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.

So please go ahead.

Thank you. If you do wish to ask an order question, please press star 1 on your telephone keypad. And if you wish to withdraw your question, you may do so by pressing star 2 to cancel. Once again, please press star one to register for question. There will be a brief pause while this question is being registered. Our first question comes from the line of Carl Regnerstam from Nordea. Your line is open, please go ahead.

Hi, it's Carl here from Nordea. Two questions from my side. Firstly, I'm a bit curious to know more about the pricing landscape for both your thermals as well as air water pumps. We heard some rumors or indications recently about the tightening price and sentiment in the market. Have you experienced similar trends in any of your bigger geographies and have you made any adjustments to your prices either on a campaign or fixed basis? Thank you.

Well, if I understood your question correctly, I think that the Inventory adjustments or the distribution chains, when they have distributed their overstocking, I'm sure that we've seen price decreases there to more or less get rid of it, if I might use a brutal word. I don't think to any degree, or any large degree anyway, that demand factors have been behind that. That's at least our understanding. I hope I understood your question correctly, otherwise you have to repeat it.

No, it's very clear. So you on the manufacturing level are not lowering prices, that is?

No. I mean, we are always observant, of course, but we are a premium product manufacturer, and that means that, of course, we're always ahead when it comes or in the forefront when it comes to our performance and our products. And that's not something dramatic. It was that now we have to sell those at a lesser price. I think that would be very strange. But, of course, we're observant on the price movement in the market. I think what you see is mostly the destocking phenomena.

Okay, very clear. And my second question is a bit on if you could help us understand the volume development a little bit month by month during the quarter and possibly entering July and August as well. On the manufacturing levels, we could get a sense on the underlying market improvements and whether the uptick in demand has been driven solely by inventory reductions easing.

I think that, as we said, during the initial part of the year, the market more or less dropped 50% during the the initial part of the year. And, of course, that is not representing the actual demand at an end-consumer level. And that's what we tried to convey. And I think that the second part or the second quarter has pretty much been the same. But, of course, this destocking started already end of 2023. So we've been three months or three quarters into that now. And our judgment already last year at the end there suggested that would be a destocking phenomena not representing in the manufacturer's level the real demand. And what we're saying now coming into the second half of the year, that should help the overall demand. And then, of course, if you also get signals that the interest rate will go down, that would also, of course, start a more positive attitude among consumers. And then, thirdly, our own program. First, we're going to sell as much as we possibly can. We are prepared for that now. But, of course, the action program is mainly meant to improve internal efficiency. So those are the three factors we are working with. All right?

Okay, very clear. Thank you so much.

You're welcome.

Our next question, Douglas Lindell from DMB Markets. Please go ahead.

Hello, gentlemen. Thanks for taking my questions. I have two as well. I'll take them one by one. Starting with your commentary there on the inventory situation, which I think stands out as quite positive relative to what I hear from your peers. I just Curious to hear what gives you this confidence, and if you could just maybe give some countries where you see this improvement as an example.

Well, I think we named one particular country that is very on the negative side. That's Germany, of course, and that has a certain explanation, we believe, because last year, already before summer, came out very positive signals from the German government that they were going to really boost demand on heat pumps because gas was going to be prohibited relatively soon. Then something happened during the summer vacation, and there's been a little bit of an unclear situation ever since. I think there was a very obvious signal to the wholesalers and installers, now we'd better get ready for a phenomenal increase. But that didn't come. So I think, or we believe, that the German stockists, the German installers, they perhaps took too much on board believing in what the politicians said at the time. And now I'm just naming one country. We have not seen in our major markets the same dramatic inventory buildup. And now it's diminished according to our observations and our context with our wholesalers and installers. That's the answer I can give you on that question.

Sorry to push you a bit, but Jeremy has mentioned that. If you could give an example of a country, maybe Sweden then, because it's an important market for you. What are you seeing there on distributor inventory? Is that incrementally better?

They have done since many months back. There's no inventory of any abnormal levels at all in our home market here.

Okay. Maybe I'll move on then to the cost reduction program. I'm thankful for more clarity on that. I think I picked up your take during the beginning of this call. You said that your employees are welcome back once volumes come back. But previously, I think we talked about these cost reductions being of structural nature. But within climate solutions, can you just maybe give some examples of what you're doing there in terms of structural costs, so not reducing headcount, but maybe investing more into automation? Just be interesting to hear what you're doing there.

