Earnings Transcript for NIBE-B.ST - Q3 Fiscal Year 2023

Operator: Ladies and gentlemen, welcome to the NIBE Q3 Report. At our customers' request, this conference will be recorded. As a reminder, all participants will be in a listen only mode. After the presentation, there will be an opportunity to ask questions via the phone lines. May I now hand you over to Eric Lindquist, CEO. Please go ahead.

Eric Lindquist: Thank you. Good morning, everyone out there. And of course, next to me here is Mr. Backman, the CFO, as always. So, we're going to guide you through the report and Markaryd, of course, the sun is always shining here. So, it’s a gorgeous day. I hope you are sharing that kind of weather in the rest part of the world. Very quickly, we're going to go through the figures and some comments. And at the end, we thought it would be appropriate also to show some of the investments that we talked so highly about, just picture-wise in a few comments. So, under the headline is already presented with your continued good sales and earnings performance as we judge it. We know that there are not everyone would possibly suggested that were the same. So good, but that's how it is. Demand has been fairly good, but varying during the period and very pleasing is, of course, that delivery performance is back on track. There's been a long haul for all of us in this industry and I think in most indices and really in reality, And of course, the obstacle here is higher interest rates and we all know the reasons behind those, but that naturally has a slowing effect. And on top of that, we have some political, if we call it, indecisiveness where they don't really fulfill their promises when it comes to motivating people to continue to invest in a sustainable way. And investments, of course, very ambitious, and we're going to come back to those at least presenting them to you picture-wise. We've also been able to acquire four companies during the first nine months, which is more an indication that we are back on track after the pandemic. Just to give you a quick look at the overall figures. Of course, the -- we typically talk about the whole period because that's how we forecast, we forecast for the year. We know that every quarter is important, but that's not how you build an industry successfully. You don't build an industry one or four quarters. In our case, it's taken us 70 years -- more than 70 years here in Markaryd. We have companies on board that have been in existence for more than 100 years. And I would say that's a formidable team that we have gathered during those years, and we are so proud to present the growth and also a gross margin that is better than the previous period and also an operating margin that is fairly substantial, at least in our world. You see some remarks there because last year -- last period in 2022, we had some income, some divestments that took us a little bit offside when it comes to figures to be compared. If we just look at the quarter itself, we've had a growth of a little bit slower than the previous period, some 15%; but the gross margin, which is a good thing, of course, that's kept up; and the operating margin is also better than the previous period last year. And if we then dive into the diagram that we always look at, we can see that we continue to grow. And the Q3 is a little bit of a difference -- you can say a different will be slightly higher than the previous quarter. That's an indication that the interest rate hikes particularly have taken their toll, but nevertheless, it's a continuous growth and almost approaching the SEK48 billion, as you see there. Also on the operating profit side and profit after financial items, it's a healthy development, but we also see, of course, that the interest rates are hitting us a little bit more now and the interest rates are tripled from whatever like only beginning of the year and particularly during the whole 2022. But that's something we just had to sustain. We have delivered that. We have to counter all sorts of challenges, so that's just a chart showing where we are and how we manage the different circumstances in the market. The distribution of sales there, the Climate Solution is having a slightly higher piece than normal because of its development element, the usual 25 stores just under nine. And of course, the operating profit is even more pronounced in favorable climate solution where we're almost approaching 80%, whereas the other two represent like 20%, a little bit better together. And distribution of sales, we noticed that North America is pretty prosperous at the moment, particularly for Climate Solution and also for Element in some instances, but particularly for Climate Solutions. And if you just go into the Climate Solution itself, we comment, of course, in summary that we've had a good growth and productivity has increased because now we receive material on a normal level. And that means that our customers will also get products more orderly. But at the same time, there is a common market development in many countries, and we've described that. It's been an over-delivery performance perhaps during some months, and we all know that. And the interest rates, of course, they hit the market, particularly in the housing, but we can continue, of course, to invest because we believe so strongly in the future for heat pumps, and we're going to come back to that in a few minutes here. And we have also launched a number of very attractive products during the nine months here, particularly on the natural refrigerant side, but also on the performance side, which we have mentioned before, where our water-to-water ground source heat pumps are now exceeding clearly a seasonal COP of 6, which means that we are step-by-step approaching our target of being close to the LED lab. We don't expect any over prices as we said before, but we think they're going to be very, very difficult for politicians or for customers to deny the product range with that efficiency, if we now believe in solving the climate issues that we are -- that are so apparent and becoming more and more apparent. So, those are mainly the reason to the better volume and also the increased productivity. Of course, the productivity has been hacking -- that's a wrong word anymore, I guess, but it's been stumbling when we haven't had the deliveries from our suppliers, but that's much better now. And just looking at the quarter itself, of course -- I'm sorry, Climate Solution, I skipped one picture. The business area itself, yes, 18.5% operating margin is in our books, pretty strong, and that is, of course, a reflection of the gross margin being on a healthy level. And jumping into stoves, we see that it's a switch here. That's why we talk about varying demands and wood burning, that is really strong here in Europe, but softer for gas-fired products and pellet stoves. Pellet stoves is, of course, more a Mediterranean phenomena. There's been a shortage of pellet stoves when they are available, they are very, very expensive and gas-fired products, that's more in Britain, their gas prices have been a hindrance sort of growth there. In North America, it's more back to the demand before the pandemic, but also there that it's softer, particularly on the gas-fired side. We continue to invest and we also give you a little bit of a hint when it comes to the new programs coming about. Already this year, we have, of course, launched a product range now more on the electronically control side and also when you can control it with your smartphone. And next year, we believe that we're going to launch now the solution for the lower particle emission one. So, everyone buying a stove could be more secure that you don't harm the environment. The operating margin has taken -- yes, it's taken a hit due to particularly the variation in demand and we've had to sort of modify our staffing dependent on that market situation. On the Element side, we see that as also very, very bearing. Perhaps I jumped a little bit too quickly from stoves, but the margin, as you saw, was down from SEK12 million to SEK10.5 million and of course, although we are very equipped to react, it takes some months before you are back on the same operating margin track again. On the Element side, of course, it's been very varying with the consumer goods, taking a hit, many quarters back and also the semiconductor industry, but there's more due to trade restrictions, whereas the sustainability side has prevailed pretty good so far. We also invest quite heavily. And that's typically when you talk about -- or when we talk about the world going electrical like the automotive industry or the truck industry going for totally different solutions. And that's why we have to broaden our presence footage-wise in a number of factories. Lower operating margin, and that's, of course, due to the variations in the demand, product mix wise, and we try to adapt as quickly as possible, but it takes its toll also here where you will go down or below 10%, which is very pleasing. But we do that in a very firm way. We do not stall any R&D costs. We just continue. We continue our investments because we are so convinced that we are on the right track. And Elements, otherwise yes, I think that's -- Hans' going to come back perhaps to more detailed figures when it comes to gross margin and stuff like that. So, I think that perhaps I'm just about ready there. And then after Hans' comments, I think that we're going to go quickly through -- go to quickly the investments. And since [Indiscernible] has been spending like 12 minutes, depending on how many minutes you're going to spend Hans, and the presentation of investments, I think we're going to allow you to put questions until noon or slightly longer depending on whoever's here because we also have two other sessions here before 1 o'clock. So, thank you for listening. Hans, I hand over the rabbit to you here.

