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Edited Transcript of NIBE B.ST earnings conference call or presentation 16-Aug-19 9:00am GMT

Q2 2019 Nibe Industrier AB Earnings Call

Markaryd Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Nibe Industrier AB earnings conference call or presentation Friday, August 16, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gerteric Lindquist

NIBE Industrier AB (publ) - CEO, MD & Director

* Hans Backman

NIBE Industrier AB (publ) - CFO

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Conference Call Participants

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* Carl Ragnerstam

Nordea Markets, Research Division - Analyst

* Douglas Lindahl

Kepler Cheuvreux, Research Division - Analyst

* Karl Bokvist

ABG Sundal Collier Holding ASA, Research Division - Analyst

* Klara Jonsson

SEB, Research Division - Research Analyst

* Marcela Klang

Handelsbanken Capital Markets AB, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the NIBE first 6 months results presentation. Today, I'm pleased to present Gerteric Lindquist, CEO; and Hans Backman, CFO. Mr. Lindquist and Mr. Backman, please begin.

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [2]

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Thank you. Good morning to all of you out there.

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Hans Backman, NIBE Industrier AB (publ) - CFO [3]

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Hello. Good morning.

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [4]

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And we're going to have the same procedures as we usually have here by me introducing, and then Hans following up. And we believe that we should give this an hour if we are not impolite because we have other matters to look after as well.

And if I start, you've seen the headline and varying demand, and of course -- when we say that, it's very important to also to understand that the sustainability profile we had is gaining a very, very interesting momentum, which we're going to talk about as we go on.

At the same time, of course, on the element side, we are exposed to the industry in general, and there, we have seen some softer segments. And that's why we have also explained that as good as we possibly can. The operating margin is slightly lower. And that's, of course, a reflection of, particularly the Element, it is lesser performance and also the Stoves, whereas Climate Solution, our largest division is really charging ahead in a very promising way.

And during the first 6 months, we have really gathered our forces around how we're now going to approach the SEK 40 billion target in turnover, and how we're really going to use the sustainability wave that we notice all over the world. And that's also what you see in our reports that we have gathered our forces both on the solution Elements and on the Stove side to really make everyone fully aware of our targets for this year, and actually -- but also the target for the SEK 40 billion and that we truly have to live our sustainability and message to the market. It's not something that we just have sort of glued on, it's something that we truly believe in, it's something that we've been preaching for all these years. And we see now an opening in practically all continents, but predominantly naturally here in Europe, where we are active in, also in North America. So the growth has been considerable, stable, of course, a little bit lesser during the second quarter, but the group has expanded with almost 16% during the first 6 months.

And you can also notice that first quarter then had 18.5%. So of course, the second quarter was a little bit lesser in growth, which we possibly can just have a very quick look at when we come there. I don't know, Hans's going to continue to report on the each division. So I don't dwell too much on each of those. But the second quarter, you can see very clearly here, of course, that the growth is around 8%. And now the difference between the currency situation this year and last year, it's a little bit less favorable and also in the first quarter.

So of course, there's always a gain by currency in the second quarter, but to a lesser degree then it was during the first. Then the operating margin, of course, went from 11.8% to 10.8%. We would like to see that, of course, stable. But that's how it is when we are exposed to the different segments as we are.

If you just have a quick look at the graphs that we critically follow, we can see that they are fairly consistent when it comes to following our pattern with the first and second quarter being clearly the weaker ones. And when it comes to turnover, revenue and then of course, the third and fourth are always the strongest one.

The seasonality, we have never gotten rid of that and no matter how we invest and how -- where we are in the world, it seems like the period in the fourth quarter always turn out to be the strongest. And that is, of course, reflecting -- also that's being reflected in our results, where you see that's 3 and 4 always going to represent almost like 60% of the (inaudible) slightly, even more from the U.S.

If we just had a quick look at each division, we can say that, of course, Climate Solution, they are charging ahead as we indicated from the very beginning. And it's very pleasing to see that many countries are now taking that step, allowing renewable energy and climatization naturally that we so much have been talking about. So we've had a decent development or good development in North America and Europe and in the Nordics.

And we've also talked about going into the commercial sector. There, we have now Rhoss on board. And we, of course, have those companies launch in North America, whereas, we're still searching for a stronger presence in the northern part of Europe. And the operating margin, of course, is a reflection of a good growth both on the acquisition side and on the organic side. And also as always, looking after the productivity.

And we can see that those figures in summary, Hans is going to come back to those in more detail, where we've had a growth of almost 20% combined during the first 6 months. And the operating margin is up slightly more or like 22%. So it's very pleasing to see and, of course, that is driving the whole group. But nevertheless, if we jump over to Elements, there we see also that the renewable energy side and sustainability profile is gaining momentum. We talk about wind, we talk about HVAC, where Climate Solution is positioned naturally. But we also see that white goods sector when the economy is a little bit questioning the development, then, of course, we see that there's a softer demand. And also in the semiconductor industry, that's relatively new to us, we've seen a slackening demand. And that's an industry that we have not fully followed so much before, but believe that, that's a more temporary, shall I say, profile because we believe that semiconductors, they're going to start sort of continue to dominate our daily lives as long as we can foresee. So we look at the semiconductor softer market more like a blip.

