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

Ladies and gentlemen, welcome to the NIBE Q3 2022 Results Presentation. Throughout the call all participants will be in a listen-only mode and afterwards, there will be a Q&A session. Today, I'm pleased to present Eric Lindquist, CEO; and Hans Backman, CFO. Please begin your meeting.

Good morning, everyone. It's Eric here.

And Hans as well.

The old couple as we call them, at least one is old. Anyway, thank you very much for calling in. And we're going to go through a number of slides as we typically do, regarding the business environment and what we see in the market and, of course, how we behave ourselves. And the headline is, of course, that it's a continued strong demand within most market segments. And perhaps the most positive thing is that we see signs of improvement in the supply chain. We've been waiting for that for a long time. It doesn't mean that everything is , but there's certainly some positive signs, and we also dare to pronounce that quite clearly. And of course, as before, the demand is driven predominantly by, of course, the sustainability ID and to get rid of gas and oil as before, but that's even more pronounced now with the Russian invasion of Ukraine. And we are, of course, increasing our capacity as well, but that should not be viewed as we are running short of capacity. In the short term, we have good capacity right now and for the coming 24 months. But of course, when you start investment, then you need a perspective of at least on 24, 30 months. So that's how that should be viewed. And then, of course, as you know, we have some one-time effects when we closed Russia, we had a negative one of some SEK 114 million and then we sold the majority of [ Schulthess ], which meant that we got a positive gain of some SEK 230 million or SEK 232 million and then the one-off net is 118. And the growth we say is good. I mean, it's still hindered by, of course, the shortage of components, but we see some very substantial signs of improvement there. And we have acquired a few companies during the year, predominantly the 3 ones we saw, been some smaller add-ons as well. But Argoclima in Italy on the Climate Solutions side, where we feel we now have a good platform for heat pump expansion, and Pacific Energy, another one up in the Pacific Northwest of Canada. And then we have ELMESS-Klöpper in Germany, which we think is an important platform for elements on the industrial side in Germany, where we haven't been, as a matter of fact, positioned before. And then, of course, there are other negotiations ongoing. And now we're almost back to normal again, we can't blame the COVID for not traveling anymore. So that's a release in itself. So we just take a quick look at the figures, some SEK 28 billion out there, and the rolling one is approaching SEK 37 billion, which is a substantial growth, of course, is a mixture of the acquired. And here, we have some figures hidden as well, of course, that we divested Schulthess. So Hans' going to come back to the figures say how much dilution we have there. And the operating margin is 14% compared to 14.7%, but if we would exclude the one-off effect, we would rather be that 13.6%. So there we see that we are still lagging on the operating margin side, of course, we like to come up to at least last year, but it's also important to remember that our history prior to recovery was rather below 13. So we've taken a step upwards since 2020, we can say. And the quarter itself, it's smelling close to the SEK 10 billion just missed with a SEK 1 million, which is almost ironically. And the quarter as such continues to grow, of course, close to [ 28% ]. And the operating margin is now at 14.7%, still lagging compared to last year, and that's where we're eagerly trying to improve the coming months and quarters naturally. If we look at the graphs that we typically illustrate, we are in steady growth and there is no decline, but rather an uptick when it comes to sales. And of course, we have the [ currency in ], we have the price increases there, but we just have to follow suit in a way. So we are hit by higher prices, of course, we had to try to compensate ourselves for that. And if you look at the graphs for the profit, then we see that was a little bit of a downturn '21 at the end there when we first started to