Hans Backman: All right. Thank you, Eric. Yes. I'll try to be quick, although we will do some deep dive, so to speak, into some of the numbers. If we come back here to Climate Solutions then, I mean, as Eric said, we've overall had a very strong growth for the first nine months, where sales have increased by some SEK5.4 billion or close to 30%. And out of this growth, the majority has been driven by a very good demand for our sustainable products in Europe, but also in North America, which has picked up nicely. And of course, the growth was then topped off a little bit by a portion of both price and currency in there. And as a matter of fact, the growth has actually been slightly better because we have this portion of the divestment of Schultess in there, which is a negative 3.6% and it's, by the way, 2.3% for the group for the full first nine months. There is no effect in the third quarter. So, thanks to this increase in volume, the gross margin has increased substantially, you can say, coming up from 32.9% to 36.6%, with an operating profit growing by more than 50%. And actually, it's slightly above 60% due to the one-offs that Eric mentioned before. At the same time, we have seen deliveries returning to a more normal level. And we've also seen this calmer development in several countries as a result of both increased interest rates and the discussions on subsidies in some countries. And this calmer development is -- and the return to normal delivery levels, you can say, is slightly visible here in Q3, where the growth came in at slightly above 17% without the acquisition included. And then again, no further negative effect from the divestment of the former Schultess business. But nevertheless, both gross margin and operating margin have increased versus last year. So, we came in here at a gross margin of 37.1 percentage units, up from 33.1% and with a very healthy operating margin there close to 19%. And on top of that, we have continued with our ambitious R&D and investment programs. In terms of split per geography, there have not been so much movement. North America has gained a percentage unit compared to last year, a slight sign showing that they have developed nicely. Moving on to Stoves. Sales grew by 23% in total. But of course, a good portion of that was acquired growth, leaving some 6% for the organic growth with portion again of currency in there, of course. Demand for wood in Europe has been good, whereas the demand for gas, in especially North America, has been rather weak. And with that -- but with that being said, we have been able to increase the gross margin also within the Stoves business area coming in at close to 37%, up from the 35.7% of last year. But due to our continuous investments in both marketing and R&D and some adaptations that we have been making in North America, the operating margin has come in slightly lower there at 10.6% as opposed to the 12.1%. In the quarter itself, growth came in at 5.2%, which is fully related to the acquisitions that we've made, meaning that there was a negative growth as such in the quarter, very much related again to the gas products, so to speak, in North America. And this has then in turn, impacted the gross and operating margin, which have then come down slightly. In terms of split of sales per geography, North America has obviously picked up due to the acquisitions we've made. A year ago, they were at 23% of that cake and now up to 28%, and movements within the other areas have been very smaller or more a consequence of the add-ons in North America. If we then move on to NIBE Element, sales for the first nine months, they came in at SEK8.9 billion, up some more than SEK900 million compared to last year or close to 12% growth. Out of this, a small portion was acquired, SEK3.2 million, leaving some SEK8.5 million, you can say, for organic growth, of course, supported by currency and some price in there. But in this area, we have, for some time, seen a decline in demand for consumer-related goods. And also with the North American or US then rather on semiconductors to China, that's also had an impact, which we, however, believe is more of a temporary impact and something that will pick up again. But at this moment, it is affecting us and that's why you see our gross margin that has come down slightly from 22.7% to 20.9% and an operating margin there, which is 8.5%, where we strive for being at 10%, of course. In the quarter as such, all of the growth, you can say, came in at acquisitions, of course, meaning that the pure organic growth was negative and this shift, again in product mix that I just mentioned, has an impact on the gross margin and the operating margin. So, we came in there at SEK235 million in operating profit, down from the SEK324 million, landing an operating margin of 8%. But then, of course, it is a business which is selling to OEMs, so overall, in comparison to the other business areas, it does have a slightly lower margin. In terms of geographies or sales per geography, there has been a shift in a way where North America and the others portion, which mainly is Asia, has -- they have decreased by some 3% units each, whereas then the Nordic countries and Europe have gained 3% each. It's, again, as we've mentioned many times, our most global business area. If we then leave the business areas and just move on to the group's balance sheet and cash flow statement and financial figures. We've had some movements here. The balance sheet has, of course, grown quite substantially, you can say, mostly as a result of us bringing these four acquisitions on board, where Climate for Life in The Netherlands is the, by far, largest one. And that has, of course, increased our intangible assets after bringing it on board according to the PPA that we've done. And as a consequence, also the tangible assets have grown from 7.5% to 10.8%. But there is also a portion of growing the inventory there. And what we've done now is to build inventory, which -- for finished goods, which we have actually not been able to do before that as a consequence of now being able to deliver again. So, it's partly planned, although we're not fully pleased with the level, and we'll touch upon that in a second again. On the liability side, it's mainly the long-term liabilities, interest-bearing ones that have increased as a pure consequence of these acquisitions coming on board. But those of you who have followed us over the years have also seen that we have had an ability to amortize those reasonably well in the coming quarters. Then just quickly looking at the cash flow statement. We've had a very strong cash flow from the operating activities as a consequence of the first nine months good performance. We've increased those by some SEK1.25 billion coming in just about SEK5 billion, up from the SEK3.8 billion. But then the change in working capital has consumed a good portion of that. And that is, again, the inventory that I mentioned. And then we've continued to invest in our operations, increasing that from close to SEK1.3 billion to almost SEK2.3 billion, but Eric will soon show you what that has led to quite some nice investments I dare to say. A few words on the key financial figures. Yes, investments, obviously, they have increased substantially as a consequence of both the investments we make here in factories and R&D centers, but also coming from the acquisitions. And since they are communicating vessels, we -- the interest-bearing liabilities in relation to equity has taken a jump from some 41% up to 70% and the net debt to EBITDA has almost doubled from 1.1% to 2% and the equity asset ratio is now at around 44%, down from just about 50%, but well above our target of 30%. So, finally, you can also say that we have gotten to use the strong balance sheet that we've had. Yes. Looking at the working capital, it is now 25% of sales, which obviously is not where we want to be. It is a consequence of having sourced, of course, a lot of components during the period post the pandemic where it was very difficult to get products on board. And also, as I mentioned before, the fact that we have been building finished goods inventory, which we have not been able to do before. But we are, of course, working on bringing this down to our more traditional levels. And all-in-all, I think the last key financial figures have developed nicely. Return on capital employed, slightly stronger than last year. Return on equity close to 18% and getting closer to our target of 20% and then an increased net profit per share and also equity per share. And by that, before we start the Q&A session, I think you're eager to show some pictures, Eric.