Also on the transportation side, the railways and there, we've had a weaker demand. And those 2 categories of products are relatively good margin-wise. And that is also of course, one reason why the operating margin is softer. So we are not so worried about that not coming back in that particular -- on those particular segments because semiconductors and transportation that's certainly is coming back.

Automotive, we all understand, I think, as part of consumers that they can -- if we call it uncertainty, how we should react to all the signals? Should we buy electric vehicles? Should it be like hybrids? Should it would be diesel ones? We've also had equipment added to them so they don't emit particles and stuff like that or NOx for that matter. So there, of course, we are spending quite a bit of money working with the automotive industry, not only in the automotive but also in the transportation sector like the heavier vehicles to go electric. And that, of course, has also burdened the result. But that's part of the game. So we will not diminish that by Elements.

Then we've all read about the low-cost countries, as we call them, where the cost increases have been significant. And we are talking about Mexico, we're talking about Czech Republic, we're talking about Poland. And then again, it's a surprise, of course, to most of us, with a magnitude they have been reinforced. But at the same time, that's a signal, I think, to all of us that you cannot outsource, and you have to be present in the market, where you also have a market. And I think that's coinciding fairly well with our philosophy of also being sustainable when it comes to producing, developing products in different markets. But of course, it causes a dilemma in the shorter period before we have compensated all those increases with the modernization and how have you go about it.

So by no means are we satisfied with the outcome? But we are very certain that Element has its very solid position within the group, and the market segments that we see now, they are positive. And when it come back to the sustainability, again, and also on the semiconductor and so forth. So we are not proud of the diminished operating margin, but we are very determined that we're going to counteract and this will continue to be a very important part of the NIBE industries.

Yes, the figures, they speak for themselves. Of course, that we have lost some millions there and the margin is a little bit lower. On the Stove side, relatively flat situation, the first 6 months. And then we -- say that the performance is after all fairly decent if we look at it. And we are spending quite a bit of money naturally on the marketing side, with all the new models coming out. We've seen that in our report. And also the R&D costs are substantial because there are new legislation and new rules coming out. And we are trying to, of course, meet those but also to beat them, to come out a little bit better than the actual requirements.

And in some markets, there've been a little bit of a price competition as well the market is contracting, but that is of a lesser magnitude. We think that the operating margin due to -- to the lesser one due to R&D and the marketing costs, that's what's worth mentioning. So figure-wise, yes, it's plus almost 10%, whereas, the second quarter, of course, it's only up like 6% and Hans is coming back to that.

As far as distribution is concerned, they are about sales, and there we see, again, that the Climate Solution is pretty much holding, its 63% as far as revenue is concerned. And then we have -- it's even more pronounced on the, of course, profitability side, the operating margins line, where it's 70%, which you can see on the next pie chart. I'm quicker than the computer. My wife is not always telling me that. But it seems like today, I believe, veering up.

And then our geographical. My last slide here before Hans is taking over. As we've said so many times, we feel that we have a fairly good distribution of sales with the Nordics now, our home market with our 25 million, 26 million people, representing like 25%. And of course, we don't like to diminish that. But as the rest of Europe and North America and other markets with though, naturally, the Nordics could potentially be of a lesser percentage. I would think right now we have a very solid and robust structure, whereas, by only 10 years ago, the Nordics and Europe was so dominant when you look at this chart.

I think I'll stop for Hans and see whether you are quicker than the computer or whether I going to beat you.

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Hans Backman, NIBE Industrier AB (publ) - CFO [5]

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I love you. Thank you, Eric. So I'll take you through the each division quickly and then also some words on the balance sheet and key numbers.

So starting out and, with Climate Solutions being the biggest area for us. The overall demand, as Eric mentioned, has been very good in most, if not all, segments really where the Nordic has been holding up very nicely. Europe has been good, especially the Netherlands, of course, sticking out following the political decisions made there, and the residential side in the U.S. continuously developing in a very nice fashion.

So all in all, during the first half year, we have grown close to 20%, up from the SEK 6.3 billion to SEK 7.6 billion where the larger portion of the growth, excluding acquisitions, have been through organic growth, even if we are helped by currency, of course. The gross margin has been fairly stable, down slightly, slightly there from 35.1% to 34.8%, but -- which is also reflecting in a way a continued R&D and product development. But of course, we have some units in there also on their path to improving their results. The newly acquired Rhoss was mentioned. And we have some other acquisitions from the last 12 to 18 months, which are still on their path to improving their results. So they're in there.

And all in all, we were able to then increase the operating margin slightly from 11.7% to 11.9%, so more than sales grew, which, of course, is always nice. In the second quarter, it was a similar picture, we grew with 19%, 7% from the acquired units, and then the remainder there some 12% organic, where a slightly lesser portion was the currency did not help us as much as in Q1. So a very good organic growth, being able to land an operating margin there on 13%. So the result itself was more than SEK 0.5 billion.

