NIBE Industrier AB (publ)

Ladies and gentlemen, welcome to the NEPA second quarter report. Throughout the call, all participants will be in less than only mode, and afterwards, there will be a question and answer session. Please note, this call is being recorded. I would now like to hand the conference over to our speakers today, Eric Lindquist, CEO, Hans Backman, CFO. Thank you. Please go ahead.

Thank you. Good morning, everyone out there. It's Eric speaking here, and And Hans is here as well. Good morning to everyone. And we're going to have the usual order. I'll start with some comments regarding the report as such, and then Hans fills in, and then we open up for Q&As. And we've noticed over the last conferences that there are so many questions, which we appreciate, of course, but there's some irritations sometimes that not everyone gets a chance to put his or her questions. So we try to bring in a new order that two questions per delegate, so to say, if that's all right. Having said that, once again, welcome. And as you see, the headline, first half characterized by large adjustments. And, of course, that's been a tough period for us. But we also see some positive signs, but the market is still very tough. But we are very eager to communicate in a very transparent and honest way the way we look at it and where we are right now and where we are heading. And, of course, there's no secret that we were taken or the industry was taken by surprise last fall when the demand slipped down so dramatically. And the whole heat pump industry primarily has been suffering ever since. over the overcapacity and the distribution chains that were built up. And this has been a destocking process for many months now. Sort of similar in the stove business, but to a lesser degree. And what we have done, well, I mean, the conditions, you know, out there, as we say, the interest rates are still high, and the construction industry, of course, still limping along. And when it comes to political indecisiveness, we would have liked to have clear signal in the market, both from individual countries, but also from the EU, are we really heading towards this fossil-free community as we have, you know, been communicated to believe in, as we have been reacting to. And, of course, the inventories, as I said again, they are, you know, on their way. to be more acceptable, but it's not totally over, and that's very important also to underline, particularly we could address the German market that is still hindered by too high inventory levels. But on the positive side, we must say that the internal program is coming along. We are well into that, and of course it's not totally completed yet. But we are very firm when it comes to its completion. It's been a tough period for us to let many good members of our teams in different countries let go. But at the same time, we have been very determined to charge through. But we have, we hope, should I say, talked to our individuals out there in a civilized way making the door or keeping the door open for a better time so they're always welcome to come back when volume is coming around in a more positive way and of course we also see that the interest rates there are indications that that will eventually come down which also a very important factor when we talk about the future market so as we predicted some even nine months ago we thought that the first half year would be tough and that is very much true. We reacted particularly in February and March when we came out to the market and said it's absolutely crucial to do something about the situation and we also said that the second half would most probably show some sort of gradual improvement and we are still standing behind that commitment and of course the whole idea is to bring back our group to, if I may call it, the more normal operating margin span 2025. So that's, I think, in short, the message that we have to the markets. And the numbers, of course, you have already looked at. So we just go through those very quickly. And, of course, when you compare it to the previous year, it's a large contraction. but now we have to look at the relative figures as we go along. And of course the margin is also down, but we look at it from the relative perspective. Now it is to improve that as we come along and we are gonna combat whatever issues we have out there because we have not cut the costs to the point where we are severely injured. Of course, we've cut costs, but we are fully aware of all the challenges out there when the market really turns up again. And then we have to be ready with R&D, with sales and all that. So it's been a balanced, should I say, action that we've been in the middle of or have passed the middle of. So it's a delicate balance, of course, when you're out there doing this kind of operations. And we don't necessarily comment so much on each quarter because trends and tendencies, they are for a longer period. But just to make a few comments about the quarter two. And on the next slide, of course, there is a slight improvement when it comes to invoice sales and also a slight improvement in operating margin. I guess that's what we can say. And if we... Just look at the typical bars that we are looking at. That's a very illustrative picture. And of course, the curve that we see in dark above there is not very pleasing. It's something that we don't like to see, but at the same time, we see that the graph is also indicating that it's a little bit of a positive sign that something is going up, although that also is built on, naturally, acquisitions. So we don't like to paint two rows of a picture, but the picture we like to paint and to give you out there is that we are in charge of the situation, of the internal factors that we can control, but of course, it's also important that the external factors eventually be on the right side. So results, of course, when you come to that, that's always a reflection, as I said initially, of the volume. for their revenue. So that graph is very elicitive as well, very