struggle with the price increases hitting us and not being able to fully compensate ourselves. And now we are on the right back -- on the right track again. If you look at the Climate Solutions, of course, there is very, very strong demand, and we have not been able to deliver satisfactory in the past, and we see now the possibility of coming back due to improved deliveries from our subcontractors, we saw that during the last part of the quarter 3. And we hope now that we will be able to see that -- continue to see that improvement. I mean, it won't be cured over 1 month, but we see it's a steady improvement. And there, of course, again, investments in capacity not for the immediate future but for the longer run, where we see a market that's going to grow since they're going to change from oil and gas. It's a change that's going to last for a long time due to our judgments. And due to better leverage on prices and also now to -- that we will be able to deliver better as the months and quarters are coming. We feel that the operating margin should improve if you close the gap to the previous period. And there again, we see the results of the Climate Solutions. The first 3 quarters, so there is a gap as we see, healthy growth. And that's the gap in operating margin, we would like to close as soon as possible. Looking quickly at Stoves, it's a tremendous demand. And that's, of course, a reflection of not only our assortment, but also the energy prices and the shortages of other fuel [ admissible ] price levels. So here, it's more comes in as more than a secondary source of heating or in some instances, even the first source of heating. And here as well, I mean we have also issues being able to deliver. The shortages of components and material has been less pronounced, both on Stoves and when it come to Element. And that's why they are a little bit of a head -- although we haven't met the margin full year, but we are a little bit further ahead when it comes to closing that gap. There's also an ambitious investment program here to cater for the demand to come in the longer perspective. And here, we see what I just mentioned that the operating margin is like 12.1% versus the 12.6% previous period last year, which is an indication that they have had relatively lesser seen issues lately delivering. But of course, the delivery shortages are not over, we see a steady improvement on that side. At Element, there, we continue to see strong demand. Of course, some sectors have softened demand now like the white goods, for instance, but on the other hand, there are other sectors that are growing phenomenally like HVAC and like the semiconductor [ part ]. So here as well, we are investing quite heavily. And the operating margin, which is pleasing to see that the good sales development. And here, we also, of course, noticed the improvement in supply, and good price discipline and good cost control has taken this up to an operating margin that's better than last year. So I guess that's an illustration of, as I just said, discipline but also the potential we have once we can deliver without any major hindrances as far as supply chain is concerned. And just a few pie charts before we hand over to Hans, nothing dramatic has happened here. Really Climate is representing some 63% in sales and Element 27% and Stoves respectively 10%. And then when we come to the operating profit, due to the higher margin, of course, Climate Solution is up there around 70%, where we've been for several years now. And the distribution of sales, it's pretty much what we've seen before. Europe and the Nordics, of course, relatively have taken a slightly bigger chunk compared to some years back. Other than that, the Nordics are stable, and Europe is growing quite considerable now as we all know. But North America is also picking up. It's a pretty healthy distribution, we believe. Of course, others could be larger than 6%, meaning predominantly Asia. And there is only Element that's active, we can say [ 2023 ]. So I guess that's pretty much for, I'd like to mention, a start. I'm sure there are going to be several questions, and we'd like to answer those. I'd just like to mention that we have an interview here with a magazine and with a TV channel around 12. So we'd like to finish this interview around 11:55 or 11:57 as late. Okay. Please, Hans go ahead.