Eric Lindquist: Well, I mean we don't like to brag, but we read so much about what other companies are doing, and they are more describe this phenomenon, and we thought it would be appropriate for you following us to know what are we doing. We're just going to go through a number of the buildings that we have opened up during this year and are in the process of building. Here, you see two office building with some 100 offices and main -- one of the main [Indiscernible] in Markaryd. And we continue, we are very proud, of course, to talk about the new innovation center, which I think is going to come up here and that's really a landmark. One of the landmarks in Markaryd now is like 8,500 office building and laboratories with top-notch equipment with EMC -- sound laboratories. And although we don't like to show that to outside is, we can just confirm this is the very best things in life spread. And that's already opened. And of course, there are a few test rigs that remain to be installed, but that's not only a landmark, it's also a place where people really feel comfortable and there's also an attraction to our company because to live sustainably, we also have to have attractive buildings and offices and laboratories, factories, and we are demonstrating that in this particular building. If you could just continue very quickly, we won't bore too much. But just to explain again where we are spending our investments is a new heat pump factory in Markaryd next to our older building that was -- 60 years ago but refurbished, of course, and that's another 16,000 square meters. That is now, of course, ready building-wise and we're just installing the production equipment in here. And if we just continue with a few other buildings in Markaryd, which is the hub of the world, as you know, the new visitor center, it's not call the White House, but sometimes we always think it will really look like that. It's a new visitor center that building-wise and exterior is almost ready to be opened up in the beginning of next year for education, for product presentation, and meeting of any kind really. That's a gorgeous building, very much in the same style as the innovation center. Here, we are erecting a new building. It's under roof, but it's not ready on the walls yet. That new production units are same as steel tanks, that's adjacent to the new heat pump factory, and that's to be opened up in next year after the summer. And adjacent to this, we are also directing another building to broaden our capacity for stoves. I'm going to see that in a little while here, that one. You've seen it. And of course, that is adding another 13,000 square meters to that facility. And what we don't have on a picture here is the old building that we have renovated for heat pump production, but that's done last year. In [Indiscernible], where CTC is located, we have acquired a building already erected, perfectly suited for heat pump production and R&D center and we are in and about there now, and that's another 25,000 square meters added and that's very handy where their buildings are already erected. In Germany, we were just in the process of starting to erect the building, then it so happen that a neighbor wanted to divest the building. So, the building you see a little bit in the back there, that's adding another 25,000 square meters to our production unit in [Indiscernible] in the area. And if we just continue with a few buildings here, I'm so excited. I'm talking to past perhaps. But in Czech Republic and [Indiscernible], we've added another 15,000 square meters for the tank production, but also for -- as a platform for heat pump sales in Czech Republic. And if we swing a little bit further here, I think we're going to come to Britain where we just opened up a building here beginning of July for Stovax, which is a large entity within stoves, brand new, like a few miles away from the old ones. It's absolutely gorgeous. And of course, they're going to mean that productivity is going to be much, much better than in the older buildings, they were sort of older and also sort of scattered around in an old industrial area. In [Indiscernible], where we had our Heating Element business head office, we have a new visitor center and also a new production unit, where they used to produce furniture in the old days. It seems like the furniture industry is having -- companies are having difficulties. So, there we have another 15,000 square meters, particularly oriented around components for the electric car or vehicle industry. And just a few more slides before we can start the questions here. We're going to land in, I think Poland, yes, we started in [Indiscernible] as they pronounced it some 20 years ago and now we have erected another building here of some 30,000 square meters. And finally, I think we have one building in North America and that is getting ready for the expansion on the components for the semiconductor industry. We opened that up earlier this year and the Therm-X is brand new. It's a very, very sophisticated product, machinery that's absolutely unique, at least to our group. So, that gives you a glimpse of where we are heading. Our beliefs in the future, they are formidable and the team that we have on board 150 companies forms a tremendous strength and spirits, of course. And that's -- we just wanted to provide you with that because there are so many negative news, wars and stuff and that we think that is terrible, but there's also hope and we're going to do our utmost to bring sustainability to scarcity and what we mean with that is to be honest, to be transparent, and to be frugal, not to waste anything. We like to hand over to next generation something is better than what we got when we came. Thank you for allowing me to preach.