In terms of sales per geography, and also following the nice development in Europe, the portion from Europe at 42% has actually increased some units from the corresponding period last year, which is nice to see. We would like to have the balance between all of the areas, of course, where we have been traditionally very, very strong and still are, of course, in the Nordics, but we are aiming at a balance throughout the world. So having European market to grow more is very nice to see. And there's a huge potential in many of them. And just small [Holland] anyway. And as -- you see what can happen when a country takes decisions in favor of renewable energy.

Coming now to Element, which is, perhaps, the theme of the day. But at the same time, I mean the world is going electric. And there is a huge potential here and of course, as Eric has mentioned already, there has been a softening in demand, specifically then in the semiconductor, whites good and partly the transportation with rail and the automotive. There, automotive is at crossroads, and where rail certainly will come back. If you just look at the Nordic region and Sweden specifically, it's hard to find a train today because they're all fully booked. And when you take one, you're not sure if you're going to get there on time.

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [6]

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But then there are so many fires. No, I can drive a train but then I'll have a choice.

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Hans Backman, NIBE Industrier AB (publ) - CFO [7]

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People were recommended this morning to take a car as an alternative, which is quite interesting to hear on the radio. Anyway, some other areas have been quite good in the Element business area. And it's the ones -- also that Eric mentioned, I mean the ones related to renewable energy, HVAC, wind. So it's -- there's a difference between the individual segments.

All in all, during the first half year, we have grown with some 9%, where 3.1% was acquired, and the remaining part then was organic where the majority of that was currency. But nevertheless, we came up from SEK 3.1 billion to SEK 3.4 billion. And the result, unfortunately, then was hit and came in lower. We had the last portion, last year of some one-off effects, which made that result additionally build you can say. So 9.3% is still a decent, but as Eric said, of course, we are not pleased. And we were always striving to become better. The effect is, of course, from a changed product mix following the shift in demand, the cost inflation in the low-cost countries but also a continued costs -- well, continued R&D development and product development, where there are a lot of interesting products being developed for the future.

The second quarter was a bit tougher. We grew by 4%, but it was -- when you take away the acquired part, it was mostly currency that helped us up there. Then also to some extent, the (inaudible) Sunday has an effect sometimes. The working days can have an influence there, but we're not trying to blame it on anything. There was a weaker demand in the individual quarter as such.

In terms of the split the geography, the sales split there is very similar to before. And it reflects the split that we want to have with a good spread months, different geographies. Having said that, at the same time, this is our most global business area. And, of course, when there are trade barriers or trade discussions and things like that, it has an effect as well.

Last, but not least, Stoves. I mean it is actually, I would say, a quite decent performance in a relatively flat market. But there's really not an area of sticking out has been very good or very bad, it's just stable. Electric stoves is actually good. But it's still fairly small. But with a very nice potential in there. And to our experience, it's a fragmented market, and it's equally much up to a good management to make money in that business, where our company is making very nice profits, mainly hovering around the lower level.

I think we're landing a decent result here at an operating margin of 5.9%. I mean it is down from the 6.9% last year, which is an effect slightly of the market moving sideways, but where we also spend a considerable amount on product development, R&D and marketing. And during the first half year, we did have an organic growth in there, helped by currency but the true one was also there.

And in the second quarter, it was basically standing still, you can say. There was a positive currency effect, some effect from the earlier-acquired agreements and an operating result and that's seemingly landed low by the 2.9% operating margin down from 5%. But really, we're talking about SEK 8 million or some EUR 750,000. So it's not a lot of money. And the experience also shows that everything actually happens in the second half in this business area. It's not so long ago, actually, that we were hovering around the 0 mark for the first half year.

In terms of geographical split, it's virtually the same as before, about 20% Nordics, a little less than half in Europe and then North America, the remaining part.

And just a few quick words on the balance sheet. I mean I've introduced during this year on which we presented in Q1, we have the IFRS 16 shift in there, which has made our tangible assets grow by some SEK 800 million. And on the liability side, it's, of course, the long- and short-term liabilities as a corresponding item in there.

We have a large portion of cash right now, SEK 3.6 billion, that is, of course, generated from the day-to-day operations. But it's also partly containing the amounts that we have received from the part acquisition of Schulthess. And also as you might have followed, we issued some bonds in the -- before the summer. And in that, there were request and the demand for the bonds was quite high. So we actually went for a slightly higher amount than we needed because we couldn't persist for good terms firstly.

In terms of cash flow, just a quick quarter math. We've generated some SEK 1.6 billion, up from SEK 1.2 billion. There is a portion of IFRS in there as well around SEK 150 million but still a much better cash flow than last year. And more favorable change in working capital as well because the working capital has come down a couple of percentage units. So that is generating more cash. We'll continue to invest in our operations. You see the number there, maybe of SEK 619 million up from SEK 358 million. And of course, there are a lot of interesting projects and expansion plans going on within the group, which requires cash. At the same time, we -- our estimate is that we will be approximately on the same level as our depreciation, which at an average is around 3.5%.