All right. Thank you, Eric. I got the message. I'll be quick. Some repetition but also a little bit more granularity here on the individual business areas, and then a few comments on the balance sheet. I mean looking now into Climate Solutions again then, obviously, demand has been very strong and increasingly also in North America, which is quite pleasing to see. And our challenge has really been on the supply chain side, as Eric mentioned. I mean, we have the capacity, we have the people, we have the factories, we have the product ranges. So it's been a matter of getting the components on board to deliver even more. But nevertheless, sales grew by almost 25% towards some SEK 3.6 billion. In that portion, we do have a divestment, as Eric indicated, and that's the portion of Schulthess that left the group, which is some 2%. But the underlying growth there and organic growth has been very healthy. But of course, helped by currency as for all Swedish companies these days, I would say, and also price increases that have kicked in. But it's the organic growth that has driven the performance. But it's on the gross margin where you see that we are not yet back on track. It's at 32.9% as opposed to 35.8% of last year. So that's where the challenges really end up in the efficiency of the factories and, of course, getting products on board to a reasonable price. Nevertheless, operating profit came in at SEK 2.8 billion, up by some SEK 450 million. If we take out the one-off effect, it's plus over 300, and we landed in then a margin of 15.5% or just below 15% if we exclude the one-off effects. So a solid result. And this also goes for the quarter as such, where growth was about the same 23%, 23.4%. The divested portion was a little bit larger, around 5.5, following them that we left the 26% of Schulthess, but then an underlying good growth there. And a gross margin that closed in a little bit on the previous year, coming above 33%, but where we still have homework to do, so to speak, and an operating profit up with some SEK 115 million landing in just above 16%. Looking at the geographical distribution of sales, it's North America that has picked up slightly now being at 21% as opposed to 18% of last year, taking share, obviously, both from the Nordic countries and Europe, but a picture that is very similar to previous years. But it's nice to see North America growing again. Moving into Stoves, as Eric mentioned, we've seen a very good demand ever since February 24, it's really when Russia invaded Ukraine. And following that, people are not just looking for a Stoves for decorative purposes, you can say, but also as a mean to save energy, if they have access to wood, and also safety equipment, something that always works offline, so to speak. So for the first 9 months, we grew with 29%, up by some SEK 625 million. Of course, there is some currency in there and a portion of price increases, although we are lagging a little bit more behind here. So that is still to come. So on a very good underlying growth. But also here, a little bit of a struggle with the supply chain leading to a gross margin that has not really or quite met the level of last year. But an operating profit we're landing in at SEK 335 million, up from SEK 270 million and an operating margin just above 12%. The individual quarter was even stronger. It was a phenomenal increase, you can say, of almost 40%, some SEK 300 million compared to last year. A portion is, of course, acquired coming in through the latest acquisition we made, but really a strong demand there. People really keen on getting wood-burning Stoves on board, you can say. Our gross margin not quite at last year's level for the reason I just mentioned, but just below 36%. And then an operating margin that we improved by some 34% landing in at 13.2%. In terms of the geographical distribution of sales for Stoves is exactly the same as last year actually. Moving on to Element. Element has continued to develop quite favorably, especially on the HVAC side, semiconductor side. As you know, we are very well represented throughout the world here through a number of segments. It's mainly the white goods side that has slowed down. The automotive is still a little bit at crossroads. But we were able, all in all, to grow sales with some 28.7% or close to SEK 1.8 billion actually. Of course, there is a currency impact here as well, slightly more than in the other areas due to the exposure to North America, but it's still the underlying organic growth that has driven the business here, also with some price increases on top. But also here, we've seen some supply chain issues having led to a slightly lower margin, although the negative effect has not been as high as in Climate Solutions, so we landed that in at 22.7 as opposed to 23.2. And the operating profit came in at some SEK 220 million above last year and an operating margin of 10.9%, meaning that we've also been able to hold our admin costs very well under control. The quarter was quite good as well, thanks to a good organic growth. We increased it by some 33.7% or up SEK 700 million compared to last year. And here, we've been able to close in the gap a little bit on the gross margin only at 0.3 as a difference. And then again, with the good cost control, the operating profit increased by 52%, landing in an operating margin at 11.4%. In terms of geographical sales, as most of you know, this is our most global business area, there have been some movements here in North America, also here picking up, making up with a slightly larger portion of the cake, Europe being the same and Nordic being slightly smaller than before. Quick look at the balance sheet. The total assets and total turnover is now at SEK 52 billion. There are not so many movements here really. What might be sticking out and which we will come back to slightly is that the financial current assets are down by SEK 1 million, and that's very much a result of us having built inventory, especially material inventory or component inventory to meet the demand that is out there. We've been forced in a way to source whatever we can get hold of. And that, of course, reduces then the cash position. But due to the performance of the group, I mean, equity has increased, up by some SEK 6.5 billion. And of course, the liabilities have also increased, which means that we've been able to get some compensation to our suppliers, if you like, on that side. But if we take a look at the cash flow analysis, that's where you see the effect of us building inventory. I mean we have generated more cash flow from the operating activities but with the change in working capital of some minus SEK 2.3 billion, of course, money is being tied up in there. And we're also in the midst of our investment programs to meet the future demands, which also then has an effect. So the net operating cash flow from the operations after change in working capital and after the investments landed in at some SEK 220 million compared to [ SEK 1.7 million ] of last year. But we know where the money is, so to speak. Looking at some key figures before we open up for Q&A as well, we're still solid, if you like. I mean, we have a good portion of cash, the SEK 4.4 billion that you see there on the page, down by SEK 1 billion, which is the result of the inventory buildup. But interest-bearing liabilities in relation to equity has improved. Net debt is stable around 1 and of course, a very solid equity assets ratio now above 50%. But it is the working capital that I have mentioned several times that sticks out, where we are now at a level of 23%, excluding cash, up from the 16%. 16% is really our historical level, you can say where we usually are. But being this solid in a way and not yet have been having been able to put that money into work, it brings down our return on capital employed slightly. And you have a similar effect on the return on equity, given the equity assets ratio we have. But all in all, I would say a solid balance sheet for further growth and further expansions. I don't know if you want to add anything, Eric, before we open up.

