in the right direction it's of course still very high and we are looking at reducing that even further of course but now we have been able to build inventory in a different way for sales that are to come and now we still need to of course be better in this during the pandemic or post pandemic period we were sourcing intensely to just be able to deliver because that was a major hindrance. And I believe that was not just for us as a company, but for many companies. So all in all, on the key financial figures, they have been improving and are reasonably healthy, you can say. A return on capital employed, that's now at 18%. A return on equity, that is close to 18% and coming close to our target of 20. An improvement in net profit per share, and of course also the equity per share, which I think leaves us with a very healthy balance sheet for further growth and whatever challenges there may be also in terms of shifting to other refrigerants and so forth. I think we have the financial strength here to take the next steps. I'll stop by that. Unless you want to add something, Eric? I think that you've covered it, perhaps too lengthy. Nevertheless, now we have... I'll try to be quick so we can add some... Q&A. Yeah, all right. Thank you all. All right. We are ready.

Thank you. If you do have a question for the speakers, please press star 11 on your telephone keypad. If you wish to cancel your question, it's again star 11. One moment please for the next, for the first question. The first question comes from the line of Kyle Bockwist from ABG Sundar Korye. Please go ahead.

Thank you and hello. My first one is just if possible, I believe during the last conference call you You did mention that the heat pump business grew about 40% or something in the first quarter. I was just curious if it would be possible to hear about the growth rate now in the second quarter. Okay.

Well, I think that the growth rate, I'd say, would be perhaps between 25 and 40 in the markets where we are present. And in some markets, it's been, you know, Like in Italy, I think that that's been quite considerably lower. So I think it's difficult to give a figure that we are present. It's been left behind the growth that we see in our own figures. But it's come down, of course, in general, you can say, from the first quarter when the uncertainty became more obvious when the subsidies sort of but a little bit of a hit there. And I think the most significant one was perhaps Denmark. We're now discussing them to come back. We don't know the details. And of course, in Germany, when they came through Sanford just before the summer holiday, and they are being to be discussed now in the parliament, as we understand, in the beginning of September.

Understood. And then, well, not only you, but your North American part of climate grew very strongly. And then it seems like American HVAC and heat pump manufacturers are quite optimistic on next year with subsidies and the IRA package and so on. How do you foresee your heat pump business in the U.S. next year?

We are positive. We've been waiting a long time. In a way, you can say that we started our investment in North America 12 years ago, and then we came in with Ozenotech Global, and then Water Furnace 14, and Climate Master 16. So, of course, we've been disappointed it hasn't moved faster. I think now, when the bold decision was taken by the current administration of now, They are very determined that for years, they're going to back this industry. Of course, that's a totally different signal than before when you had like three or two, two or three or four years horizon. So we are positive, but at the same time, I mean, we know, you know, criticizing politicians, they live in a different world. I mean, as we mentioned in the beginning of this conversation, all of a sudden, Chinese export was banned. by the same administration, that hit element. Now we hope that this trade year period will remain disregarding administration. But if you look now, it's positive, very positive, we have to say. And of course, our three companies in the U.S. and the one in Canada prosper from this. And not only our industry, but also the people engaged around it. They dare to hire people and the whole drilling, energy drilling industry is growing. That's possible. It's taken a long time. It's taken a long time.

My final one is just on the refrigerant side. You touched upon briefly. Could you just give an update on your ambitions with regards to how large percent of your portfolio will be running on, by current standards, compliance refrigerants and by what time?

We can say that our exhaust air heat pumps and ventilation heat pumps, they already 100% switched over to propane. That means that The models that we already came with, you know, without inverters, they came late 90s. We never changed that. It's been propane for all these 25 years. It's a tremendous experience. Now, of course, all our inverter-driven ones, the 750, the 735, this is our latest model, better for us driven by or using propane. Then on the water side, They switched over there as well. But there's been a lack of compressors suited for the larger capacities. So there we have to switch over in a few quarters to come. And on the ground source side, there we are working again on an intermediate solution. And the aim, of course, having that assortment ready at 25. Now it's a little bit uncertain where they're going to be at 25, because a lot of the lobbyists are saying they're going to be difficult for many manufacturers to comply with the first of January 25. That's our target. That's how we work. We will be there with our full assortment at the beginning of 25. But as you know, the legislation and the bill has not been passed in the European Parliament yet. It also takes place here in a year and a half. The rumors are suggesting they're going to be deferred a year or even two years, but that's rumors. But we will stand there in our first quarter of 2025 with a full assortment that's switched over.