Some words on the key figures. Net debt to EBITDA is at 2, also following the IFRS effects. Without that, it would have been slightly below, so I think we're very well positioned for the cash with the net debt ratio, we're very well positioned for further acquisitions. And even if we've only acquired one company this year so far, I can assure you that we are, as always, looking at many acquisitions all the time, that's part of the DNA set-up to have such discussions.

Working capital. I don't need to comment on that again. Here, you see the portion coming down from 22.7% to 20.5%.

Last page here, return on capital slightly up 0.5 percentage units, return on equity as well. Of course, that is the key number, maybe that is farthest away from our target, which is a result of the right submission we did some years ago with cash we generated. And -- so we definitely need to get to that money and working on those projects. And an increased net profit per share of some 10% -- 11%. So I think all in all, very stable and solid set of numbers, even if we always want to -- we grew, of course.

And by that, I'm ready for questions. And I guess you are as well, Eric?

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [8]

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Well, I'm Happy, Hans. We're all are geared up.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Carl Ragnerstam from Nordea.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [2]

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It's Carl here from Nordea. I have a few questions. First, looking at the Elements. What do you see there in terms of demand from the semi and auto industry for H2?

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [3]

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Well, I mean that's -- I shouldn't say it's a good question, it's impossible question to answer. I think that the automotive industry is struggling with that question themselves. Of course, from our side, the electric vehicle's, of course, going to equipped with much more equipment from our side. But I think customers are hesitating buying a car at the moment. What kind of a car should we buy? So I think that our situation is a reflection of the automotive industry, in general. But what we have seen on the R&D side, let's say, shouldn't use too strong words, but a very strong demand for solutions when vehicles are getting different from what they have been using petrol or diesel. We are definitely going into hybrids and electrical vehicles, not only on the passenger car side, but also on the mining equipment, on the heavy-duty equipment side. We see that as a positive development but can't guarantee anything for H2.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [4]

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Okay. And also you talk about, similar to Q1, investments in automation in order to mitigate the salary inflation. What time line should we expect there in order to implement that? And also did you still plan to move manufacturing footprint, I mean from -- made from Mexico and China into other low-cost countries?

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [5]

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I think we are well positioned. Well, Hans, you can perfectly answer the questions. You can, but we're staying now in Mexico. Of course, it's a tremendous increase. And -- but we have a very loyal workforce. We have no intention of moving production from where we are. But I -- we have a very extensive robotization program going in Mexico, where we substitute, of course, manual labor with robots, the smaller ones, not like the heavy-duty, like KUKA or the ABB, but the smaller ones that it's so easily programmed that can be catered for by the operator or by the operators rather than having a workforce of engineers during the programming.

So it's always going to take time. We can't promise you, say, now we're going to take a quarter or 2. But I think that you should remember all of the -- you should remember that, that when we tried to change a company from a lower or lesser EBIT line, we typically give an 18 to 24 months and then we talk about changing the whole company. Here, we talk about, of course, matching labor cost increases. So that has to be during a shorter period if I'm not getting too much hide and seek.

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Hans Backman, NIBE Industrier AB (publ) - CFO [6]

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And I also think we're well positioned in the manufacturing space in the sense that newly acquired companies or where we have invested lately, we have also set up manufacturing units in other low-cost countries. That's what we want to call them, like Malaysia, Thailand, Serbia, Vietnam for that matter. So we are spread in many countries.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [7]

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Okay. And the automation -- sorry.

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [8]

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No. I was just -- perhaps, we are too politically correct when we're going to say, we're going to say now, but I sort of indicated that, sustainability, if you really believe in that, that's also treating people in a fair fashion. I think those days are gone when we could have -- I shouldn't use such strong word, perhaps, but we could have people underpay people.

Everyone has to live. And I think that's -- by that, you also gain quality. You gain loyalty. So you have to consider also there's not only a negative factor and it might sound strange when I say that. And the meaning of sustainability is to treat people decently, but get them to work hard and when -- if it gets too expensive, of course, we have to robotize.

But that's also making it more interesting for the operator that he or she could have like 2 comrades being mechanical friends rather than a human being. So I think it's a natural trend. But of course, we would have welcomed them not in 100% but rather in perhaps 10% or 15% stages. So it's coming -- it's been coming quicker than we would have liked to.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [9]

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Okay. Perfect. So the automation initiative will be on a global basis, not just in Mexico, do you think Europe as well? And...

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [10]

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Absolutely. All over.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [11]

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Perfect. Final one for me. In terms of the F-Gas regulation. What -- I mean what portion of your product portfolio is now converted?

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [12]

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Well, that was a question. I think that when it comes to 2021, I think that practically the whole European assortment is going to be converted. Whereas in North America, they don't have those demands. So there, of course, we are talking about now utilizing the European experiences and also changing only to those intermediate refrigerants like 454 and all the other ones and even the 32, and eventually aiming for propane or the 290, as I call it in chemical terms. So I think when the next slot arrives, when 3 years have been -- have passed, then I believe, without giving you a guarantee, we should pretty much be out of those 410 and -- yes, maybe, 407 heavy-duty refrigerants.

