NIBE Industrier AB (publ) (NIBEB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the NIBE Year-end Report 2019 Q4. Today, I present Gerteric Lindquist, CEO; and Hans Backman, CFO. Mr. Lindquist and Mr. Backman, please begin.

Good morning, everyone.

Good morning.

And thank you for calling in. We're going to have the same procedure as before, as we call it. So Hans and I are going to present the report in brief, and then we're going to have an open session. And we believe that we should be ready about noon. So we give it an hour. If I start Hans, same procedure as previously, where the headline, we call it as a robust full year in a diverse market. There's no secret that '19 has been a challenge for most companies. For us being quite a bit into the sustainability market, of course, we've seen a very positive sign there or signs. But we're also exposed to, as you know, the regular consumer goods, and then there has been a lesser positive situation. And also, we've been in a political situation in the world with trade barriers and tariffs of all kinds and instabilities, and also the Brexit, of course, has influenced us. So we believe that after all, we are coming out with a fairly decent result and judge ourselves, considering the conditions that we live in. Of course, interest rate has been another issue, particularly during the first part of the year when people were worried about the interest rates going up. But that has now -- of course, that concern is diminished and now it's rather than the other side. So we see a possibility there that demand could actually be spurred by lower interest rates. Just in general, of course, we've had growth, both organically and through acquisitions. And the result has improved. And that is naturally a function of the revenue itself and the way we focus on productivity, both in already existing units, but naturally, also in the units coming into our group. The operating margin is slightly lower, and then -- that's the reason, I mentioned, initially here with a market that has not been so favorable in all aspects. And when it comes to acquisitions, of course, there was a criticism we heard during the first 2 or 3 quarters that we weren't active that we have forgotten to acquire companies. And we've said all along, there's no reluctance, there's no slowdown whatsoever. It's just that it takes two to tango. And sometimes, we have to wait a quarter or two before acquisition go through, and now we've had a number just in the last 3 or 4 months. And it's the same rate of discussions going on as before. So nothing has changed there. And if we just look at the figures themselves, we are, of course, comparing ourselves during Q4 with a very strong Q4 '18. Nevertheless, we are coming out with a result slightly above previous year. The margin follows the same pattern really that we've had during the first quarters is lagging a little bit, and that is mainly due to stoves and elements lagging behind there in previous quarters. But other than that, we see that we continue to grow even during the first -- the fourth quarter. And for the full year, we passed the SEK 25 billion, which we are pleased to see coming out with the margin overall on 12%, and that is like 0.6 percentage units below the previous year. Of course, we're not pleased with that. But when we talk about our robustness, I think that should be viewed as a softer year overall, and we are able to come out with the results that's, after all, in our books, fairly decent. When you look at the graphs from the coming 2 slides here, we see that the growth is fairly much following the previous path, where the full line there is having a steady upturn. When we look at the profit of the financial items, we see that it's a slight, should I say, tendency towards a flatter situation. But nevertheless, we believe that, that's more that we compare ourselves to a very strong quarter at previous year. If we just look very quickly into the business areas, of course, the business has been very positive for NIBE Climate Solutions, continued stable growth, the sustainability discussions and our way of living anymore that is influencing all of us. And we are right in the middle of that market, that thinking with our products. And that is, of course, giving us a spur. And on top of that, we've now been able to acquire a number of companies. Rhoss was more like the remaining part of the shares earlier in the year. And then Üntes came in during the fall and also the TIKI Group in Serbia. And just a few days ago, we were able to acquire 51% on Nathan Holding in the Netherlands, which is Alpha-InnoTec main source of heat pumps since many years. And we're very comfortable and happy to have that on board with Netherlands being one of the strongest markets when it comes to growth in the heat pump segment as it stands. But on the downside, we can, of course, also say here that the Swedish market for heat pumps, new construction has gone down, whereas, the refurbishment market is very prosperous. But we noticed that the new construction went down considerably, particularly during the last 6 months. But we've been able to compensate that, at least partly with the refurbishment market. We have a very good product range, strong product range, and we focus very much now on the green, we can call it or the environmentally friendly, the refrigerants and going to be a focus for us in the coming quarters. And we, of course, also talk a lot about connectivity and intelligent controls, which we believe belong to the future. And as a summary there, we look at climate solution coming in with a SEK 16.4 billion, and the operating margin is slightly above the previous year, the 13.8%. So all in all, climate solution has performed relatively strong, we believe. And if you look at the business area Element, that's been the most, we can say, sensitive business area for us during this quite difficult year 2019. In particular, since we are exposed to the consumer goods and white goods trends, and that has not been so buoyant. At the same time, we are very strong in the renewable, with the heat pumps, of course, being supplied and also the wind turbine industry. But that has not been enough to support the margin that we had in previous year. What we can