Understood. That's all for me. Thank you. Thank you.

The next question comes from the line of Douglas Lindell from D&B Markets. Please go ahead.

Hello, gentlemen. Thanks for taking my questions. I wanted to follow up on the previous question a bit where you gave some useful information on the heat pump growth rate in the quarter. I'm assuming you're referring here to sales that you are seeing for your business, but I wanted to get a better picture on this underlying demand that you see in the market. and you talk about slowing pace in terms of the market in general, but can you confirm that you are still seeing positive volume growth when you talk about the sort of order intake side rather than the sale side?

Well, I cannot comment upon the market as such because we don't have those figures. The figures we have, that's what is reported as being invoiced, the order intake, It's not possible for us to judge when it comes to the industry as such. That's a typical reaction, if you say, in Germany, where there's been a tremendous demand, and still continues to be a decent, really good demand. But of course, when people hear that, you know, Incentives are going to be lesser, or there's just uncertainty. We wait. That's how we react as individuals. We all react the same way, and that's what we've been trying to communicate. Again, we don't like to criticize any politicians, but we like to advise them that if they are to change, they should say, well, we might modify them, it might be different, but don't hesitate to continue because We can subsidize or continue to help those who are willing to do something in the interim. That's exactly what they did, they must say, in the U.S., when they took away the subsidies. And that, of course, was a big blow because then no one knew whether they were going to come back or not. But they came back and then they said, well, okay, we reinstated them. And to be fair to those who are bold enough to invest, they're also going to get the subsidies. I think that's the request we have. So we don't have these stop-and-go, stop-and-go events all the time.

Okay, I see. I guess moving onwards then, I was curious to see if you could get any sort of comments on the underlined volumes and underlined pricing for climate solutions specifically here in the quarter. It's not specific maybe in broad strokes. Any comments on that would be useful.

Well, I think that, of course, it's a volume increase naturally as you see it. I think that everyone talks about inflation and so forth. It's not our style really to increase prices unnecessarily. The picture that you get now in Q1 and Q2, that's really the full leverage, you can say, when we are in balance. Because even if we invest quite heavily, of course, when you start to increase volumes, I mean, we still have one CFO and one CEO, just to make it a little bit the joking side. Of course, we get a leverage, as you see, also on the gross margin. But we are not going to increase prices or try to squeeze the last thing out of the market. What you see is that we are fairly much in balance with The price increases that we've been hit by, although it's taking a long time for it to compensate for that. And on top of that, of course, the volume has helped us tremendously to come up with a better margin, and at the same time, continuing to be cautious with costs. I think that the pandemic, in one facet, has changed forever, if I dare just use that word. we all travel much, much less, meaning that we also stay in hotels much less. I think that's not only for our industry. I think that society has changed. And I dare to say that we don't even travel, you know, I think we reduce it with at least a third, possibly more, where board meetings are perhaps cut in half. So combination of being in balance with the price, getting a better leverage out of the production. Of course, we've been idling here, being overstaffed, as we've said so many times, in production, and then continuing to be in courses across. Of course, that's all ending up in a better margin.

Okay. But on the price impact, can you confirm or deny that it's double digits in the quarter? So count here, please.

I wouldn't say that.

Okay. So my final question is on the elements. You already gave some helpful insights into the semiconductor exposure there. But it seems as if the underlying growth is slowing still. Is it mainly the consumer goods business behind this? Or what's your, if you could elaborate maybe a bit on that would be useful.

Consumer and the semiconductor.

So them two combined. Okay.

Thank you.

The next question comes from the line of Victor Holsten from Danske Bank. Please, go ahead.

Thank you, Operator, and good morning, everyone. First, Jesper Erik, you said that you expect to go back to a more normal situation in climate solutions in the second half. What do you mean by that?

Well, we believe that We cannot have months and months of delivery times. We have to have a realistic delivery time of a few weeks from the time to get the order. I mean, we also, you know, we sell to wholesalers and I think we don't like to be abused. Wholesalers, they have to have their inventory. They cannot expect us to deliver within a week. But now we've been dragging our feet. It's been a terrible situation. I mean, we've never been through anything like it, as we said so many times during our 70-year existence. So coming back to a normal situation, meaning that we can respond within the ordinary delivery times. That could be an exception, of course, if someone says, well, I'm going to have that, I need that heat pump, but that's what we're going to come back to. And that means that we talk about delivery times of weeks rather than several months. And sometimes we talk about half a year, as we all know.