After that, it wouldn't be possible to try. Try to leave some room here now for the questions so that we can finish on time.

Please, go ahead with questions now.

[Operator Instructions] And our first question comes from the line of Gustav Osterberg from Carnegie.

Thank you, operator, and good morning, Gerteric and Hans, the iconic dual here. So a couple of questions from my side. You have a continued positive message on the supply chain and looking from Q2, it seems to be improving. Could you elaborate whether we're seeing specific components -- easing on specific components? Or is there also a general improvement in the capacity to deliver on all components.

Well, I mean the capacity to deliver, that's 100%. And one of the reasons for the lower gross margin is, of course, that we have an overcapacity staff-wise. So if you get the product in, then you have to be able to assemble and produce as quickly as possible. That's one, of course, obstacle in the past. And we don't like to name any specific -- some supplies that we had difficulties, where we can just say that the one overall difficulty has been, of course, semiconductor availability because not only ourselves in our control boards, but in many of our suppliers' components, there are some crucial semiconductor components. So -- and we see that, that is improving. And of course, the reason for that -- the reasons for that, we can only assume that there are some sectors that are not as prosperous as before, let's say, the white goods sector, for instance. And that is, of course, a possibility for other sectors to grow. And also the production capacity from several of our sub-suppliers, they had increased. They did not expect the quick growth that we forecast. It was a thought that they would be able to meet it quicker. And now, of course, we can say that the last 5 or 6 quarters, we've been suggesting that they should invest and they should increase the capacity, and we see that. I think that's as specific as we can be.

Okay. Perfect. And then just following up on the improving supply chain situation. You were mentioning lead times of up to [ 2.75 ] previously. With improvement in the supply chain that you're seeing now, is it too early to speak of improved delivery times? Or will that happen soon as well as supply chain constraints ease?

Well, I don't think we're going to see like as of December 1, as of January 22, everything going to be very [ hashy ] or totally improved. I think that we see a continuous improvement. And as I said, we saw that during the latter part of quarter 3, and we continue to see. That doesn't mean that we are totally satisfied, but I think it's appropriate to send a signal to you as analysts and to the market that it's not as bleak as it was before. But we suggest also in the report that they're going to take some time to restore everything back to the ordinary course. I don't think that we're going to stick our necks anywhere after that particular date, everything will be back in the orders. I think that we foresee a strong demand for several years here. And that means that our sub-suppliers they just have to continue to grow production-wise and capacity-wise as we grow. And when we now see improvements, they also have to prove that, that is for the [ longevity ], okay?

Perfect. And then a final question on demand. I mean, you're seeing still strong deliveries from Elements and Stoves. And you see positive comments on the market within CS. You mentioned a record-high order intake level still. Are we seeing sequential improvements here in the overall business?

I should answer that. I think that on the Stoves side, just to mention one thing that occurs, the typical Stove demand would have a very cyclical profile. But due to the energy situation in Europe and due to the price level, I think that the demand has been reinforced quite considerably. And of course, the HVAC growth, that is driving not only kind of Solution, but that's also driving Elements. So I guess those two very specific ones are very obvious. And then, of course, if you go back many years, we didn't have semiconductor deliveries of -- to any magnitude. Now, that's an important part of the Element business as such. And that's, of course, also something that is growing gradually over time here. So I don't know whether I answered your question, but it was an attempt anyway.

Okay. Those were all the questions from my side.

All right. Sure.

Our next question comes from the line of Carl Ragnerstam from Nordea.

It's Carl here from Nordea. So firstly, is it possible to sort of try to at least quantify the organic growth split between sort of Europe and the U.S. for Climate Solutions?

No. It, I mean, relatively seen, is growing quicker in Europe if we just compare them. And I think that it's quite recent that those new arrangements in North America have kicked in. It was quarter ago or 4 months ago, whereas in Europe, we've been talking about this and we have a war going on, making everything very realistic in the sad way. But the America or North America is certainly picking up. So I guess that's relatively seeing the picture we can give it.

Okay. Very good. And also, when you say that margins will gradually come back, I mean looking at Climate Solutions, is it possible to come back to the sort of full-year 2021 margin level? Or is it tough, given, I guess, you have the capacity coming in, maybe somewhat higher cost than you had in 2021? Or is it a good baseline to reach again?