dependent on the volume. So that's something, of course, that we have now to really improve. And it won't come overnight, but we hope that our predictions are on the right side. So looking in to more specifically climate solution, We can say that being a large fund, that's very much challenging out there. Nothing has really been extraordinarily positive, but at the same time, as I said for the overall picture, they seem totally dark. I mean, the European heat pump production still at very low levels, naturally, but inventories are gradually changing in the different markets. There again, I'd like to say that German market, to our understanding, is an exception where we would need another or the industry or the wholesalers and installers would need another one to two quarters, really, to bring it down to an acceptable or more acceptable level, as we can say. And as far as the action program, most of it is put through. And we've been very, very determined to make that in a professional way, but still in a human way. And I said that earlier this morning when we were interviewed in some medias that it's not without wet eyes you have to part from good employees, but at the same time you have to stand tall when it blows. And that's important from our point of view. And then, of course, the whole idea is to bring back NEBA here on every business area to where we were margin-wise, you know, historically. So that's a few words about climate solutions. And then we just look at the first two quarters individually. Yeah, I mean, we've been used to much higher operating margins. I think the contraction that we've seen in revenue it's almost impossible, at least with our measures and our capabilities, to reduce the cost at the same rate as the revenue is reduced. So that's why the margin is down, but our aim is to very determinedly improve that as time goes by. And if we then look at elements, they of course have a great variations between their different segments. They suffer severely from the heat pump industry going down overall in Europe. That is very tough, naturally, and also the white goods. That's a reflection of high interest rates and low construction combined with that. At the same time, there are some positive indications from the automotive industry, particularly when it comes to the electrification of vehicles and the heavy or commercial vehicles particularly, and also the rail and the semiconductor industry seems to now come back gradually. And those are positive signs, and they won't change overnight dramatically either, but we'd like to give you a little bit of a whiff of how we perceive the market. Here again, the Action Program has been, implemented and we are well through. And now, of course, we hope to see all the results of that. And that's why we say, well, the second half of the combination and now the improvement due to the action program, lower inventories also going to affect this business there, particularly when it comes to heat pumps then. The semiconductor industry, we believe, will come back. And all those factors together makes us come out and say, well, the second half is going to be, you know, we expect that to improve. And then, of course, for the full year next year, that's what we are really aiming for. But nothing starts exactly January 1st. There has to be a gradual improvement. And then, you know, 25, that's when we really like to be back at the end. with the margin levels or span that we had in the historical years. Just a few pictures regarding the sales itself. I think that perhaps I'll skip that, but that is also, of course, a reflection of the margin being much lower now and again when we are at a lower level. And also, different margins between the different segments. If we just have a quick look at the stove business, that also has been suffering, or is suffering from variations in demand naturally. They were overstocking. We don't have so much of a distributor, or we call it the wholesale stocking there, but it was more like on the individual retailer's level. We believe that's also coming to an end. And what we see now when the economy is, should I say, the demand is returning more, I shouldn't say normal, but to another level, this was hysterical, you can almost say, for a while there when everyone was trying to protect themselves for high gas prices and so forth. Then, of course, now we are more back to the seasonal pattern that we've been used to in the past where The second quarter is the weakest one, whereas the fall and the latter part of the second year or the second half of the year, they are always the strongest. So, we also there feel that we've seen improvement during the second half, but naturally, here again, we aim for a year 25. That's going to bring us back to our historical should I say, span of profitability or operational margin. Then we typically have a few pie charts illustrating where we are standing as far as distribution of sales and so forth. And perhaps I forgot that. Yeah, there we are. And that is pretty much the same, after all, in the climate solution about 63 and then of course elements just about the quarter and then stoves a bit less than 10% and I think that typically stores we grow or will have a slightly larger portion of the pie We're returning to with a normal path and the remaining part of the year as far as operating profit and that's pretty much the same as before that the climate solution is although relatively lower, of course, but neither climate solution is still, by far, having the large part of the operating profit enablement, and so share the rest, pretty much as in the past. Geographical split before haunt comes in. Yeah, it's pretty much as it's been. For a while, it hasn't changed that much. Europe and the Nordics, of course, being together, they're the biggest chunk. North America, a little bit better than 30%. And also outside Europe and North America. This is primarily on the element side where we have some 6%. So I think, Hans, I stop there and hand it over to you. Thank you very much, Eric.