say about the business area Element is, I think that we have a totally different resilience now than we had in the past, a downturn in the economy that we've seen would have in the previous years, affected us much more than what it actually has affected us this particular year. And I think that's due to the broad product range that we have now and also our presence in the market in both Europe, North America and Asia. So overall, we believe that NIBE Element has never been as strong and resilient, again, as it is right now. And of course, the acquisition of the Therm-X in California earlier this year is also a step in that direction that will improve, again, our assortments that has a different volatility, you can say it doesn't follow the ordinary economic development. It's rather -- when something is happening in the electronic, if I may call it the industry, like the 5G now coming in out, then we see the demand is coming up fairly quickly. And that's something that we have not really been aware of before. Well, it's lacking. Well, it was sort of a generation of products that went out of not business, but there was a slackening demand. And that was, again, not following the economy overall. So that's something that's going to balance, we believe, the business area as such. Operating margin, of course, that we would have liked to see that remain on the 10% to 10.2%. We've taken a hit there and the reasons mentioned already. The cost, of course, that we have occurred in R&D because the automotive industry, for instance, is very positive long term, but it's been a little bit tough short-term where people or customers being a bit hesitant, should I buy an electric vehicle or should I buy a hybrid one? But we are certain that, that's going to come back, the demand for vehicles. And we have seen ourselves very well positioned there with our different companies exposed to the vehicle industry in broad. And of course, one thing that we should not forget is the cost increases in some of the so-called low-cost countries like Poland, Czech Republic and Mexico, for instance, where they had immense cost increases. And we try to combat that. But it's not done in one quarter. I mean, to automate and to robotize is the only way to go forward. We just have to fight the conditions out there. That's why we are here as management. If we then swing over to stoves. And that's been a relatively flat market as well. And also, on top of that, it's been a debate or there is a debate about emissions, both in North America and Europe. The North American new regulations. They're going to come into existence in May this year. Our assortment is, of course, fully at a par. And the only thing we can say that during 2019, the demand in North America and Europe has been hindered, somewhat by, again, the uncertainties and the debate going on. We have, of course, approved all our products in Europe, they're already approved for the new standards 2022, but nevertheless, it's a debate going on. And we have taken a self-imposed mode, let's say that we're saying that we're going to try to improve our products even further as far as efficiency and lesser emissions, just to demonstrate that the market leader has to take that position, and we believe that these products are very much appreciated by the final consumers out there. So the broad arrangement that we have with pellets, with gas, with electric stoves, and then, of course, with wood burning ones. We're going to continue to drive that. And we see that's the main reason why we are strengthening our position in the market that we have the full range, and we will have the full presence. So looking at the figures, we see that -- stoves is still the only business area that's been able to position itself above 10%, ever since we launched our group on the stock exchange. Now it's a thin margin, we can say. And of course, despite the fact that we have an organic growth, at least over SEK 100 million over the previous year, we still suffer operating profit that's below previous year. And we are taking quite a bit of cost when it comes to R&D marketing, and it's, in some instances, we've also felt like it's been a price competition out there when the market has been softer. Just a few graphs before Hans is coming in. This one, you've seen so many times before, The Tiny Company, [ 93 ], hardly visible in this graph some SEK 300 million in turnover. And now we've passed like the SEK 25 billion. And nothing has curbed our positivism or our ability, we believe, to continue to grow. And this graph is a good demonstration of that. Same thing when it comes to profitability. It's steady uptick. But of course, you can see there that compared to '18, it's a lesser margin to the previous year. And just a few words about seasonality. You can also see here that it's the third or fourth quarter, when our sales typically would come in. And it's very persistent. It's very consequent year after year, but the first quarter is relatively weak, then it comes up to 46%, 47%, and then it goes even further. So it's relatively easy to follow-up us when it comes to the seasonality. Even if we acquire companies during the year, the pattern is pretty much the same. It is even more pronounced, as you all know, sitting out there that when it comes to our profitability, how the third and fourth quarter really are the ones where we make money. And at last, 3 pie charts here with the distribution less sales, climate solutions typically around the 63%, 64% , and a few other -- 2 other ones, 27% and 10% for the full year. And when it comes to an operating profit, of course, NIBE Climate Solutions, having a higher or better margin, they represent a little bit better than 70% of the total group's operating profit. And the final pie chart here on the geographical spread. It's pretty much as before, where the home market, as we call it, the Nordic countries now represent some 25 healthy percent, the rest of Europe, some 40%, North America 30%, and other continents 5%, as we can foresee that it would possibly grow slightly more in other continents or the others there. But overall, we see that's a very stable and robust, you can call it the distribution of sales. So with that Hans, I let you comment on a few other things.