Hans Backman: And if I just may add, we try to live as we learn as well because the majority of the buildings that we have built, if not all, supersede the building requirements in those countries. We need the building standard gold, meaning that they are very environmentally-friendly, you can say, and of course, equipped with our own products.

Eric Lindquist: That's right.

Hans Backman: For cooling, ventilation, heating.

Eric Lindquist: And we pay ourselves. All right. So, let's start with the Q&A. That took us like 24 minutes -- 34 even. Now, let's go.

Operator: Thank you. We will now begin our question-and-answer session. [Operator Instructions] And our first question comes from the line of Carl Deijenberg from Carnegie. Please go ahead, your line is now open.

Carl Deijenberg: Thank you very much. Thank you very much for the opportunity. So, a couple of questions from my side, maybe if I start on the outside. A question around is you've seen, let's call it, political programs that have been under discussion or unfolding throughout this year. And my question to you is sort of from an historical standpoint, when we have experienced previously, how does the timing and demand usually unfold because I guess we have some specific dates now where we'll see some of -- sort of, absolutely coming in to --, I guess, Germany being the most notable one. So, would you expect a pickup in demand as to when they come into effect for -- gradual pickup at [Indiscernible]? Thank you.

Eric Lindquist: Yes, we're a little bit difficult to hear you, but I'll try to put my input there. Well, the problem is always the subsidies, as we all know, that once they are announced and perhaps some to negative politicians, but it's always like I don't understand what they're saying, that's also negative, as I said. But we understand that when they like to launch a program, they should have a very specific thought about when you do that. And from the day they launched the program, they should say as of today, we do that. They should never say in a quarter or two quarters, we're going to introduce subsidies because then people are going to wait. And at the same time, we're going to now have programs for two years and it's going to be an over investment period during -- particularly the later part during that period. So, the last six months in such a two-year period is going to be phenomenal demand, which means that the manufacturers, they have to accelerate and then deaccelerate. So, if they're going to give subsidies, they should do that with a longer term view. And that's why we also comment in North America that given the consumer is now a very clear message that we're going to give you 12 years and that is not only for the consumer, that's also for the industry -- as such, the drilling for the trenching industry or the installers and, okay, now it's for rear gold. So, I don't know whether I answered your question correctly, but it's very difficult when it's stop and go, stop and go. And we had the terrible war starting in the Russians invade the Ukraine, everything, not only from that sad part, but energy prices were soaring, of course, and all people got so worried. And on top of that, subsidy programs were launched. And then -- and energy price will go down and countries say where we don't have necessarily the money anymore and everything stalls. If it's not stalling, it goes back to different levels. It's very difficult for the manufacturers to sustain and to be there to service property. That's one -- that's the metric we're sending. We attended a meeting in Paris just a week ago on the behalf of the heat pump vendors said, would you have the capacity, of course, any entrepreneur will have capacity given a certain time. But we also have very clear rules, you can't pay soccer with different boots during a match. You have to have permanent solid rules. This a long answer to your question. I hope I -- something got clear.

Carl Deijenberg: Definitely. That’s very well. And I had a second question also on this sort of in [Indiscernible] investments that you were maybe mentioning [Indiscernible] talking about that some installers and distributors who are sitting with elevated inventories on certain heat pump depending on sort of manufacturing capability et cetera. And I just wanted to ask if you could elaborate a little bit on sort of the product categories that you see are being the most affected here or primarily Elements inventories heat pumps with lower technical barriers, such as their heat pumps? Or is it sort of a broad-based phenomenon as you said?