Well, I mean, that's our best forecast. In some ways, you might play hide and seek by not answering precisely our market share and stuff like that. But when it comes to this, of course, we've had, we think we relate increasing our own prices and not that we didn't want to, but we were hit very hard, as we said so many times previously, when the price increases came to us, and we've been trying to increase our own. And of course, we feel that the gap is going to be closed as the months go by. But also on the productivity side, having an overstaff production suggesting that once the components come in, you have to produce both for the immediate demand, but also for the demand that you haven't fulfilled previously. If the, as we suggest and as we hope, delivery performances from our sub-suppliers are going to be better, our overstaffing, relatively seen, going to be less and productivity going to improve. So those are the two major factors that we try to convey to you as investors. And we don't specifically say we're going to come back to that in that level. But as you know, the Climate Solution margin, if you just look at it historically, I'm sure you have that picture somewhere, in that we are now on a different level than we were just some years ago. And I think that should also be a reflection of we have larger volumes. And we also have greater, should I say, better platform and sales. So it's more stable as the quarters are rolling on. The whole Europe is waking up when it comes to replacing oil and gas. And previously, we have perhaps a more limited market, but there's nothing stopping it really from having decent margins as we go along here. We feel that we are well equipped to have high productivity and decent margins as we roll along. We don't foresee that we're going to all of a sudden be hit by sudden expenses. We've demonstrated that we can increase prices. We know that our productivity, given proper supply chain, is among the best ones that we've seen. Now we are fairly positive [ around ] the future.

Okay. Very good. And a final one from my side is a bit on, coming back to the component shortages, I mean, of course, is improving. But of course, you have many critical components in heat pump or, I mean, taking [ EBM ] pumps, for instance, to just name [ one ] supplier. Do you think it's possible for you to reach a normalized situation in 2023 when you have so many competitors competing for serving the same components in the industry or what's your thinking there? Is it -- will you get as much components as you want in 2023? Is that possible?

Well, if I have a complete answer to that, I think they should have another job because then I would be -- sort of administer connection with higher mountains and skies. But I think that the promises and the contracts we have signed, they indicate that we will get our deliveries. But that also means that we need to broaden, of course, our number of suppliers. That's no secret. But we would be very surprised if we wouldn't get our chunk out of our [ sub-suppliers ] as agreed. We believe that it's going to be tougher for the smaller ones coming about. We've seen that in the past, not only this particular outcome. Of course, we've seen heat pump upticks in Sweden, where we've had some 50 producers in the past. And it seems like the larger ones, so well established ones, they have stronger strongly negotiating arm when you negotiate with them. So we are fairly confident. But how can I underline I would be 100% certain, that's -- that would be too far to go. But we feel that we did not be abused by any means. And of course, the answer is that larger volumes on existing ones and sub-suppliers and also complementary sub-suppliers.

Our next question comes from the line of Douglas Lindahl from DNB Markets.

My first question is on the negative factors that you commented already. You mentioned a bit about this, talking about overstaffing as well. But more specifically on the price cost lag. Do you have any sort of view on when you should be able to sort of catch up on that? That would be my first question.

Well, again, of course, we are trying to guide you as far as we possibly can. But we believe that no manufacturer will, in the long run or even in the shorter run, absorb all the cost without doing anything about it. And we believe that we are able to cater for that, but we've been a little bit taken by surprise, and it's taken us some time. And we will be able to cater for the price increases that we have been hit by. And to give you a very precise answer, that will be on November 30. I mean that's impossible. But I think we have -- how much stronger it can be in our signal to you analysts when we say we're going to be able to close the gap, it would be asinine to suggest that they're going to be like in 2025. I mean we understand that you talk a new reason within the coming quarter or the coming quarters, which means that, of course, we don't talk about any unrealistic times. I guess that's not the answer you wanted to have, but I think...

It's -- I understand it's a difficult question to give a firm timeline, and I understand that. But on the sort of profitability improvements on Argoclima, do you see any opportunities to lift profitability for that business specifically?