I think all investments that we carry out is, of course, in a direction of be more modern, be more rational, and also be more environmentally friendly. So there are a number of factors when you invest. And you have to robotize or automate as much as you possibly can, and that's been the whole driving idea with this program, both volume-wise but also producing in a more rational way. And then, of course, when you have companies in a group like we have, you brought together many former companies sort of colleagues or competitors. And it's not so immediately clear that you're going to do everything on a joint basis. I mean, purchasing or procurement, that's very obvious. Everyone wants to participate there. And everyone wants to participate when it comes to, okay, well, I'd like to borrow that production recipe or I'd like to do the same thing. But, of course, when you come then to saying, well, perhaps we should be more rational by exchanging products and so forth. Then, of course, we are into another subject. And also when you say, well, let's jointly develop products now. And those are the things that we are working on now to do that in a constructive way, that everyone should have a certain part of the pie on the positive side. So those are a few examples on that working together. And when you say that we've got to invite all the employees back again, of course, that should not be interpreted as the next, just soon as you turn around, you're going to start to employ people. But what I'm saying, and I'd like to clarify very much what I said then, when you have to part from an employee, no matter where it is or who it is, you do that in a civilized manner. And that's always a very, very tough thing for a manager or management to draw the line who is going to leave. But you have to explain that clearly in a civilized way. So one day when it turns around, you should not have left with a very negative or sour taste in your mouth.

Okay. No, that's fair. I understand that. And it's a delicate issue. Thanks for that answer.

Thank you.

Our next question, Victor Chornstein from Desk. Please go ahead.

Thank you, Operator, and hello, Jette-Erik and Hans. So perhaps two questions, please. And firstly on, you know, the underlying heat pump demand. Now when inventory levels are moving towards, you know, more acceptable inventory levels, can you just perhaps give any sense or indication for where, you know, end demand If climate solutions have negative organic growth of, let's say, 30% in Q2, is M demand, is it down 20, is it down 10? Just any indication would be very helpful.

Well, I mean, fairly sincerely, we don't have that precise figure. But, of course, if all this stocking Situation of course the demand is higher than what we've been experiencing in production Line because otherwise the inventory reductions or the de-stocking couldn't have taken place So it's a delicate math To say well has the market really deteriorated with 50% likely suggested in the first quarter No, of course not and has it deteriorated with 25% to 30% I wouldn't like to I couldn't really give you a precise figure there, but what I could say is, of course, and that's the whole idea here, that the destocking situation is not illustrating the actual figure in the consumer level because the installation numbers are higher than the production levels that we're talking about. And I think that I can't really answer that question.

No, I see. I understand it's difficult. I just guess it's quite interesting in Q3 how to sort of calculate on it, given that let's say it's a 20% impact, 10% impact now in Q2, and that is gone in Q3. That would, of course, imply quite sequential improvements in Q3 versus Q2. That's what I'm asking, but I understand it's very difficult.

I think that we like to be as transparent as possible, but if you If we can't really answer everything, then we don't like to do any guesswork. I'm sure we appreciate all of you out there. We like to be as transparent as possible, but also at the same time as correct as possible.

A question on my side on cost savings. You noticed redundancy at 314, please, on 18th of March, if I'm not mistaken. And I guess that, you know, that, you know, saving should reach full run rate in Q3. But am I right to say that there were very limited impact now in Q2 from that program? It seems OPEC space is up in climate solutions, the way I look at it.

Well, yeah, as we said, you know, if you're going to do these cuts in a, if I may use the word again, civilized way, it's nothing, you just don't send out a message and now you're redundant. You discussed that intelligently, so that's why we haven't seen that much of an improvement. And that, of course, will take some months to come here now. So it's very important that we give you a balanced picture. The market is still tough. The program is running. But we'll gradually see the improvements over the year or the rest of the year. of course, a clear aim that everything should be in place at the end of the year, because next year we have promised the market to have the full 750 million as an improvement, and I think that's what we're working towards.

Okay. Thank you very much.

You're welcome.

Our next question, Carl Dangenberg from Carnegie. Please go ahead.

Thank you very much. Two questions from my side as well. Maybe if I can ask first here on the sort of ambition of 2025 to return to this historical margin range. I just wanted to ask you in that sort of ambition, does that assume a significantly better market or does it just incorporate normalized inventories in the channels and your cost savings program? Would that sort of be sufficient for you to reach those historical margins? That's my first question.