So, yeah, let me take you through the... Business areas, a little bit more in detail, and then, of course, balance sheet cash flow, all of that, what you're used to, before we then open up for the Q&A. But first, I would just like to clarify one thing up front, and that is the group or the elimination of group transactions, which you can read on page five in the report. I believe that would otherwise be a question afterwards. There you see a positive figure of some 24 million. where it usually is a negative one of around 35. And the simple reason for that is related to settlement of acquisitions, you can say. As I'm sure you all know, we need to recognize a liability for contingent considerations when we acquire a company and have a second and third tranche to pay for and bring on board later. And the funny thing here is that if a company performs better than you anticipate, you will have a negative effect because you haven't set enough aside. And if a company does not perform quite as you anticipated, you have a small upside. And that's what we experienced this time. We settled a couple of acquisitions, and we also had a case or two where management of the local companies wanted to stay on board as shareholders for some further years, where we had to, you know, adjust the accounting according to that. So that's the simple reason for that. Heading on to climate solutions, as Eric said, and as is stated in the report, I mean, the market is continuously tough, for sure. Still high inventories, although they have come down, high interest rates, a low new construction, and this political indecisiveness. This has led to an overall low production, not only by us or with us, but with every player out there, I would say. And we have, as you see, come in at some 12.3 billion of sales as opposed to almost 15.9 last year. So it's a drop of sales of some 29%. And as Eric pointed out, when sales fall that quickly, although we do take measures, we cannot compensate for that immediately. So gross margin is affected coming down from 36 last year, which on the other hand was very, very good because of other factors where everything was pointing in the other direction even later. And now down to the 30.9, landing then an operating profit of some 840 basically, and an operating margin of 6.8. If we look at the second quarter as such, we lost some close to 27% of saves, which of course also is a dramatic drop, but slightly less than the drop in Q1, where it was basically 32%. So as a consequence, and due to the action program we have in place, and the reactiveness that we have in general, I mean, we've been able to protect the gross margin slightly better with that. and also the SG&A expenses, which are not explicitly stated on this page, but which are in the operating profit, obviously. We came in at an operating margin of 7.8. And as Eric said, but without giving any forecast, of course, with the effects now of the savings program kicking in during the second half, and hopefully a market that will step-by-step pick up, we should see improvements moving on. from here. In terms of geographical distribution of the sales, there are no major changes. But as a matter of fact, the Nordics last year represented some 25% and is now some 20%. And this is where we've had the major drop, you can say, together with Europe, although the acquisition of Climate for Life compensates likely for that. We were at 50 last year and now came in at 52%, you could say. And North America has gained and is at 25 as opposed to 22 of last year. So it's very much a reflection of the heat pump development. Moving on to elements, the significant variations between the different segments are very clear here. especially with the weak HVAC performance and semiconductor up-to-date, also with some not-so-rosy development within the white goods industry. I mean, we've definitely had a major impact on the business area, although the other segments typically are doing fairly well and are growing. We talked about, or Eric mentioned, automotive, for example, rail, wind, so there are good good opportunities as well. But due to the weight that the HVAC industry has and also on the profit side, we are naturally affected. Here the drop in sales was roughly 9%. All in all, I mean, both for the group and plant solutions element and so is that currency has not had much of an impact at all so far anyway. Yeah, and here we came in at an operating margin of around 5%. Cross-margin is not quite where we want it to be, obviously, but expect also improvements here moving on. In the individual quarter as such, bays have continued to drop, but much less than in Q1. Here we came in at 2.8 as opposed to 2.95 last year. but the drop in Q2 was only from 6% as opposed to 13 in Q1. So improvements are being seen. And that has also led to a better operating or gross margin there of just about 20% as opposed to below 19 in Q1. And the operating margin also here at 5%. This has also resulted in some movement in Q2. between geographical areas. As we've said many times, and as you know, this is our most global business area where we are present in most parts of the world. But there have been some shifts following very much the development in climate solutions due to the drop in HVAC. So the Nordics is 13%, 18% last year. And Europe, 32%, was 37%. And then North America and the other region, being Asia, both have gained as a consequence. Stoves, after two consecutive very strong periods of growth. First, the