But how do you see that impacting, you know, growth and potentially margin sum? Because I guess, you know, you're in a massive, you know, ongoing investment sales. You're basically ramping up, you know, the new market ed factor, et cetera, I suppose. So in terms of growth rates, you know, oh. What would the normalization mean for CanSolutions?

Well, now you're touching, you know, forbidden grounds. I mean, we're not trying to... We cannot give you more... But, of course, when you write like this, that we have massive investments, if we didn't believe in the market, would we, as people in smaller... Would we then invest that heavily? Isn't that a very heavy signal to you folks out there that we are massively investing and we are massively believing in the future. How clear could it possibly be?

Yeah, I guess you're touching upon my second question, actually. You know, if your view on the investment program has changed anything the last, you know, let's say quarters, you are now mentioning some regional weaknesses, but I guess you just answered that, that you're not, you know, viewing your investments, anything different?

Not a bit. Good to hear.

And then coming back on the order side, just what we are hearing from the industry, obviously demand has come down a bit from the currency high levels in the last couple of quarters. But what we're hearing is that orders are still well above sales levels. Would you agree on that, that demand is still higher than currently?

Yeah, well, again, it's a very, very difficult question. But if we are to meet the target that everybody's talking about, if I just give it the broader, and I'm not trying to play hide and seek, but I don't know anyone that would like to give you a more detailed forecast, but The industry talks about 20, 30 arriving at a volume anywhere between seven to eight to nine million units. And that means to arrive there in a manner that would guarantee quality, that would guarantee installation capacity and so forth. Then you would need to go like 15, 20, 25% per year as an industry. to arrive there. Otherwise, that's never going to be fulfilled. And now it's been pinpointed as one of the major sectors to decarbonize. And all the people that we talk to, they are very convinced that this has to happen. And I'm not talking about colleagues, because sometimes, you know, an industry can be sort of over positively stimulated We firmly believe in that, and that means that we're going to double, you know, every four years as we see now the coming eight or nine years. And that means that we have not fulfilled by any means the demand by decarbonization when it comes to buildings. That is just the start. And we see that in Sweden now when construction is going down, and everyone is so worried about that, and that is, of course, not good because the building industry is dry, the same, but new construction is about 15%, 17% of the Swedish market, so 85% or at least 80% plus would be retrofit because of the massive installation that we started to go through here in 98 and onwards, and it's going to be the same in Europe. Once we have rebuilt Europe into heat pumps, going to last well into the 2030s, then the massive investment that we see now, they will be ready for replacements in 15 years. So this is a total. The ballgame is totally changing. And we don't understand the nervousness when one or two quarters would be a little bit softer. Because we are in for a major change. I don't know. how you should explain that, whether we are the only ones in the world believing in this, but it doesn't sound like it.

No, no, I, you know, I can, can I be, but I guess, you know, the market gets a bit nervous when you speak about, you know, normalization and then, you know, we look at historical growth rates in climate that, you know, that's a 5% pre-COVID, but I guess that's the wrong way of looking at it.

Well, we are, Only human beings are migrating, but we've had a hell of a drive. I can tell you that. And we've been through all these different situations and difficult ones. We've been through Lehman Brothers. We've been through IT crisis. And now we are facing this. And facing this is a phenomenal growth pattern behind it. How the heck could anyone question the possibilities for us to grow now? Oh, it's hard to comprehend. Excuse me, I'm getting a little bit, you know... No, but it's good.

Thank you very much for your answers. I'll stop that. Thank you. Thank you.

The next question comes from the line of Carl Ragnarsson from Nordea. Please, go ahead.

Hi, it's Carl here from Nordea. A couple of questions from my side as well. I mean, with the changes in subsidy programs in Germany, Poland, Italy, Denmark, could you perhaps quantify your exposures to these markets on heat pumps? And also with the coming demand in the hopefully very short term here, do you see a risk of underabsorption in productions since you add new capacity? Or do you still rely on the I mean, helps the order you take and then backlog to compensate.