All right. Thanks, Eric. So I will continue then with taking a slightly deeper look at Climate Solutions. As Eric mentioned, it's been a continued solid growth and performance of that business area. And most markets have actually performed quite well. I mean, Sweden, as Eric mentioned, has been stable and grew initially more flattened out some, where -- when the newbuilds were reduced, but has been on a high level. North America has also continued quite well. The Netherlands has continued to grow. And finally, Germany is starting to move, although it's not quite there where we, of course, want it to be. So the overall organic growth has been quite good throughout the year, although, the last quarter was somewhat weaker. And of course, I think that is, to some extent, influenced by the way, the working days fell out in December, in relation to the holidays, where a lot of people went for a longer period of vacation. So I guess, it remains to be seen in Q1 here and if there was any spillover effect into the area. In Q4, anyway, the sales amounted to 4.6% and growth there of 10.7%. Of course, there is a help of currency in there, but a fairly decent organic growth after all, and improved gross margin, and then landing on the same operating margin as last year. And for the full year, we were able to grow by 15.3%, coming in at 16.4%, whereas the operating profit actually grew by 16.1%. So that's quite pleasing to see that we were able to increase that more than sales. And this, despite that, we still have some larger units in there that we mentioned before, like the climate controls group in the U.S., the AMETEK group, the Rhoss companies, which are not yet at these levels, so to speak, even if they are increasingly performing better and better. In terms of geographical split, it's to a large extent, the same as last year. But Europe has taken a slightly larger share. It's now at 42% of sales, up 4 percentage units from last year. And the North American pie chart there or share of the pie chart has also increased by 1 percentage unit, which is good in a way because it's that decreases the dependence on our old home market, which, of course, is continuously very important, but it means that we're growing in these areas, which is quite nice to see. In terms of the profitability, ever since NIBE was listed Climate Solutions has been -- with the exception of the 2 initial years there in '97 and '98, been well above the 10% operating margin. The one bar there that is lower is in 2007 when we had the overall financial crisis. And the reason for being slightly lower, these 3 last year, so as you can see on the end of the chart are, of course, these larger entities that have come on board. And where we are working on improving their profitability. Within Element, as Eric mentioned, it's been a softer demand for sure in several segments. And this is our most global business area, and the performance is, to some extent, a reflection of what's going on in the world in terms of geopolitical decisions and environmental challenges and Brexit and whatever there may be. In general, ESG-related segments have been performing quite well as the HVAC industry and wind, whereas consumer-related areas have been weaker. And as Eric mentioned, the automotive industry is continuously very interesting, but is currently at a crossroads, where there's a lot of hesitation in the business. And the train segment, which also is an important one, sort of lives its own life, has the potential to be good, but it's dependent on state subsidies and how they kick in, and they don't follow a traditional business cycle. Anyway, the business area landed at SEK 1.85 billion in sales in the fourth quarter, up 13.3% and acquisitions drove that to close to 8%. And then a large portion of currency out that, but there was a small underlying organic growth. And we were able to defend ourselves and had some comeback of the business area, you can say, in the last quarter. So we landed in the operating margin on a level of 8.4% versus 8.2% of last year. Also here, we grew profitability slightly more than sales, which was pleasing to see. But for the full year as such, it has been a challenging year for sure, and the overall result did not come in as expected. I mean, we came in at SEK 622 million, down from SEK 650 million of last year, and we're just below 9% on the operating margin side. Whereas we were slightly above 10% last year. And of course, we've had to combat with wage costs and increases in several low-cost countries. And we continuously address those questions, of course. So we're not satisfied, but we're not either worried, I would say, on the level. In terms of geographical split, this is the area where we have the most global split. And there have been very few movements within that compared to previous years. When looking at the operating margin from '97 to the end of this year, we've had a steady climb since a restructuring reserve was taken there, as you can see in 2005, up to a level where we came in about a 10% for '16, '17 and '18. And for those of you who have been around for a while, they were slightly helped by one-off business that we had. But we had a very good and stable situation than given the movements or what's happening on the market. This year, we came down now slightly but are, of course, determined to get it back above the 10% going forward again. Stoves, then as we stated, it's been a very flat market in a way, but with variations between the markets. In general, gas has been stronger than wood. And North America has been stronger than Europe. And with these mild winters and weather that we've seen, they have not either really help sales, but we don't like to blame it on that. But