homeowner trend during the pandemic where everyone renovated their home with a wood-burning stove. And then following Putin's invasion of the Ukraine, where everyone, or many at least, wanted a second heating source, we are definitely now into another phase, you can say. After that consumption, and now with high interest rates, low new build rates, and a strong hesitation among customers, sales have obviously dropped. And we're to some extent back to the traditional pattern also, where the first half of the year has less sales than the second half. So here sales came in at just below 1.9 billion for the first half year down with some 22%. And obviously here as well, the gross margin is hit because impossible basically to react that quickly. And the operating margin came in at very low 3.3%. But we've been there before in a way because Traditionally, we did not earn that much money in Q1 and Q2. It all happened in the second half, and we're, as I said, back to that pattern. It is, however, a very long time since we did make the loss in an individual quarter within Stokes. And that's what happened in the second quarter. Sales actually dropped slightly more, or they did drop more in Q2 than in Q1. coming in at 800 million SEC down from almost 1.1 of last year. And a gross margin which is far below what we're used to. So we came in at a minus three there. So obviously also here the action program is fully underway. To some extent it's been more or less already been carried through in the North American operations. As you know, we have quite some businesses up in the Vancouver area in Canada. And you can see that their portion of the geographical distribution of sales have gained. It's 32, whereas it used to be 27% of last year. And the Nordics used to be 23, which is now 19. So this is a direct consequence of what I just mentioned. Europe and the continental Europe is basically the same. That heads us into the second part here, and I'll try to be quick to open up for your questions. No major changes on the balance sheet. I mean, we have a total assets of close to 70 billion SEC. I guess what I would like to point out here, although the movements are not huge, but if you look at the non-financial current assets, they are at 19.5, coming down from 19.9 at the beginning of this year, which means that during this phase where we usually typically build inventory, we've actually been able to reduce it somewhat. And it's very important because our working capital is still high. And in my role as finance, well, responsible for the finances, you know, it's still too high, quite frankly. But we're definitely addressing that and moving in the right direction. On the liability side, it's stable. The equity is basically the same as in the beginning of the year, slightly lower. which is connected to the long-term liabilities, which have increased some, mainly for taking care of acquisitions and these tranches that we pay to bring companies on board in our stepwise approach. But the working capital and the performance so forth this year, of course, colors. off in the cash flow analysis. We generated some $700 million from the operating activities, which is, of course, a huge drop from last year, which was almost 3.1, which, on the other hand, was a very boosted year. I mean, we're not pleased with that, but it is a positive number, of course. And the change in working capital, although still negative, is much, much less negative than last year. which is a sign of us improving within especially the inventories. You might react on the investment side. They are basically the same as last year. I still dare to say that the investments are in a way coming to an end, at least these large programs that we announced back some four or five years ago. And what you see here is the last bits and pieces basically of those investments where we said that what we have started we will complete, except maybe for machinery that is not needed at this point in time. Some quick words on key figures. Unappropriated liquid assets, that's basically the cash. It's a complicated word for that. It's at 4.6 billion, so we're still relatively cash rich. So that's a good thing. The net debt to FDA is about 3.1. It's obviously much, much higher where we are used to being, but those of you who have followed us for a long time know that the average is just about 2, ever since we went public, despite all the acquisitions and the growth and the expansions that we've made over the years. I think it's still manageable, and the equity assets ratio is is at close to 43. It came down with bringing on board Climate for Life, but it's still at a healthy level. Yeah, the working capital I mentioned, it's 25%. That's not where we want to be. We were as low as 12% when we couldn't deliver and we emptied out everything we had. That's not either a level to be at, but we should definitely be at 20 or below. Last picture, the return on capital employed, return on equity are obviously affected by the phase that we are in right now. We are determined to bring those back. And although, I mean, we can on the one hand lean on historical numbers saying that that is in our DNA setup, but at the same time, you're never better than your last game. So this is definitely something we are addressing as well and looking very much into. I think we will manage that as well. Yeah, by that, I think we're ready for Q&A, unless you would like to add something, Eric? Yeah, nothing can be added to that precise description.