Yeah. No, we try not to build too much inventory. I mean, as Hans said here, of course, we've been trying to compensate for deliveries of components and material to be ready. Because if you have 95% of the material and still miss five, nothing's going to happen. I think that's what most of the manufacturers, not only in our industry, have been doing. been trying to compensate so when you get the the two crucial components then you're ready to produce but of course that's no way to live in the long run and that we of course we could specify to the very name you know our market shares and so forth but that's i don't think that that's our profile well now we have so much in poland and so much in germany as a rule i think that We have such a broad presentation, and that's something we decided to change in 1992 because then we were so exposed to the new construction industry in Sweden with a very narrow assortment. Since then, we've been working for 30 years, consecutive years, trying not to be too dependent on one particular country. And that's why we suggest that we don't like to be dependent of one country to 20, 25%, because then you're too vulnerable. Of course, we like to sell as much as possible into one country, but our philosophy is to have as broad as possible penetration. So, I mean, I know that you don't like that answer typically, but I don't think you expected anything else.

No, that's fine. And also a bit on pricing. Like many others in the industry, we've raised prices quite a lot here over the past two years. I mean, with a maybe more moderately growing market and also raw material prices coming down, freight rates stabilizing, what is your view on the pricing landscape here over the coming few years? Maybe not tomorrow, but over the coming few years here? I mean, do you notice any gradual increase in focus from installers, wholesalers, or end consumers in pricing?

Right. I mean, here we can philosophize. I think that we've been tremendously hit by the shortcomings of, of course, shortages in components. I think that the supplier, sub-supplier, said in They've taken that lesson and they have invested on their term to be engaged in growth. And that means, like someone said before, now you're investing in me and how should we pay for that? When you invest, of course, you assume that the market's going to go up and not necessarily say, well, now we're going to try to make less money because we've invested too much. I don't think that's anyone's idea. Hopefully, with all the programs going on now, that inflation is going to be sort of hindered and controlled, where we come back to, if I may call it, a more normal situation. Normal, we haven't had a normal situation perhaps for 15 years, ever since the Lehman Brothers situation. Negative interest rates, we do not believe, would be a good thing in the long run. It should be, of course, on a realistic level. So that's a long story about the pricing. Of course, there are going to be some manufacturers perhaps, or I don't know who would do that, that try to decrease prices for some reason. But we've never heard anyone that really, in the long run, has gained any market share and also made more money by decreasing prices. I mean, that's a very simple model. And you don't have to participate in Harvard to study that to understand that that's the wrong avenue. But the coming price increases, on the other hand, will be more moderate, we believe. If inflation is coming down, there's no reason. Because if you look at it, and I don't know whether you read the article in The Economist there, not the last issue but i think it was the issue before they say that it's nonsense that the manufacturers increased prices unnecessarily and caused inflation there were other factors doing that and and we fully explored that analysis our history is nothing to increase budget but rather absorb a few of the price increases that we have gotten by our productivity And that's how we're going to conquer the future as well. Now I'm stealing your time or the other's time perhaps.

No, it's very good. Thank you so much. I step back here. Thank you.

One moment, please, for the next question. The next question comes from the line of from . Please go ahead.

He just put his questions.

Oh, my apologies. Christian Hindoraka from Goldman Sachs. Please go ahead.

Yes, good morning, everyone. Thanks for the question. We've got three and we'll go one by one if that's okay. Just wonder, following up on the regional conditions in climate solutions, the mark Italy, et cetera, you touched on this a little bit earlier, but eager to understand not just in heat pumps but more broadly, how affected you've been by the construction slowdown in some of those regions.

Well, I think that when it comes to interest rates, you know, everyone or most of people have the same reaction in any country. So, of course, the new construction is important, but to various degrees when it comes to our sort. But I think the most obvious example is here the element decrease in workers. Because when you build a new house, a new flat, of course, the flat where the house is always equipped with dishwasher, a cooker, and a dryer, and all those workers. And on top of that, if people say, well, now it's a bit It's not the right time to replace a dishwasher. They also wait. So there is like you're hit twice. Whereas when it comes to saving energy, that's more something that no one can predict really about energy prices. We better do something here to come back to a realistic level. And also if you're going to sell the house or sell the apartment, this is a point of minimum we have to have. a decent way of climatization here. There's a different situation, but of course, new construction is going down. I don't see any market that's really increasing the construction in Europe.

Understood. Thank you. Secondly, maybe I'm just interested. We talked a little bit about pricing and obviously the volume dynamic, but given the higher rates and sort of macro sensitivity in the back half of the year, how do you think about mix or any risk of down trading? Is that something that you've seen in terms of category sales in the second quarter?