it does kick in as an effect sometimes. Sales grew by 1.2%, which in reality is a decline in organic growth in the fourth quarter, since we were helped by currency when converting the -- our North American and British operations into the Swedish kroner. Nevertheless, gross margin was fairly stable, and we came in there with a very decent result. And as you can see there, we have a strong seasonality in this business, where we earn most of the money in this fourth quarter the SEK 142 million in relation to the SEK 252 million for the full year, speak for themselves. And then for the full year, SEK 2.5 billion in sales, very thin but still existing organic growth behind that. But then, of course, not being satisfied quite where we ended up on the operating profit level being slightly below last year. But on the other hand, pleased to see that we did manage to maintain the operating margin above 10%. The geographical split is also similar to last year, Nordic, roughly 1/3. And then the rest of Europe, slightly less than 50%. And then thanks to the acquisition of FPI some years back, the good foothold in North America, there is some 23%. And then just the operating margin over these last -- over all these years since the listing. As Eric mentioned, it's the only business area that has constantly been above the 10%. And so therefore, it was, as I just said, very pleasing to see that we've just managed it this year as well. Then summing up '19 from an income statement point of view, it was an overall robust year, although not quite there where we want it to be. We grew by some 12.5%, whereas the last 4 years have rather been in the range of 16% to slightly above 20%. Operating margin of 12% is robust, I to say, but of course, slightly lower where we have been before. Nevertheless, we had a fairly decent organic growth throughout the year. And looking back since 2015, we have basically been able to double in sales and maintaining a decent profit level, which gives us a very good platform going forward and showing that it is possible to also eventually work towards our SEK 40 billion targets. Balance sheet, just quickly to leave some room later for your questions. There's not so much to say, I mean, SEK 37 billion in total assets. Intangible assets is, of course, the single largest item there. It's a consequence of our acquisitions. We do the impairment test according to all rules and regulations and can defend the value quite nicely. On the liability side, equity is quite strong. It's increased by SEK 10 billion since 2015, of which SEK 3 million came from a rights issue that remained in 2016. And then, of course, on the long-term liabilities, noninteresting, and also the short-term ones, they have increased by some SEK 840 million following the introduction of IFRS 16. Cash flow has been strong. Cash flow before change in working capital came in at slightly above SEK 3.4 billion compared to slightly below SEK 2.7 billion of last year. And thanks to a better management of working capital, the change there was slightly below SEK 500 million, ending up then at the SEK 2.958 billion, as you see there. Whereas the change in working capital last year was a negative SEK 764 million. So cash flow has been very good and allowed us to continue to invest in our operations. And after having been investing below depreciation for several years. So we increased our investment program as from last year and after -- well, 2018, that is, and then continued it in 2019, leaving then up to an operating cash flow of around SEK 1.9 billion for the full year. If we just continue with some key financial figures. The depreciations that I referred to, you can see here on the second line, and I think it's important to note that as from 2019, well, of course, have depreciations for leasing included there as a result of the IFRS 16, and that amounts to SEK 240 million. So on a like-for-like basis, the depreciation according to plan for our fixed assets is just below SEK 800 million to be compared to the SEK 691 million, SEK 640 million and so forth. Then we have a strong cash position, good relation to interest-bearing liabilities to equity and net debt-to-EBITDA, that has come down a notch there as well, leaving us with an equity asset ratio of around 47%, which is quite stable for our continued growth, not the least through acquisitions. I think the only key parameters that might stick out and have come down over the years, a little bit, our return on capital employed and return on equity, being both a consequence of the acquisitions we've made, but also the rights emission that we made. And you see that quite clearly between 2015 and '16, where return on equity, we went from 18% being close to our target of 20%, down to 14.9%. But apart from that, the other key numbers are decent idea to say, which also is seen on the very last picture here in terms of numbers, the working capital I mean, it's an area that we continue to address and look at. And if we don't look at the year for 2015, which was affected by an accounting change, you can say, you see that we were at 19.6% in 2016. We brought it down, started an initiative, but came into a bit of a squeeze there where we didn't have components to fully deliver what was possible to deliver in '17. And hence, the relation came up again to the 19.6%. But quite frankly, we were a bit overstocked at that time. And this year, I think we have a fairly decent level of 18.1%. And this in the ballpark of where I think we will be -- even if we're continuously looking at reducing that slightly going forward. And then the last picture here is more a summary of the development on our key parameters ever since we were listed. And by that, I hand over to you, Eric.