In some instance, it's going directly for propane; in some instance, it's going with an intermediate solution of that GWP index running around 500 rather than the 2,000 that is so prominent now, eventually hitting for the 0 -- not for the 0 but for the 1 to 4.

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Operator [13]

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The next question comes from the line of Douglas Lindahl from Kepler Cheuvreux.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [14]

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Three questions from my side. I hope it's okay if I take them one by one. First of all...

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Hans Backman, NIBE Industrier AB (publ) - CFO [15]

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Thank you. That's very good. No, you don't trust our members out here.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [16]

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No, it's a somewhat long question. So I'll prefer taking them one by one. So -- and looking at...

First of all, looking at the Climate Solutions for margin development, we continue to see somewhat low operational leverage here while you obviously are operating at high underlying organic growth. So I'm just trying to understand the better sort of margins being up year-over-year. Is this mainly investments weighing on profitability? Or is it something else you want to highlight on the Climate Solutions business?

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [17]

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Well, did we get the question? Why the margin is not higher than it is? Or...

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [18]

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Exactly. You're growing quite substantially year-over-year, organically. And you do not really see the operational leverage feeding through in terms of earnings coming up, really.

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [19]

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Right. So I think that what you see is, of course, a reflection of companies that have come on board that do not have the profitability and that the business unit has going to be (inaudible) start. And there's a conflict, of course, between growth and profitabilities to a point, and that's why we have said that had we abandoned, of course, the acquisition, and particularly acquisitions with a lower margin, we could gain quite a bit of momentum only riding out the wave of sustainability.

But we like to build a company that is more robust. We like to enter the commercial segment. Of course, and Rhoss coming on board is an example. They came on board with a relatively weak margin and, naturally, we have to compensate that by those companies being on board since many years, by improving their profitability and margin when they grow. But at the same time, we're going to take like 18 to 24 months, as already mentioned. So by having those aggressive targets, you may call them -- or -- yes, you can call them aggressive targets are growing, we cannot grow organically, it's kind of the strategy and cumbersome sometimes to grow 10% without some favor on the currency side.

So that's the -- I shouldn't say conflict, but that's pretty much the mix we arrived at. When you hit a good organic growth or the company is already in the group, and then you add new companies with a lesser margin, you pretty much land at the same level. And you saw that when NIBE brought Climate Control Group on board, I think we landed on some 13.3% or 13.2%, if I recall it correctly.

And now we're taking up to 13 points on a running basis, 8 or 9, whatever it is. Because at that time, we brought those InnoTec and the other ones on board, and they, of course, are coming up to 11% now, or they are much, much better.

And now we have a new company on board like Rhoss, for instance. And I don't think you can see a situation where we, all of a sudden, would arrive at 17%, 18% with the growth target that we have.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [20]

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Okay. Yes, that's very clear. So following on, on your acquisition. You mentioned it yourself that -- so far this year, we haven't seen any acquisitions. So what's the reason for this? It's valuation holding it back? Or are that lack of target companies in general? Or...

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [21]

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We wanted to have a question like that during this session. And, of course, I mean as Hans was saying, we constantly have, I'd say, 10 to 12 negotiations or discussions going on. And sometimes, you come to a signing at almost in -- during the same quarter, 3 or 4, and sometimes they are just dragging on for various reasons. I think you should know is well enough and all of you out there that if we would slow down in acquisitions, we would tell the market that -- we will tell you. There's no hide-and-seek approach. You might think that we are little bit cheated through the certain things, and there's no to hide information from yourself. But we are very exposed also to our customers. Just Hans mentioning now that it's -- we're deferring in Holland, and in Norway, for example, typically within 4 months, we've got almost like Rhoss, so been around (inaudible) international juice, and everyone is going to be there. So that's why we want to, perhaps, less transparent. But when it comes to acquisitions, would we have a desire to slow down, we would mention that in report. So there's no intention whatsoever. I think you should look rather at something Hans mentioned during his session here that our ability to acquire is very, very good, and it's very strong. So I mean we are -- why do we invest to have those bonds, but they're not to sit there just to generate interest. They are there because we see there are so many interesting companies. But I should correctly say, we don't necessarily like to overpay. And we also like to do our homework very thoroughly. We've always done that. And we don't like to run into situation where we have a fairly robust, strong company, and now we start to be less meticulous when it comes to do when you're pairing out the due diligence that's always going to be -- it's a very, very important to it, as it was years ago when we were a smaller company.

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Hans Backman, NIBE Industrier AB (publ) - CFO [22]

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So that was a long answer to your question.