Eric Lindquist: I mean, I understand we are on thin ice if you criticize things. But I mean, I'm old enough, if I talk for myself, to be able to straightforward. And I think that human beings in general, we are -- we try to be very social and nice to one another. When there is a shortage and whether it's a danger, where there's a fire in the cinema, you don't look at all the other people say, you can run ahead of me. I wait until my suit is burning. Everyone is trying to say that little fanning, excuse my language, and that's exactly what we've seen. And of course, the demand that we saw enormously high, everyone wants to sell as much as possible. And I'm not saying -- we are not saying that the quality was poor when these ones were installed, but the risk of jumping with tremendous increases, it's always a risk that quality will be lower. And these products are going to sit there for 15, 20 years and we wouldn't like heat pumps to get a bad reputation. Now, it sounds very serious, like me this, perhaps, oh, boy, white flag, we are waiving. But what we're saying is for this industry to be prevailing to be successful, we all have to be very responsible and we like to have clear rules. And of course, when there was a shortage of heat pumps in the market, and we did not contribute because we had a shortage and we weren't able to produce as much as the market wanted, the market -- we buy something else because the demand is going to be unlimited. But as we all know, that's not the case. What happened was that distributors and wholesalers became overstocked. And now we're trying to digest that as a whole industry. We are not criticizing that the installations were poor, but the risk when you have such a tremendous demand an increase is always that you bring on board people that haven't been properly trained. So, talking in general terms, a long answer again to your question. But I said, period, I don't know whether you'd like to add anything Hans?

Hans Backman: No, that's fine.

Eric Lindquist: It's not possible to add anything after that.

Hans Backman: Exactly.

Carl Deijenberg: Okay. Very well. Thank you very much for taking my questions.

Eric Lindquist: Thank you.

Operator: Thank you. And our next question comes from the line of Carl Ragnerstam from Nordea. Please go ahead, your line is open.

Carl Ragnerstam: Hi, it's Carl here from Nordea. A couple of questions from my side as well. Firstly, coming back to the inventory levels in the value chain here, as you said, quite elevated still. How long would you say that it might take to sort of flush out the products in the channel? What's your best guess with what you see today?

Eric Lindquist: Yes. That's -- now you're going to broadcast my guess. We -- it's impossible, as you know. We all know the figures. And I think our industry, for some reason, has been investigated more than any other list in the last nine months. It's almost like every day, someone saying, now, I know more than anyone else. So, I almost would like to put the question back to you folks because you seem to know everything, every day, and I'm not blaming you particularly now.

Carl Ragnerstam: That's fair enough. Okay. And--

Eric Lindquist: Guessing.

Carl Ragnerstam: That's fair enough. And you showed a couple of slides of nice production, obviously, extremely good in the longer term. In the shorter term, however, how will you manage absorption rates in the production? If I just said, volumes in the market might come down in the short-term here, you're bringing up capacity. How will you try to protect margins? Will you implement cost-out measures to offset the potential under absorption? Or how do you square that?

Eric Lindquist: Well, the inventories to this stage is, of course, much more on the component side, which is not very good, as Hans mentioned. And of course, we would have liked to have much more for ready-made products, but we have not been able to produce those. So, that's why we are a little disappointed in a way. But of course, we have to adjust costs, but in a civilized way. When you talk about sustainability, that word, if you're not going to use that again. There's also treating people decently. There has to be a balance between what shareholders get and what also how you treat the employees. And we try to be as decent as possible to those if we have to reduce number of employees, they're going to do -- be done in a very respectful way. Of course, we cannot build a ready-made good inventories limitless. But at the same time, we like to have some readiness for the next increase, which is going to come. We know that -- and it's a very delicate situation where there's been a shortage, overstocking, I wouldn't say we are overstocked on ready-made products. But of course, when we come, the wholesalers and the distributors, they would like to get rid of whatever they have prior to buying perhaps or selling what they really would like to sell. So, I refrain from a guess there, and I think that we, of course, have a tremendous experience when it comes to curbing costs without being brutal to the employees because that's really the team that's done all this for us during the years. We cannot, of course, live without some fewer people around if this is going to be prevailing. And we've done that in the past, but that's the last thing we do. Typically, we -- our companies in different countries like in Germany, they have a different way of dealing with lesser demand, as we all know. Quarter-backs [ph], whatever they call that. And here in the Nordics, we have more like flexible people like we have a few hired agencies or agencies where you hire them with a very short notice time. So, we'll be able to cater for this, but of course, we have no wizards, as we said so many times, but we have a legacy of being fairly good when it comes to comparing ourselves to anyone else in the market, not coming out any lesser when it comes to margins and stuff like that. But again, we are no magicians.

Carl Ragnerstam: Okay. Thank you so much.

Operator: Thank you. And our next question comes from the line of Douglas Lindahl from DNB Markets. Please go ahead, your line is now open.

Douglas Lindahl: Hello gentlemen. Thanks for taking my question. I just wanted to just quick briefly follow-up there on the previous question. I just want to clarify, basically, you're saying that you don't see a positive margin implication for Climate Solution for a potential overproduction here in the short-term because the inventories you're building up is not finished goods. Did I just get that right?

Eric Lindquist: Well, first, what we have, if you were looking at our inventories here in Markaryd, there's too many components to build up during a period when we also thought the demand will be much bigger. And as we all know, we have not been able to deliver as much as we would like to and that's the brutal fact. So, perhaps you can say that we are saved by that. But at the same time, we have to have some inventories like when we left the fourth quarter last year, we hardly had anything because that was the first quarter where we could deliver. And then, of course, the first two quarters of this year, have been fairly prosperous and then a different time started at the beginning of this year. And so we've had struggle -- we've been struggling until quite recently to provide the market with products. But we have--

Douglas Lindahl: Okay. But just--

Eric Lindquist: But it was material [ph].

Douglas Lindahl: But just sorry to clarify my question then. I just wanted to get the margin implication from this change in recent quarters?