No, I mean, thank you. Yes, I think this graph is quite illustrative. You know that, of course, it's better to have some cash on hand rather than trying to borrow when you need money. So of course, we are not totally proud of having a return on equity another 2011 , but rather than the '13 , '14 . But we also know that we have a fairly decent goal for money that we can use for acquisitions. We just wanted to reiterate the current immediate -- intermediate target that you mentioned, Hans and the SEK 40 billion. And when we set that target just relatively recent, people said, okay, is that possible? And when we look at the next graph here, we feel that we're getting closer and closer already. And so of course, we've seen that every double saves every 4, 3, 4, 3, 7, 5 years. And feeling now that we have exceeded the SEK 25 billion, we don't see the SEK 40 billion yet, but we are fairly confident that we will be able to rise there. Just to confirm that nothing has changed as far as our targets are concerned, our target, and that's very much driving all our business entities in a positive way. And of course, with an equity ratio of some almost 50%, it's difficult to have a return on equity of 20%. But it going to be used in a wise way. So having said that, some 35 minutes on the history. We like to invite you for questions, and we'll do our best to answer them. Please go ahead.

[Operator Instructions] First question is from the line of Klara Jonsson from SEB.

So first, I have a quick question on the operating cash flow. It's strong for the full year. But in the fourth quarter, it tends to be a bit higher, if I've done my calculations right. So could you give a little bit of color on this?

Well, that is very much related to the seasonality we have in our business. Q1 and Q2 are -- and I think you saw that in one of the pictures that Eric showed before are not as strong and as the latter part of the year. And really, Q4 is always our strongest quarter for the full year. So I think it's a typical pattern that we have seen over the last years.

Yes. But is it something in the Q4 2019, it comes to be even stronger in Q4, I think? So was it something particular this quarter that you want to highlight? I mean, inventories came down like you said.

There's nothing sticking out really that I'm aware of. I'm starting to think now when you put the question, of course. But...

All right.

Yes. Well, there should be anything out of the normal there.

Okay. Next question is about Element. It's exciting that you have a lot of projects going on there to meet the demand for electric and hybrid vehicles, but you're also talking about higher costs that connected to development of new products to those areas. Are we seeing those higher costs in the numbers already? Or will they increase ahead pushing profitability?

You see part of those numbers in the figures already. I mean, the automotive manufacturers, they are -- these are new products. Of course, we had to start. Everyone is very eager to get the products out. I guess, we're all as private consumers recognize the uncertainty, as we mentioned before. And there's a race, you can call it now among manufacturer to come out with the new products. So of course, as soon as you sign a contract, you start. And that's quite a bit of pressure on us to fulfill the timetables that they -- that these large corporations are sort of -- I shouldn't say perhaps dictating, but have chosen now to install. And we're going to make our utmost, of course, to fulfill that. And so we start right away. As soon as we sign a contract, we start very quickly to address them and hire engineers, and yes, whatever is required to fulfill the demands. But it's a high-pressure in our laboratories and on our engineerings boards in general.