Yes, that's what we certainly hope because that's -- as we say, a new company coming on board, we give them typically 24 to 30 months, and then they should be up and running above the 10% [ and decline ] again. So that sticks with this company as well, and they've been on board now for a quarter. So it's going to take a little bit to lift it up. But that's a matter of making their business more aligned, but also, of course, being able to sell products already available from the other companies in the group. So that's the first time we really had a stronghold in Italy on the residential side.

Okay. And Eric, you already touched on this with regards to Elements. You mentioned that it used to be a highly cyclical business. And these days, it's more correlated to HVAC and semis. Is that correct interpretation? And the white goods exposure is not so relevant anymore when we look at growth for Elements? Or how should we look at that?

We said, that continue to be cyclical or continues to be -- and we've seen that already. But whereas in the past, that -- we took a hit. When we saw that, the way we experienced that, we are so broadly exposed now, and there are other sectors that are more important for us. And that, of course, very healthy. And we also spread in a different way than we were in the past. So that's why we are quite positive about the future that other sectors will compensate and we won't see that cyclical -- or we won't be that much cyclical than as we were in the past on the Elements side due to these new segments that are growing so well. Okay.

Okay. No, that's -- yes, that's clear. And my final question is, we touched a bit on competition. Are you able to comment a bit? I mean we see now a lot of projects coming on stream with regards to heat pump investments in Europe over the next few years. Do you agree with the picture that competition is heating up? And how do you sort of plan to address this? I guess it's a broad question.

Well, no. I mean, we see that. And we just understand and we know that's how the market works. If someone is predicting that the market is going to grow from a level that we were of heat pumps and they're going to quadruple or it's going to be 4 or 5x as big in 8, 10 years, any Managing Director of any company being in this sector would be crazy to tell the Board I am going to stay out of it. I think it's still difficult. But on the contrary, if you have been established there for all this for 40 years, I don't understand why it should be more difficult for us to sustain the growth. Why should we all of a sudden be the suffering part when the market is going to be 5x as big as it was in the past? I don't understand that question. We are very, very, very positive, 3x underline that. And we are now being very sincere and serious in the market. We are well established. And of course, the competition is there. But that's also natural. It would be unreal if NIBE will be the only company out there sailing across the seas. "Well, NIBE is going, I am going to take the whole market." I don't understand why in all the newspapers as soon as someone starts a company, [ they're ] now we're going to be tracked to NIBE. Come on. I mean, what kind of reasoning is that. I apologize dwelling a little bit, but...

No. I mean it's -- I understand it's a difficult question to answer in a short answer or...

I think it's an easier question to answer. On the contrary, I don't think it's a difficult question at all. I think typically, companies well established, they benefit from their market for growth. They don't have a disadvantage. That's what I'm saying.

But I mean there is a risk if there's overcapacity, obviously, that's not positive, but...

No, no. Well. You can turn it around. That's on the other side, of course. We all sit there with empty factories. That, of course, will be tremendous [ backlog ].

I guess we're quite far from that scenario right now, at least.

Yes, I don't think that's going to be the issue in the next coming quarters.

Our next question comes from the line of Uma Samlin from Bank of America.

So first question is I was wondering if you could give us an update on your capacity expansion plan. I note that in the report, you have the doubling of capacity in the short term and another doubling of capacity in the longer term. Could you please give us a bit of more details such as the time frame of both the short-term and long-term plan? And what are the expected ramp-up here post the completion of the factories. That would be really helpful.

Do you also expect us to give you the name when Nobel Prize went in 2029? Or did I miss that? I'm sorry. No, seriously, I can guarantee you one thing. That's -- we also see the figures in the forecast that EU and all others are forecasting. And we will have the capacity through that expansion without any doubt. We're going to have a short term, midterm and long term. It won't be any issue for us when it comes to capacity. The only one issue, and that is that our sub-suppliers are going to be there. On the engineering side, on the production side or the capital supply side, it's 100% solid. So you don't have to worry about that. And we won't release any figures precisely, of course, on our capacity. But that's -- I think that's the answer that caters for your questions.

So I guess my next question is on the pricing. So I guess the market anticipate the raw material prices would potentially normalize into next year. How should we think about how that would affect you? I mean do you expect to give back some of the price increases you have achieved this year if we are to see lower raw material prices? I mean I appreciate that you have -- that you have not increased the prices much enough to compensate the cost you have seen. But if that reverses, how should we think about pricing?