Eric Lindquist: Yes. I mean now we build inventories, of course, we -- okay, no. So, what do you call it, overabsorption under absorption. I think that's not to worth even mentioning -- being mentioned so far.

Douglas Lindahl: Okay. Sure. Thanks. And then coming back to your Climate -- in terms of growth, it would be surprise if you could give some sort of indications on the volume component and price component here in the quarter specifically?

Eric Lindquist: Well, could you please repeat that question?

Douglas Lindahl: Yes. On Climate Solutions, the organic growth you reported year-over-year, could you possibly break that out with some indications on pricing and some indications on volumes? I know you don't like to give the firm numbers, but maybe just some indications would be useful.

Eric Lindquist: Well, I mean, price increases just in general terms, we don't have any price increases anymore. They took place last year around midyear.

Douglas Lindahl: Yes, but the backlog -- you're executing on a backlog, aren’t you?

Eric Lindquist: Yes. That is true. So, of course, the price increase -- but don't we mentioned that the price increase has had an impact. We do, but he is, of course, looking for a more detailed figure.

Douglas Lindahl: No, but I think--

Eric Lindquist: You like to know the color of my underwear as well. No, no, no. That's -- now we are beyond what we're going to answer.

Hans Backman: I think we said that the majority is organic growth, but there is a portion of both price from order book and also currency in there. And I think the currency -- all of you have calculated backwards fairly well yourselves.

Eric Lindquist: Thank you, Hans.

Douglas Lindahl: Thanks for that answer. And just -- I'm not going to dwell too much on pricing, but just to interpret your answer there correctly, you're not hiking prices further. So, as we head into 2024, you're not considering hiking prices for heat pump specifically?

Eric Lindquist: I think that we always mentioned our strategy has always been to be fair on the price side. We try to absorb as much as possibly, which sells -- boy scout, girl scout attitude. But we have no reason to jack-up prices any further just to increase the margin. We were forced to increase the prices due to the price increases we were forced upon. So, now when inflation is going back, it does, hopefully, I don't think that we would ask for any major price increases. And if we would have to, it seems like they would have to be very small compared to where they've been during the last 24 or 30 months. I think we are back to, hopefully, to ordinary situation again where we haven't had any price increase is worth mentioning. If you go back, say end of 2019, very, very modest price increases. The market has been working well. And everything, of course, -- hell broke loose 2020 and onwards. And now we believe that we're going to return at least component-wise to more normal situation. Okay?

Douglas Lindahl: Okay. Yes, thanks very much. Just a final one from my side, and I'll jump off the call. On goodwill testing, have you done that already for 2020 for US to come in Q4 would you say, Hans?

Hans Backman: No, no. We continuously do that and especially with focus on Q3 and Q4 for the year-end. So, we've done around here recently, which was a little bit more detailed, and we'll do the fully fledged one now for the full year.

Douglas Lindahl: Okay. Thank you so much for those answers.

Hans Backman: All right.

Operator: Thank you. And our next question comes from the line of Viktor Trollsten - Danske Bank. Please go ahead, your line is open.

Viktor Trollsten: Thank you, operator. Good morning Eric and Hans. Perhaps on your comment, Eric in the report about the European heat pump market where you mentioned that we could see one or possibly a few coming quarters of more weakness. I guess if I look at it, it seems that Q3 volumes in Europe are already down, let's say, 1%, 2%. So, I guess the first question is, is Q3 included in that comment?

Eric Lindquist: Well, as I said before to one of the other folks, you seem to know so much about the market, you write an article almost every day. So, if you repeat that question, again, I'll try to answer this good as I possibly can. Please.

Viktor Trollsten: Yes. So, I mean volumes in Europe in Q3 seems to already be down 1%, 2%. So, I guess that is weaker than the good growth that you have. So, I guess what I'm after basically how far are we into the weakness that you mentioned, one or possibly a few coming quarters?

Eric Lindquist: Well, I think that's course. I mean, as we know, the -- I think the weaker demand has started during the Q3. And then it won't stop just because it's Q4 and Christmas. And I think that what we also indicated is that when the interest rates are being curbed then the enthusiasm to some point, will return to the market because the uncertainty is not only bad for investors, but also for the private family or the private investors, well, okay, can we do this now? Can we build a home now? And I think that all the horrors are described in the newspapers and media almost like it was a role also in our country. It's very sad that we have a war on our doorstep. But I think that media, if I may call it, they are sort of amplifying the situation that is so bad. We try to be more realistic about things and knowing that the interest rates will have a dampening effect on the building and on which particular month that started, we can't really say. But you see yourself that our growth was a little bit less this quarter than it was -- the third quarter compared to quarter three to last year, but there's no catastrophe. So, we like to send signals that, of course, even if it continues to be weak another quarter or possibly another one after that. But the world won't go under. We need clear rules how to play and once we get those, of course, it will be a much more stable situation for everyone. That's what we have about if we don't get any help, we have to do as good as we possibly can on our own. I don't know how to answer that in a different way.

Viktor Trollsten: Yes. No, but I think it's fairly clear, but I guess what we're all wondering and we're wilting your words on the kiln here. But given that weakness is already into Q3 to some extent, I guess what would be interesting to hear is more weakness in a few coming quarters, does that mean a negative growth? Or is it just more muted growth in relation to what we all are seeing for the long-term?

Eric Lindquist: Well, I have respect to your question, but I think that's not only tactical from our side, but it's also realistically impossible to suggest that they're going to be so and so. I think that depends on every week in how people are reaching, what kind of decisions they are taking. And I think that we've given as clear as possible of a signal in our report. I don't think it's appropriate to dwell more on that.