Yes. And when did you -- have you hired more people throughout 2019? Or did that start recently?

No, we have started, and I wouldn't exclude that they were going to be more people on board as the -- but I think you shouldn't look at that so dramatically. But we have started already during '19.

All right. Okay. And then my last question is about Climate Solutions and the Commercial Business in the U.S. Could you give us an update on how this is progressing growth-wise and profit-wise?

Well, I think that it's this the climate control group. This had a decent growth, but it's not like phenomenal. So we are still working on that. Of course, on the heat pump side is fine. On the chiller on the ventilation side, it's still relatively small compared to our big giant competitors. So there, we are looking for additional acquisitions to have a fully-fledged assortment.

Okay. Is that what needs to happen, some additional acquisitions for you to feel more comfortable with...

Well, I think that you saw what we did now in Europe, you put your toe in the water, like we acquired Rhoss partly in Italy, like a couple of years ago. And then by doing that, you get more knowledge about the market and then we said [ boy ], take a chance where you can team up with Üntes. You know Üntes wasn't, as an example, wasn't the company that we were so acquainted. And until we bought, should I say, Rhoss. And the same thing in America now in the U.S. market, of course, we have the people in Oklahoma, and then we got in touch with the Tempeff people in Canada, and that was acquired. So it's a puzzle that we constantly are laying.

Okay. And you said that you were -- you felt okay about the performance, but not more. Does that mean that you have a profitability level at group level for those operations? Or are they still below?

Yes, of course, I think Hans mentioned that, that they are not at course to 13.9%. And I think that we have to also understand that the commercial side, they will not be at that level. I think that actually, we look for a slightly lower margin in general, because that's where the industry is. So I think the residential market is slightly higher performance level.

Next question is from the line of Fredrik Moregard from Pareto Securities.

Actually, just one question on my part on the Dutch market for Climate Resolutions. There was another Swedish building product company talking about some hesitation among property developers in the Netherlands. I was hoping you could give us some comments on that as well, if you've seen anything like that?

Yes. Well, I don't know how recent you read that. But I think that there was a hesitation on the NOx values there. And I think they have agreed now that [ cost a partner ] solution going to be to reduce speeds on motorways down to 100 kilometers. It might sound strange, but they look at this from a broader perspective, and that's the conclusion that they've come to and they have done that. So from our knowledge, the market is heading in the right direction again. The overall driver is, of course, that they have decided on the government level that they're going to discontinue gas in newly built properties. And that is, of course, in itself, driving the market. And then there are subsidies being introduced for the renovation market. So this is a bold move in the Dutch market from the government side. And I think that there were irritation on the stalling situation for a moment there. But to our knowledge, that has been cured.

Okay. That sounds very good. And I mean, the Dutch market is still -- you're driving penetration of heat pumps in the market. Could you discuss your exposure to retrofit versus newbuild in the market as well?

Well, well, I think that we can say that the new build is, of course, a market where there is an immediate need for pumps for heat pumps. So that is difficult to connect the house that has anymore. It's either just the heating or heat pumps. Renovation, refurbishment, there, you can still use condenser boilers. But now of course, the refurbishment market will be helped as of this year with further subsidies. So I don't think we're going to disclose our balance between refurbishment and new construction. But as in all markets, it's the new construction is typically driving the market but in this particular case, they've also given time limits from when the gas will be totally cut off. And that is, of course, also influencing the refurbishment market positively.

Okay, okay, okay. Just a final question on this topic. Any ballpark number of how much of the European exposure in Climate Solutions related to the Dutch markets?

Well, that's -- I think that we have to pass that, not that we're impolite. We don't release -- it's not that we don't want to tell you, but I mean too much a competitive point of view. And our competitors are -- they're also listening in. So we need to...

Next question is from Carl Ragnerstam from Nordea.

It's Carl here from Nordea. First of all, can you I mean, you previously mentioned price increases within Climate Solutions. And I wonder if you have implemented further price increases recently?

No. You mean like in the quarter 4? Or what is the question?

Yes, for instance, for quarter 4, yes?

No, no, no.