Well, I think when it comes to prices, we do not negotiate prices over a video trends like this, as you well understand. And I think that prices, just like capacity, is just like water down the mountain. It always founds its way. The same thing here. Now raw material prices might go down, but then other costs might go up. As we all know, labor costs are going up. And the energy prices are very difficult to predict. So even if steel is going down now, you cannot select one item in the product calculation. It's the whole picture. And we follow the market, just like we've done now in the past 24 or 30 months. And we will not, of course, would never indicate over conference like this, what we're going to do with the prices, the steel price would fall. I hope you appreciate that.

That's all for me.

Our next question comes from the line of Pam Liu from Morgan Stanley.

I have three questions, please. First, I'd like to understand more about your expectation of a gradually improving group margin from here. So while I appreciate that an improving supply chain and a more sustainable input costs will help, I can also see a number of headwinds from here. For example, first of all, your customers have already seen quite substantial price increase over the last year, surely that they would be more price sensitive now in their discussion with you than before. Second of all, you are investing ambitiously in capacity and workforce growth across all your divisions, so that is cost. And third, in Element, you did say that in most of the industry end market in this division, you are actually seeing demand decline. Could you please help me understand more about the specific plans and actions you have in mind in order to drive the margin growth in this backdrop? My second question is in Climate Solutions for Q3. If I take away the acquired impact, the very positive FX, if I add back the washing machine impact, I think the Q3 organic local currency growth would be around 15% or so, most of which I expect to be pricing. Now Q3 last year was not a particularly strong quarter anyway because you already started to experienced supply challenge. So could you help me understand why Climate Solutions volume growth has been weak in Q3 relative to the very strong demand you see in the market and an improving supply chain. Do you think you might have more some market share in air to water in Europe specifically? And my final question is in Element, you mentioned the declining demand in commercial and auto. So I think it's reasonable to assume -- I also think it's reasonable to assume that your customers who also have built up quite a lot of inventory during the last 12 months. So how should we think about Element's growth and margin into 2023 in light of the demand and customer inventory backdrop, please? And if I could, I think if I'm correct, I think your semiconductor exposure in Element is mostly acquired. So it's probably about 10% to 15% of Element's end market. So surely, it's probably not enough to offset the more cyclical sector. Thank you.

Yes. We would need another hour to answer all those questions. And I understand that you have difficulties believing in our future. And I also read that you're always negative on your report. So I won't be able to change that attitude. And that's fine. You can continue to be negative to us, and I have no intention changing that. And what you read in report, that's exactly what we believe in. And of course, if we have not been able to deliver as we have not been able to deliver in all sectors, that is, of course, possible that some might have taken a few heat pumps or Stoves or Elements out of our hands, but that's not because the customers would have liked that, that's been because of shortages that we're going to compensate for now. And the signals we are getting from us in reports I mean all the 100 questions you've bombarded with us as reason here now, I don't think we have time to answer those. We -- you've read a report and you've heard the answers that we've given to the other analysts, I think that, that has been catering for all your questions. Okay.

Our next question comes from Viktor Trollsten from Danske Bank.

Yes. Thank you, operator. Eric and Hans, greetings from Finland. So you have been rather explicit in your previous answers, but I'm going to try to push you a bit more on your own ability to grow into next year. I mean you have a record order book. You now say that supply is sort of [ using ] your overstock. So I guess from that context, you have an annual growth target of 20%, and I guess you would be able to lift volumes by 20% into next year. Is that how we should think about your current capacity structure?

Well, that's an interesting analysis. I mean I don't think we're going to change our targets. We have been living by the same targets now for some 30 years, at least since we got launched on the stock exchange. And that was realistic to believe that when the market is going in the direction that we see right now, of course, the 10% organic growth would be perhaps on the more cautious side. And again, I mean, we won't give you any more precise organic growth figures. But when the market is growing, of course, as we said all along, when the market is soft, then of course, we have to rely more on acquisitions. And as you see now, the acquisition part has been lesser and then we still grow quite healthy. So we continue to anticipate a strong organic growth for the coming -- or at least what we can see now in the future to come. In 2023, we cannot see that, that year unless another war breaks out or something really crazy that comes on. And we believe that's going to be a healthy market for us.

No, but I think that's clear. And maybe just question one your order book. Just interesting to hear whether you have seen any cancellations. I mean little times are significant. So how steady is your order book? Have you seen any cancellations?