Yeah. Again, a very difficult question. And naturally, starting the year, this year, is very, very low production output. Of course, the assumption is that the market should not, from that level of where we are now, contract any further, but we should benefit on the destocking. and hopefully somewhat a better market than we've seen so far. But not assuming, you know, like unrealistic figures without giving those precise. But again, saying that if interest rates are coming down and the construction starts to move again during 2025, which I think those are the ambitions, and we can only read the newspapers, we don't have an immediate contact with all the national banks or whatever you call them. But obviously the economy or the economies in Europe particularly, everyone wants to revive them. And we believe that even our sectors will be positively affected eventually. But not perhaps by dramatic figures, but it won't be a further reduction. I guess that's as far as I can offer that.

Yeah, yeah. Fair enough. And then I had a second question also on the expansion program, which has been undergoing for quite some time now, 10 billion in total, and I think you're at roughly 8.5 now. So I just wanted to ask sort of what's left here. Is that going to be, if we're talking about the timing and the phasing, is that going to be, you know, do you have good adjustments there depending on how the market develops, or should we think, you know, a fairly linear pattern here? towards mid-25 or end-25 on the capex side, sort of on the finalization side.

Well, I think that when you build a new factory, as we all know, those investments are fairly major, of course. But I think we're going to return to a more, not streamlined, but I call it more of an investment level to depreciation. But that has been the increase now and our aim was always to keep up with the inflation with the Depreciation rate and now we've increased that and we believe that we've come To the point now where we should not necessarily increase that money Any further percentage, but of course when the volume or revenue Has gone down the appreciation level has of course naturally gone up but I think we've structured our production in such a way that whatever is installed this year now, we have the buildings, we have the machinery, and the buildings are of such a capacity that you can further install lines, but you also have a flexibility. So before you install a line, you can add another shift in the existing premises. allowing you to further investments if you need that capacity long-term. That's our way of reasoning. I hope you're following that.

Yeah, yeah, yeah, yeah, yeah. Okay, very well. Thank you very much. Thank you.

Our next question, Christian Henderaker from Goldman Sachs. Please go ahead.

Yes, good morning, Eric, Hans, and welcome, Frederick. I want to start on the incremental margins given the acquisitions and, of course, that $8.5 billion of capacity investments that we've just discussed since 2020. Does the prior guidance that you've given on incremental margins still hold, in other words, 20% to 25% for climate solutions and somewhat below that for both element and stoves?

Okay, brilliant. I think that you have to repeat that question if you don't mind. The margin you mean, operational margin, what was the question precisely?

Yeah, sure. So the incremental profitability, so for every unit of volume, the expansion that you might see in margins, historically I believe you've talked to a 20% to 25% incremental or drop-through margin. And I just wondered if that's changed given the capacity investments and acquisitions you've made over recent years.

Well, I think that the instant natural result of heavy investments would be that the appreciation rate naturally goes up, both as a percentage and in real numbers. and we then can keep the operational margin. I mean, I think that we have to look at what we've been able to do historically, assuming that 22 and 23, we must admit, they were a little bit of extraordinary times. But we've been through better times and worse times in the past, and we wouldn't say that we would come back to some sort of a span in the operational margin if we didn't believe in that. And I think that, as far as I can really answer you on that, because it is dependent on volume eventually, naturally, because you see the depreciation rate going up and the actual depreciation going up. So I think that when we were hit by this wonderful, if I may call it, increase in volume, we were a little bit taken by surprise. But then we said, okay, we will not be taken by surprise when the next wave comes around. But we won't invest crazily either. And that's why we put it a little bit on a hold on further equipment right now. But what's done cannot be undone. And we feel comfortable what we have done investment-wise now has been, for the long term, a very, very important factor. Because to run the previous premises at a high rate, that also comes at a cost. Now, of course, the likelihood of increased productivity is much better than we were with the previous premises. All right?

Thank you. My second one then maybe and just want to talk a little bit more about the comments on the inventory adjustments in the channel I guess broadly speaking firstly Can you give a sense for how many distribution partners you have in Europe and then secondly? What are the quantitative data points that you're using to inform that view on channel inventories? I appreciate and I know you've said on the call that the visibility is difficult but you did mention that installation numbers were higher than production and Just curious as to what quantitative signals you've seen. Thank you.