Viktor Trollsten: Fair enough. And if I try to push you a bit more then Eric, would it be possible to give a similar comment that you gave in the report at least on the Nordic market also? I guess organic growth was close to zero in Q4 -- Q3. So, also there, I guess, we're already quite far into weaker market. Just any comments on the Nordic market?

Eric Lindquist: Well, I mean we can read every day or if I'm exaggerating every week how poor new construction is in Sweden. I mean we are -- most of us calling in with possibly be living here. And I don't know how many houses are going up where you live and where you see. So, of course, that's a very obvious sign that if the National Bank here or a Central Bank, whatever you call it, then we give it a clear signal. We like to have people unemployed because we're going to curb inflation. No one talks about the consequences of this. But what they're saying is that we like to have unemployed people because when people are unemployed, then they don't buy, okay? But this be straightforward and don't play hide-and-seek are going to part inflation that in real terms means they're going to make people unemployed. We don't believe that having people unemployed for a longer period will prevail because politicians they have to survive and they will not be reelected if they continue to punish people that are right in the middle of the lives, and they would like to have new buildings and live in a decent way. So, that's why we believe that's of a shorter, should I say, substance or a shorter period, it has to change. But of course, if you call any -- as you do, you do that very rigorously and you sent out a report almost every day how poor things are, you can talk to the prefab house manufacturers in Sweden, Aston. Do you think they're going to increase the house production next quarter? And I'm sure you're going to get an answer. Well, it won't be any new blood until we've seen the peak of the interest rates. That was a long answer.

Viktor Trollsten: No, okay. Fine. I'm sorry, if I may, just very shortly on the Element business, negative organic growth of 6% is a quite rare event if we exclude the more extreme period, financial crisis, COVID, et cetera. I guess what I'm off to just any green shoots in Element that we are sort of on the bottom of the cycle?

Eric Lindquist: Well, again, it's very difficult, but it's no secret, of course, when the economy gets a little bit softer, they are hit the first, particularly on consumer goods. That's -- and they are also the quickest ones out of it because when the economy gets tighter, you don't necessarily buy a fridge or a cooker or any one of those light goods products. And of course, we are exposed to that market whereas the other market renewable that has shown a more sustainable, if I may joke a word profile, of course, the semiconductor industry, that's a chapter for itself. We are relatively recent operators in that market. And there, of course, the trade issues between the US and China, there was a surprise to us. That, of course, perhaps that hit us the hardest because it's difficult to combat that and it's also an uncertainty. And now we are into that process because they're going to erect new buildings and new buildings or new factories are erected both in the US and North America. That's why we feel confident that that market is certainly coming back because that's not due to the interest rate. That's more due to the independence of semiconductor supply and that is certainly coming out in already next year in North America and also in Europe. All right?

Viktor Trollsten: Okay, super. Thank you very much.

Operator: Thank you. And our next question comes from the line of Brijesh Siya from HSBC. Please go ahead, your line is open.

Brijesh Siya: Hi, good afternoon. So, I have two questions. The first one is on the demand side. You have fully provided color about how things are going and what your expectations are. If I just ask you to do more medium term. You talked about subsidies, think one driver of this weakness. Now, the electricity to gas price multiplier has also played a crucial role in it. Now, looking into the future when you say that the weakness is limited to a couple of quarters, how do you see these dynamics? So, your confidence is based upon what the subsidies is getting resolved? Or do you need more politicians to come through? So, I just would like to understand your confidence about the market being shortening in a couple of quarters' time?

Eric Lindquist: Well, it’s a very complicated question. When people are being interviewed in general, they always say it's a good question. I'd say it's a complicated question because then we don’t have to judge the future. I think that the future is very much linked to the interest rates after all because that is influencing everyone. If you continue to increase interest rates, even if those people have had a long-term interest rate, like three or four or five years, eventually, they're also going to hit higher rates and even more so perhaps because they've been living in a different world and all of a sudden, they have rather 5.5% than 1.5%. And that is where it's not contributing to any good things either because they know that's coming and that means that they expect a shock and we don't believe that's good. So, it's difficult to predict weather, which is affecting naturally the energy prices, and it's difficult to predict interest rates. We believe that the interest rates will arrive at its curve already in this quarter, I'd have to say. This is very personal assumption. When it's going to be down again? Difficult to say. But that's going to be a signal to everyone, it won't be any worse. And that's as good as I can judge or we can judge where we are heading future-wise. It's impossible to say now we're going to be like three months, and then we got everything about a turn. We believe that there have to be positive signals from the what you call them, the banks again. And there have to be positive signals from the politicians as well. Not necessarily saying now we're going to have enormous subsidies. We believe it will be tremendously good if you've got clear rules, how do we curb the CO2 emissions? Are they harmful? Or is it just something that the politicians say in front of TV camera? Or do they believe that we are in a very, very crucial situation. So, really, if they say something in front of a TV camera and behind say, well, but that's hogwash that with climate change, that's something some people talk about, I don't believe in that well. Of course, then it's a different ball game. We believe because until quite recently, we have built our company lesser on subsidies, but more of conviction that people are very realistic about how they affect nature. No one wants to harm nature. That's how our heat pump legacy comes from to be very efficient and be frugal using that word the second time now when it comes to energy resources. So, it's a very complicated question to answer fully during three or four minutes, and I've already taken full, but we are committed to solve it, but we can't give you a very precise predictions. No one can that. And what we wanted to give you the signal in our report is that we're going to prevail -- we are strong financially. We are investing our money wisely. If the world is coming to an end, we're going to be above the medium of the misery, but we can stop the world going in the wrong direction. I'm sorry not being more clear about it, but that's -- that is I can possibly come up with. All right?