This has not changed, and 2015, I think it was now, we didn't acquire too many companies either. And then all of a sudden many came in the year after.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [23]

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Yes, obviously -- your balance sheet obviously sort of indicates of this, that the pace could've potentially been higher. So also -- but multiples, from what I understand is, it seem to be somewhat deteriorated right now you're at. And -- so my last question is, I remember in Q2 of last year, we talked about that you're building inventories. You built up stocks of finished goods because you expected a busy second half of the year, and this was something you learned back in 2017 when you were not able to deliver on the very busy 2017. I guess you remember this. So that's why, in this report, when you don't comment inventory levels, I'd just be curious to know what this sort of indicate for H2 this year? Because now we're seeing that inventory levels in relations to sales in this Q2 is down compared to Q2 last year. So I guess your Element market outlook is -- we've discussed that, but I'd be more curious to see what the impact this would have on the Climate Solution business?

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [24]

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Well, I think that we always build up inventory, and perhaps we should have mentioned that. But when it comes to a sort of a situation where you do it all the time and the investment speak out as much for this full year, we have forgotten, perhaps. But it's the same procedure, we -- during the first 6 months, we have excessively distribute the demand for the coming 7, and a little bit better. Because you always know that the second quarter -- the second half of the year is going to be much stronger. We also have developed perhaps a little bit more sophisticated system to meet production demands. And we hope now that we have not overvalued that. We hope that we have a workforce that is more flexible that could kick in fairly quickly, if demand would get bigger than or greater than we have anticipated. So they come in through stage, there is more business as usual. And we also have improved our way of running larger volumes.

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Hans Backman, NIBE Industrier AB (publ) - CFO [25]

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I think we were a bit surprised by the demand in 2017. So that's -- and where we couldn't really meet the demand. So that's why we've been (inaudible) in '18. And now it's more stabilized. As Eric said, it's more business as usual and with some better tools.

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [26]

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Doug, it's just one very quick comment there on your conclusion regarding the acquisitions. I think your takeaway from that was that the multiples are high and that's why we're not acquiring. I wouldn't say that is the case at all. We always do our homework in terms of both due diligence, valuation, strategic fit, whatever. So that hasn't really changed. And from an investment point of view, I mean we could retain very high multiples and the companies we acquired would still be accretive to us. But we have our own philosophy in how we bring companies on board. So we call it a discussion.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [27]

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Okay. And just a follow up on that. You're mentioning that this is more sophisticated system in order to meet demand. Is that something that's been rolled out down in recent time? Or is it -- has it been ongoing for several quarters or years, so to say?

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [28]

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Well, Doug, I mean we have -- given our suppliers -- just to give an example, our suppliers are more geared up when it comes to giving us good deliveries with shorter notice rather than storing the ready-made products in our own warehouses. And the reason is, of course, that if we get that assistance from those, it's a lesser capital tied up. But is also the difficulty forecasting for the marketing and sales side, which are the categories of products to be sold or they're like air-to-water or a geothermal exhaust there, and so forth, which capacity is in like 4KW, 8, 12. So we try to tie up money at a little bit earlier stage, and then once you see the demand, when the components are there, we tried then to build the products up to a finish stage.

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Operator [29]

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The next question comes from the line of Klara Jonsson from SEB.

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Klara Jonsson, SEB, Research Division - Research Analyst [30]

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So my first question is about the U.S. and Climate Solutions. Could you say anything about how your sales have progressed in Q2 versus Q1? Did you see any change in demand?

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [31]

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No. I think it's pretty much charging on. Q1 was good and Q2 was good.

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Hans Backman, NIBE Industrier AB (publ) - CFO [32]

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Yes.

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Klara Jonsson, SEB, Research Division - Research Analyst [33]

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That's sounds good. For the Climate Solutions segment as a whole, do you have any big launch of new models coming up ahead?

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [34]

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Yes. Well, we have now the -- we launched, of course, at the shows. And they are now being delivered here. We had some slight delay. But they are now being -- when we come into the first week of September, then they will start to deliver those fully fledged. But we have not taken such a dramatic decision that we yesterday discontinue the previous assortment. So they're going to be parallel with the new assortment for some time. Because if a rather sophisticated assortment is coming out that now connected via through the cloud and that's pretty sophisticated also for the installers, we'd like that to mature.

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Klara Jonsson, SEB, Research Division - Research Analyst [35]

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Yes. And also does this mean that you had any extra production set-up costs or anything that impacted profitability in Q2, maybe?

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [36]

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Well, of course, I mean when you start up a new -- produce a new model, as always costs are there. But in this particular case, in all fairness, it's not a change that is so dramatic. Of course, there are facelifts. I mean if you come here, you can see that several shells of new machinery. But we believe that the major change to the customer, to the end user is after all the control and a possibility to be linked to the cloud and all those possibilities. But of course, it's always expensive to launch a product, I mean production setup, marketing activities around it and all that. But comparing it to when we launched Generation-2010, it nearly changed everything. It's a little bit less than 2010 and '11, that they had major in production as well. And also when we introduced the air-to-water 2016.

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Klara Jonsson, SEB, Research Division - Research Analyst [37]

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All right. But maybe since you're launching this in Q2, then we could maybe hope for some good sales development for the new models then?