It's always difficult to analyze the order book, but we have not seen that could possibly take place. I mean we wouldn't exclude that. But had we seen that so far, I think that we wouldn't have as bold as we are in our forecast for the future. I'm sure that any plumber or any potential Stove owner would say, "Well, if I can't get it there, I might put an order there" might be that they have placed in order to different places. We can't really control that. But we have not seen that so far.

Okay. No, that's clear. That's all for me.

Our next question comes from Karl Bokvist from ABG Sundal Collier.

Thank you. And perhaps a good day to you both. The -- I have only two questions. The first one is just on, I believe you mentioned Sweden, in particular, but it still seems like the Nordics is growing very, very well for you in Climate Solutions, for example. So just out of interest, do you think that there might be product mix differences that you continue to perform very well in the higher categories or something like that when we just compare it to the publicly available market comments? That would be my first one. So I'll start there.

Once again, I got a little bit disturbed here about another, how we perform compared to...

Yes. Yes, sorry. It just seems that you performed still very well in the Nordics. And if we look at, for example, Sweden, the market is not growing as fast. So I was just a bit interested in hearing if you believe that your maybe some of the more higher priced premium segments or you've been able to deliver quite significantly better this quarter.

Well, I think that the Nordics as being a small country, we have to rely on the Nordics as our home market. That's where we have those 25 million people. That is certainly our home market. And that's where we always have to serve. We have to be very, very obedient. We have to be obedient in any market. But I think all companies have their home turf. And our home turf, that is certainly the Nordics. So we try to do our utmost to serve customers there and to -- I mean we are not perfect by any means. Of course, there have been people waiting for heat pumps and Stoves for a long time. And -- but we count on their loyalty and also the fact that we are coming out with new products very frequently means that we've stirred interest and people are, in most instances, willing to wait for our products. We can say that there aren't any exceptions, of course, there might be an exception to that. But we see that we have a very strong position in our both 4 home markets, Finland, Norway, Sweden and Denmark.

Understood. Maybe difficult to get a quick answer on this one, but I'll try anyway. Could you give us an update on the transition towards more friendly refrigerants and where you feel you are in terms of your own timeline and considering the kind of recent proposals with more stringent gas restrictions and so on?

No. I think that we've been talking about that. That's not a secret where we are being heading. We've been heading towards the natural refrigerant ever since the first science came out, particularly in 2018, but we're given recommendations that we were going towards on the GWP issue down to single digit. And then when we started to work in that direction, then, of course, EU, for some reasons, were sort of convinced by manufacturers outside Europe that they were going to use other refrigerants, that's totally a detriment to the target. And that's been, of course, a debate that with the refrigerants having a GWP factor of 600, 700, 800 would be sufficient. We never believed that. That's why we never altered our direction. That's why we see the products coming out now, and we will be in there with our natural refrigerants. It is now 2025 when we have to fulfill that, and we're going to be there. And you see our models on the market already. We never gave up the natural refrigerant on our, say, [ exhaust ] heat pumps. We've been with there since 1997. It's our 25th anniversary now. So we have very good experiences with that. We found it very, very peculiar that manufactures from outside Europe have convinced your teams to use other refrigerants. It's a very sad story. We embrace the legislation that's coming.

Understood. That's all for me.

Our next question comes from the line of Anders Roslund from Pareto Securities. Your line is open. Can you please take yourself off mute. Okay. And since we are not getting a response. Once again.

Hello?

Anders, can you hear us?

Yes, Okay. Excellent.

Please go ahead with your question.

Yes. I had a question regarding the order book. I assume that the order book increased in the third quarter over the second quarter, and I wonder if the order gap for the last 12 months should be quite substantial looking into '23. And I guess that order gap -- order intake minus sales is part of your sort of bullish view on that you will grow organically, maybe above your target level of 10%.

Yes. Well, we have a good order book, but that's not the reason why we have a bullish outlook. That's why we -- that's -- the reason for that is that we see the true demand to continue to increase.

Okay. Excellent. Thank you.

I think that -- we now have to rush to the next session. So we apologize for cutting it short, but we've been trying to be as open and transparent as possible not at the same time being able to answer all questions.

Yes. Thank you, everyone. Thank you very much.

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.