Brijesh Siya: No. Understood, Eric. That's fine. And the second question is on pricing. I know in the past, you have alluded to the fact that you are noting on volume, again, you'd rather keep the prices stable and your comment about next year price going up because you don't see a reason. That's fair enough. But when you look at the marketplace, you have so much of destocking to go through in a couple of countries at least. How do you see the marketplace is playing out? Are you seeing any pricing competition coming through? And in light of what you have shown as well to us that there's so much capacity from your side coming through and your plan of doubling capacity. So, how do you see the pricing environment evolving in the near-term as well in the medium term?

Eric Lindquist: That is my favorite question. Thank you for putting that question. That's my favorite question. And to decrease prices, I think, that's the last thing a serious producer should do, particularly if you invest so heavily, as all manufacturers are saying they do it. How could you possibly expect a return on your investments if you immediately start to erode your prices. That's unbelievable. How -- why do we go to universities until we either lost or hair or they've gone grey. And the first thing we do when we get out there to lower base. I can't -- I don't get that. I think we have to send a clear message to the market because they missed that perhaps a term at the university. If you decrease prices with some 10%, you have to sell 25% more and is that going to take you anywhere in the longer run, I'd like to have an answer from the universities are, how do you combat that? So, of course, there are going to be price increases from some partners for some reason. But I don't think they're going to come home to their shareholders saying, now we reduce prices. Look, how good I am, you couldn't send out like a 15-year-old student done the same, but without anything added to the bottom-line. Thank you.

Brijesh Siya: Understood. No, thank you. And just one last, if I may sneak in. On the M&A side, given the -- how the market is at this point in time, are you seeing any of the assets which you are targeting are looking more attractive and compared to what it was one year back? And then if you can just comment to you on how the M&A pipeline looking for you?

Eric Lindquist: The M&A market is prosperous in a way because they're very -- it's many more, I may use that, and Hans can confirm that, many more objects out for sale, not necessarily or they're all very good. Some are out there because they have a lesser result. We can see that the results are getting weaker. And that’s not necessarily what the companies that we would like to bring aboard. Other categories, companies that have a very great performance and they have the same price tag as they've had before. And if you can't argue -- or if you can't agree on a multiple that is high enough, they often just refrain from being sold or acquired, and they just wait. There are two categories and we -- typically, as we've said in the past, we'd like to have companies on board -- to get on board with profitability that won't harm us or where we can see where we can bring it up to a decent level, fair liquidity. And we still live with that philosophy. So, there are many more out there, but not necessarily are the good ones, less expensive. I think that we have -- was that fine for you?

Brijesh Siya: Understood. No, I understand. No, that's all. Thank you very much.

Eric Lindquist: Thank you. I think that we have -- we are running out of time here. Should we allow one more question? Okay, one more and then we have to run for another meeting here. Thank you.

Operator: Thank you. And we will take our final question for today's call and it comes from the line of Axel Stasse from Morgan Stanley. Please go ahead, your line is open.

Axel Stasse: Hi, good morning. I have two follow-up questions. Thank you very much. Just wondered, leverage went up to two times. Is that a concern to you for potential further acquisitions going forward?

Eric Lindquist: Well, I mean, we know that when we have large acquisitions, then, of course, that rate goes up. And you also know how we were able to amortize that fairly quickly over the years. We won't do any nasty things to ourselves by acquiring companies where we would endanger our group to any degree. So, of course, that Climate for Life in our group is a fairly large acquisition. They're going to contribute and we will try to amortize that as quickly as possible. So, but at the same time, if there would be any larger acquisition, but then we really talk about large, large. That is -- Climate for Life is like 10% of the size of climate control, which is ideal size in a way. If we would reason about an acquisition, that would be three or four times, we'd be very hesitant because we have -- that's not something we've been practicing in the past. We try to make a clear distinction between who is the acquirer and who is the company being sold. We don't like to go for mergers necessarily, we've never done that.

Axel Stasse: Okay. Very clear. And then my second question, I know you guys don't have much time. So, thanks for taking it. Just my second question, given the strong comp this year, given your comments on falling energy prices, high inventory at distributor level from changes in regulatory reviews, can we actually expect positive volumes in the first half of next year or should we actually expect negative volumes? Thanks.

Eric Lindquist: Well, impossible question to -- we try to -- if you follow -- if you've been following our quarter reports, it's a story being told every quarter. We try to guide you as investors or shareholders. Where are we? What have we achieved? Where are we heading? Try to be as transparent and constructive as possible. It's very difficult to predict what will happen next year -- the first two quarters, we can't we can't judge that. And, if I would give you one sentences -- or one sentence or two sentences, you would say, well, I have another question. I think that we refrain from that in a friendly way. So, it is difficult. But we, I hope, give a fairly positive overall view because we know whatever happens, we can manage and we can be constructive even if the demand is weaker because we are not a one quarter, two quarter phenomena. We've been there for a long, long time. We've been through a number of issues in the market that have been painful. We always come through. We never lost any money. And that's the legacy that you should sort of have in mind when you evaluate our company. So, I think that's the answer you're going to get today. Now, we have to run.

Axel Stasse: Okay. Thank you very much.

Eric Lindquist: Thank you.

Hans Backman: Thank you.

Eric Lindquist: Thank you all for calling in. Have a nice day now.

Operator: This now concludes our conference. Thank you.