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [38]

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Well, that's why we hope naturally. I mean we're all geared up. We had a Board meeting here yesterday, and everybody is aware that this new generation, it's a major, major step. That's the first time you can say that we have taken this step. And now heat pump, we can say, is now possible with artificial intelligence whether you call it. And I -- perhaps I'm not the right guy to talk about this. But being quicker than computer I guess, I know how it works anyway. And now we are very positive, I must say, or we must say about the potential here. Because...

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Klara Jonsson, SEB, Research Division - Research Analyst [39]

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Yes. Are you launching it in -- sorry for interrupting. But are you launching it just in the Nordics or is it abroad in Europe and U.S. as well?

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [40]

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All in -- all the German-speaking countries and Sweden.

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Klara Jonsson, SEB, Research Division - Research Analyst [41]

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All right. You also talked about -- you're running quite large-scale campaigns in the U.S. now to raise awareness among consumers. I guess maybe this has based on profitability slightly. Are you going to run these campaigns for the coming year? Or is this something temporarily for this quarter and the next?

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Hans Backman, NIBE Industrier AB (publ) - CFO [42]

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No. We're going to continue to run that. We think it's very important that we try to -- because it's fairly positive environment now, good environment. And we feel it's fair to try to educate the market, watch the heat pump, watch geothermal with air-to-water. How can you save? How is the sustainability thinking behind that? So we're going to spend -- we're going to continue to spend quite a bit of money on that, not to just squeeze the lemon everything out of it and then stand there. Okay, well. People really understand.

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Klara Jonsson, SEB, Research Division - Research Analyst [43]

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Yes. I guess that's -- okay. So I have some questions on Element. I know we already spoke a bit about that. But just to understand, I'm trying to understand how much volumes were actually down in Q2? Because if I'm correct in my calculations, you mentioned that, excluding acquisitions, sales were basically flat year-on-year in Q2 and then FX should have been some 5% growth. So is it a fair assumption to assume that volumes were down some 5%?

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [44]

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Well, perhaps a little bit less, but it's a contraction. That's correct.

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Klara Jonsson, SEB, Research Division - Research Analyst [45]

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Yes. And can you say anything about how Q3 have started, maybe it's difficult so far?

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [46]

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Okay. Yes, we'll better have to be too quick to answer that question. Well, I mean we are very cautious when it comes to those comments and not to guide in an unfair, but we understand your question, of course, Klara, but they of course -- sometimes, we have to be very polite and we say, no.

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Klara Jonsson, SEB, Research Division - Research Analyst [47]

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Yes. Of course. I understand. Then I just have one more question, if I may. It's about the increased investments in automation and productivity that you talk of before. Can you say anything about the magnitude of those investments? And are we seeing there increased investments in the numbers already? Or will they increase more ahead?

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [48]

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Well, I think that what you've seen, if you go back some quarters, we were fairly steadily under the depreciation rate. Now we indicate that we're going to be more in line with depreciation. And I guess that will not be like one quarter. We believe that, that's something that we pretty much going to remain at. Of course, automation is one thing, but we also see that in some factories, where we have to expand. So it's not only automation, but we also have to go for fewer footage or square meters. Like in Markaryd, we are continuously growing. So we are trying to renovate all the factories that we acquiring. We try to add on our logistics center. We are building a new factory in Poland on the Climate Solutions side. So -- and of course, also on the Element side. I don't think that you should look at it now, it's absolutely something, I think that we should -- I mean sometimes you're hit by a softer market. I don't think that this is the end of the world. We feel very positive about seeing how the development where we are. And of course, we are also you can call it, racehorses. Of course, you always like to win, every quarter, every month, every week, you would like to win. But we are not so (inaudible) that we can't a quarter that's a little bit softer, of course. And then we have nothing to hide. I know. Just bear with us, young lady.

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Klara Jonsson, SEB, Research Division - Research Analyst [49]

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I'm here. You still have a quite a good profit growth. It's not really a lifting quarter anyway.

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Operator [50]

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The next question comes from the line of Marcela Klang from Handelsbanken.

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Marcela Klang, Handelsbanken Capital Markets AB, Research Division - Analyst [51]

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You promised us 1 hour, so I'll try to be quick. One short-term question, and one more long term. When it comes to Element, we already touched upon it, but what approximately is your visibility in terms of weeks? Or do you have visibility for months when it comes to Element division?

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [52]

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Well, I think that we have -- you know how it is. I mean the customers, they put in all of this. So we have a very good picture of how the demand is the coming 6 to 12 months. But having said that, then, of course, they have the possibility to changing within a few weeks depending on factory. So they are -- if demand is getting softer, it might look good in October, but if our customer has not sold what he or she or the company had desired, then of course they change the forecast. They cannot do that within 2 weeks, but that depends on how you setup each individual factory. So in theory, we have a fairly good visibility. But then it depends on how the industry or the economy is developing. And that's -- it's a very difficult situation because whether -- it's a rollercoaster in a way. So when somebody is coming out with good indications, okay, now we should put on the accelerator. And then when it's a bit tougher, I don't know, all puts on the brake. It's almost like sitting in a stove in Germany. All of a sudden, everybody is driving at 110, and then down to 0. So -- and we try to be as good as possible in -- under those circumstances. Of course, we know that if it, all of a sudden, comes to a little bit of a lesser demand, we know that demand is not going to totally evaporate. And we're there to perhaps produce a little bit. During -- so not to just use your people as an elastic but be decent also there. There's a long answer to your question, but the visibility, in theory, it's fairly good, but no customer is taking products if their demand isn't solid.