I mean, I think I gave an indication there to your previous answer that, um, there will be more renovation, there will be more of that category of added and new construction. But when we talk about the volumes, you know, like arriving at seven, eight, million units per year, like eight years, depending on who you talk to, of course, that is predominantly, you know, rebuild, new construction is your is of course perhaps even a good year is much, much lower could possibly be around if even a million new dwellings for heat pumps. So that's a smaller category, but it's an important category in the sense that that sends a good signal to people, okay, in new buildings, they installed this category of heating. Just like when we went from wood to oil, that also started in new construction. But eventually, everyone caught on. There was a tremendous era of changing to oil from wood. Just an example in this country. It took 20, 25 years. And in a similar way, it took another 20 years to change from oil into heat pumps. But that, of course, was not the new construction that was driven by the tremendous amount of dwellings or houses already existing. All right?

Thank you. And then just finally, question relates to the decline in the consumer segment. You've talked about customer destocking. Just wonder how big of a growth contribution that had from destock. And then also what your sense is in terms of channel inventory levels and whether there's any other product categories or segments that destock could be a risk. And also just more broadly or sort of at a higher level, How much visibility or control do you have in terms of understanding your customer inventory levels?

Well, I think that the last question there is that no one really wants to admit that they have all the stock. I think that's the human brain in a way because that's a misjudgment. But at the same time, as I said before, we are all the stock from components. I think the whole industry is always stocked on components. We wouldn't like this massive increase, although it's lesser now, as Hans explained. But of course, that's built on our assumption that even if those companies are going to come out of their woodworks now being so much better, we like to make sure that we have the ability to deliver. And I think that's exactly like many stockists. When you sell directly to the consumer or to the business-to-business, I think that's a lesser risk of having that. But of course, when you sell over a stockist or a wholesaler, there's always a risk that they've also seen the difficulties delivering and they have ordered a little bit too much. But I'm not talking in general terms. We don't have that disability rate. All right?

Okay, thanks very much.

I think that we have come now to, if I'm not impolite, you know, we are five after 12, and we try to, two very quick answer questions then, so we're not impolite. There's a lineup here of some, some are from Hong Kong, China, and Hawaii. Please, if you have easy questions, then we're willing to take them. All right. We'll take two more questions, please.

Thank you. The next question comes from the line of access from Morgan Stanley. Please go ahead.

Good morning, everyone. Thanks for taking my questions. I have two. The first one was linked to the numbers of growth you have mentioned for the climate solution division. how we can link this with Germany, for example, which has announced this number of applications that has dropped significantly in the first half of the year. And I just wanted to understand how you guys have seen this impacting your business in the first half of the year in Germany. Yeah, a bit more clarity and visibility on this would be highly appreciated. Thanks.

Well, what should I say? We believe, without being 100% sure, not even perhaps even 69% sure, that the companies, the European companies in general, they have all had difficulties, we believe, and I talk about ourselves as a group, and I think that companies producing elsewhere, they have had a little bit of an upper hand when it comes to deliveries. The European manufacturers are coming back. It seems like they've been lesser hit by a slower pace. I think that's as precise as I can be. Okay.

All right? Yeah, okay, understood. And last question, just wanted to make sure, have you seen a change in sales split across your ETH portfolio? Can we still assume that? geothermal is representing more than 50% of your total sales in climate solution or has this significant change over the last couple of quarters?

I think that it's very important that everyone out there fully understands that we follow each market. There are a few markets in geothermal that would be the largest. That's when you have the severe climate like I think Sweden, Finland, and some East European countries. But of course, new builds, that again, is the requirement of energy or output. It's so small, so then you need smaller modules in there. The ventilation heat pumps would be quite sufficient. But to change the gas and oil burners or boilers, There, of course, air to water is by far the largest segment. And we follow suit. That's why we have the free assortments, not trying to convince everyone in France or in Germany you should have these assortments. So we follow very much each market. So that is the wrong assumption that we have there.

Okay. Understood. Thank you very much.

Thank you. Thank you, everyone. Now the time is running short. We appreciate your questions, as always. We try to be as sincere as possible, but sometimes we have to crack a joke, and we cannot answer every question, even if we would like to. Thank you very much. Thank you. Bye-bye.

Thank you, ladies and gentlemen. Thank you for your attendance. This conference has been concluded. Thank you.