Well, I tried to answer that before, and I took Sweden as an example where we naturally have very good contact with installers and with wholesalers, and they are certainly not all the stock. But they were, even here, being in a home market, all the stock. But they've taken that down. And there are other markets out there that have done the same that we have been able to acquire information from. I'm coming back to, perhaps I shouldn't, there's no reason to badmouth Germany here. I explained the reason why they were overstocked. And I think that's like any, we react as human beings. When demand is higher than the supply, we start to collect. or gather inventories, and I think that was done in the industry. But we wouldn't tell you out there, investors, that this is coming more to acceptable levels. That's not the vibe. Yes, that's something we have gained from all or from many of our wholesalers and installs, but also talking to some markets that we are not totally finished yet, and we also send a signal about that. And I think that we also had a disadvantage. You could say, why didn't you have better contacts in the past? And it was a little bit of a, I think, the overall heat pump industry, if you talk about that. We had a, I call it civilized, a friction there because we could not supply, you know, 22 and until the beginning of, yeah, the second quarter last year. Then we started to deliver most in the industry. But during 22, there was chaos, you can say. So having asked at that time, do you have too much inventory? It would have been sort of a silly question in many wholesalers and installers here that you can't deliver what we need. Why do you put that question? But, of course, at the same time, again, coming back to how we react, they had built up inventories because they also believed that the market was now going, after all these years of talk and the Green Deal and everything we talk about, what the politicians have been talking about, now we're going to rebuild Europe at least. And that was not fulfilled. So now we are back to, I shouldn't say normal, but a different situation. And I think we had to apologize to our partners out there. We did not perform during later part of 21 and 22. Eventually came up their production. And when we and our colleagues, if I may call them, started really to pump our products at the rate that they would have liked much earlier, then demand out there slackened. So it's a difficult... We call it the... a bullwhip effect, and that's exactly what it is. Okay?

Understood, Eric. Thank you.

Our next question, Carl Bockwist from ABG Sandal Collier. Please go ahead.

Thank you. Good morning. Most questions have already been asked. First one is a bit of a follow-up on one regarding SG&A. It looks like it is up year-over-year here in Q2, so I'm just curious if there is anything temporary explaining this, and if you could please elaborate when we will start to see material benefits from these savings actions.

Once the programs are fully in place, you will see those. But we also like to address, you know, that if you were to cut costs to a point where you would endanger your future position, we would not do that. So that's a very important factor to remember. Then also when you look at the cost side, STNA as you call it, you also have to remember a substantial acquisition coming on board. with the acquisition in Holland, Netherlands, Climate for Life. And I think that comes out as a big chunk, I would say. So I think that explains part of that. And of course, we will not reduce that month from a program point of view, an action program. There you'll see reductions, of course, in that point.

Understood. Yeah, understood. And then on just a bit of a more long-term question on inventories, do you think that either you or if you can think also about the industry as a whole, how one should think about the inventory levels going forward? Hans, I believe you mentioned an ambition to go down towards 20, but that is still above the levels we used to see like pre-2020 levels. But is there a strategic shift now that one still wants to keep inventories to sales or working capital to sales a bit higher than what we've seen historically?

No, no. No, I think that coming back to that, you know, the word or saying of the Bullwit effect, of course, we like to return to having a working capital of more ordinary levels, as Hans suggested here, below 20%. and also having a reasonable inventory term. And I think that everyone is striving for that. Also, our partners out there in the field and everyone's partners, our colleagues or competitors, they're doing the same. So no one wants to have too much money tied up into inventories. And I think that now the distribution chains, they're well underway to cater for that. But then, of course, it's up to us as distributors industry to keep up with the demand that they were going to see at the end user level. So it has to be a better balance. And I think that the only way to facilitate that would be to communicate better with one another and being very transparent. When we have problems, we should inform our partners that now there might be shortages of products, and we're going to cure that within so many months. But what we couldn't really do as an industry coming back now was because we were, I may use the word, fooled by so many suppliers that gave us promises and they could not perform. So I think it's been our task now in the production line to gather and to secure our supply chain partners. They have to have a readiness in the future. They can't fool us or, I mean, I say us, the industry. That's very important. So it'll be a work in progress for some time to come, I'll say. And then, was there a break, Carl?

No, no, sorry, I interrupted you. Okay, if that's the answer, then thank you.

Thank you, Carl. I must say now that we've spent like 62 minutes. And I think that we have other issues that we have to deal with here or questions. So if you are not blunt or too impolite, we'd like to just say thank you now for calling in. And if there are any specific questions, you might have to call Frederick or Hans here. after this because we have to run to the next assignment here, if that's all right. Thank you again for calling in. Thank you, everyone. Thank you. Have a nice day.

This now concludes our presentation. Thank you all for attending. You may now disconnect.