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Marcela Klang, Handelsbanken Capital Markets AB, Research Division - Analyst [53]

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Yes. I understand. And the second question related to M&A. I guess ventilation is a big area of interest for you. And generally, there is lower profitability within ventilation. Is this an issue for you? Is it more difficult to find quality ventilation companies?

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [54]

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Well, I think there has been also -- that takes a -- takes two to tango, as Marlon Brando said. And I think that's exactly what it does. And of course, some companies in this industry, they had some tougher times and we think they're a little bit hesitance to enter there. And some companies are making really good money in there, and they like to continue on their own. So it's a match there. But of course, we would like to enter the ventilation markets on depreciation for larger buildings. And we see that some companies are really profitable, and some companies are not so profitable. And I'm sure you could find companies without a profile, and we would have been saying, companies in our industry, they have been saying profile. Because we wouldn't like to come into a company with an extremely low profitability less and you running around 0 because we know that it takes quite a long time to monitor that. We rather have to work with companies that are preferably about -- definitely about high, and then we try to monitor them with our way of doing business, our way of thinking production and so forth and combining it with what I already got. So I understand a little bit frustrated that we haven't bought in a gigantic company. But we are very, very, meticulous. And we have not, by all, abandoned our target than what we have here. So you can rest assure that you're going to see press release that NIBE has finally done something here. It could also be some smaller -- or not smaller, some midsized company that it combined if that wouldn't be possible to acquire a larger business.

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Operator [55]

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The last question comes from the line of Karl Bokvist from ABG Sundal Collier.

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [56]

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I also know that you are a bit stretched from time, but I'll try to be very brief. I just wanted to follow up on Carl's comment on new products. When you launch a new product, do you expect that you can get better price or with better margins on those products? So this is sort of a necessity to continue to release new products into market.

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [57]

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Yes. Of course, that's a good question. I think everyone desires to slightly improve the margin on the new products. So that's support the aim or I don't know whether we can sit here and promise that now we're going to improve our margin. I think that's -- it's very important that you don't launch a product that diminishes your margin. And that's we are -- so of course, when it comes to quality and performance, that if we don't launch anything, they will tarnish by any means our reputation in the market. And I think that we rather would like to see larger volumes and perhaps, increasing the margin additionally because it's also important that we now come out with products that we can sell on a broad scale in Europe, that are not too expensive. So there's also very easy to enhance volume. But the first question, of course, and the pre-calculation, but we always try to be a little bit better than the previous model. But having said that, we also know how it is. I mean it's -- in theory, it's better. But at the same time, a model or a series that we've been producing for 3 or 4 years, you have fine-tuned that model into something that is pretty good. A new model coming out is not necessarily fine-tuned in all details to the point where the previous model is.

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [58]

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Correct. That's perfect. And then my final one here will be super quick really, just has to do with some finances, they're for Hans. So just in terms of noncontrolling interest now going forward. If I have to see it in the quarter then I guess, one should expect that will you see some SEK 10 million or SEK 20 million of noncontrolling interest from Q3 and onwards?

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Hans Backman, NIBE Industrier AB (publ) - CFO [59]

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You mean in terms of...

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [60]

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Overall the interest. Yes, exactly -- or...

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Hans Backman, NIBE Industrier AB (publ) - CFO [61]

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Yes. That's right.

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [62]

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Yes. Okay. And the net financial expense, should we expect it to remain at these levels approximately?

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Hans Backman, NIBE Industrier AB (publ) - CFO [63]

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Well, the thing there is that we have some IFRS effects in that number or we do have, which is like by SEK 5 million, SEK 6 million. And then -- yes, the other effect that has come in, there is -- when we issued bonds, we typically go for the variable interest rates, so to speak, where someone may just want to have them in the fixed. So we make a swap there, and they're of course, revalued as we move along. So that's the reason for the tick-up right now because the Swedish interest rates are now rather around 0, around 9.5 percentage, so slightly higher, but no real big movements. And I mean the whole world seems to be lowering their interest rates again.

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Gerteric Lindquist, NIBE Industrier AB (publ) - CEO, MD & Director [64]

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Thank you for all your questions. It's always intriguing and interesting to listen to your questions. And we really hope that you're going to follow us with the greatest interest. And here, you have a number of fighters (inaudible). And we can guarantee you that we're going to produce several press releases, so you won't be disappointed about (inaudible). All right. Thank you.

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Hans Backman, NIBE Industrier AB (publ) - CFO [65]

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Thank you so much. Thank you.

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Operator [66]

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