NIBE Industrier AB (publ) (NDRBF) Q2 2023 Earnings Call Transcript

NIBE Industrier AB (publ) (OTCPK:NDRBF) Q2 2023 Earnings Conference Call August 17, 2023 5:00 AM ET

Company Participants

Eric Lindquist – CEO

Hans Backman – CFO

Conference Call Participants

Karl Bokvist – ABG Sundal Collier

Douglas Lindahl – DNB Markets

Viktor Trollsten – Danske Bank

Carl Ragnerstam – Nordea

Christian Hinderaker – Goldman Sachs

Axel Stasse – Morgan Stanley

Operator

Ladies and gentlemen, welcome to the NIBE Q2 Report. At our customers’ request, this conference will be recorded. [Operator Instructions]

May I now hand you over to Eric Lindquist, CEO; and Hans Backman, CFO. Please go ahead.

Eric Lindquist

Thank you very much. Good morning or good afternoon, or good evening wherever you are in the world.

Hans Backman

Yes. Hello, everyone. Hans here as well.

Eric Lindquist

Very nice to have you on board. And we’re going to follow the usual procedure by going through numbers and a few comments, and then we have the M&A session. And today, as usual, we have another gathering with the TV set around noon. So we have just about an hour to go through all this. So if we just start with some general comments, and of course, you read the headline, we believe it’s fairly strong first half year.

And since Climate Solutions is so dominating, we can say that within most market segments, it’s been a very good growth and also within the segments within Element that’s related, there’s been a very good growth. And of course, on the Stoves side, it’s very much the wood burning that’s been showing the best growth since pellet stoves has been hindered by tremendous price increases coming down, however, on pellets for instance.

And to cope with the coming, as we see it, growth, we are engaged in a pretty massive investment program, both here in Sweden and as around the world. And it’s also pleasing to note that after the pandemic and despite the – all the wars in the world, we’ve been able to increase the – or accelerate the acquisition again or the acquisition rate rather. And the first six months here now, if we include some weeks into July, we’ve been able to sign four dotted lines, and we’re going to come back to that.

And of course, it’s been a growth, and that’s also come along with a pretty healthy margin increase in operating margin. And the acquisitions that we talk about, they are, if not evenly distributed. Of course, on the Stoves side, we had that acquisition that we made in the beginning of the year with Miles Industries. Again, in British Columbia, meaning now that we have three companies fairly close to one another, which is facilitating the traveling because when we go there, it’s one stop in Vancouver and then you can visit all three companies.

And then, of course, on the Climate Solutions side, we have a fairly large acquisition, in our world anyway, with the Climate for Life Group that we’ve been, of course, talking to for many years, and now finally, there was an opportunity to bring the company on board.

And then we have another company on the stove side, which is in Portugal, where we have not been acquiring any company in the past and that’s Solzaima, which we believe going to give us a good platform for further growth into the pellet stove business. And then finally, we acquired the Ceramicx Ireland Limited in July on the Element side, which is a consequence, you can say of the electrification where the LED lamps are fairly cold and you have to have something that’s heating up the headlights and that’s interesting to see how the automotive is changing, not only the engines going electrical, but also all the equipment in the car is to be changed.

If we have a quick look at the figures, I mean, you’ve seen them, the growth is considerable. And there again, I know through Hans that you’ve been requesting how much was the divestment of Schultess, and I think it’s around 3.5%. I think Hans going to come back to that.

So the growth that you see here with 27.6% should perhaps have been then if we dwell into all details some north of 30%. But the growth in operating margin is perhaps more interesting to look at. It doesn’t look as dramatic here, but considering that we had one-off events last year and during the first six months, and we’ve been very clear here when it comes to how that is described, saying that the growth, of course, 43.5%.

But in reality, it’s like 50% or just north of that due to the one-off events during the first quarter of 118 – or first six months and SEK 118 million. And it’s also the same thing with the operating margin, of course, 15.3% is, as I recall it, the highest ever we’ve had and comparing that to the 13.6%.

Of course, last year doesn’t seem too dramatic, but that is actually to be compared to 13% if we exclude those one-off event. And we prefer, as we always do, to talk like, on the running year, like the six months, nine months and so forth. But we also know that you, out there, are very interested in looking at the individual quarter. And we are a little bit stubborn there, always commenting on the full period because when you run the manufacturing business, that’s how we reason. We reason over rolling 12-month period typically with investments and so forth.

So that’s why we are sticking to that. Nevertheless, the quarter, as such, of course, again, had a healthy growth of 22.6%. And the margin, again, is quite substantial at 15.6%. And if you recall, it was like 15.3%. So it’s been an improvement there.

And there again, we shouldn’t compare the 15.6% with the 16.2%, but rather 13.8% as of last year. So the figures are quite pleasing. But of course, again, Climate Solution is overshadowing some shortcomings in the other two, which we’re going to come back in a little while here. Just looking at the typical graph with the bars here coming up and seems like to be a healthy development over the last nine quarters.

And if we look at the profit of the financial items, of course, there again, Q1 and Q2 ’22, they stick out because Q1 is a little bit weaker than usual, and that is again burdened by the write-offs and the Russia there or – yes, in Russia because of the closure of our operations.

And then Q2 comes out a little bit better last year due to the – but we are selling Schultess shares there in June of SEK 232 million. So looking at the typical pie chart, Climate Solutions is like 2/3 now. The total sales Element is 1/4, and Stoves is like 10%. And due to the difference in margins, of course, the distribution of operating profit is even more pronounced, the Climate Solutions now almost is like 80% and the other two, 14% and 7%, respectively. The pie chart describing the geographical distribution is slightly different now because North America is coming up and having some 27% in the Nordic countries, around the same in Europe.

Excluding the Nordic countries, some 47%. So I don’t think there’s too much to be mentioned there. Climate Solutions again, a few comments, strong growth and everything is driven by sustainability. And of course, that’s why we invest as we do new attractive products. Everyone is talking about the new refrigerants and not only that, also a broader assortment within all three categories of heat pumps that we supply and which is very significant, further improvements in our supply chain.

That’s been commented upon now the last seven or eight quarters, and we see now clear signs of improvements, of course. And we will even predict now that during the second half of the year, we’re going to come back to a more normal situation.

And of course, I know that there has been a lot of – or we know there’s been a lot of writings amount, demand in the heat pumps market in Europe. And we mainly believe that is depending on subsidies or support from different governments coming to an end and how should they structure the new ones. We are firmly believing that they will be in place during the later part of the year.

And then we also dare to mention there’s been such a chaotic increase in demand. And the worst thing that could happen in our industry when it comes to the heat pumps would be faulty products coming out or not being serviced correctly. So although we don’t necessarily like that the market has a slower pace – a somewhat slower pace. But I think at the same time, for the customer’s point of view, we think that was almost necessary. And acquisition, again, of course, of Climate for Life in the Netherlands.

It’s a fairly large acquisition, which last year, some EUR 220 million. And that is, of course, an assortment that is sort of complementary to our own smaller buildings. And it’s also strengthening our market position, of course, not only where they are now, but also for us to be able to tag along and set that assortment in other sales channels that we already have established outside Climate for Life’s immediate sales channels.

And the growth is healthy, as we say, with a 11.9 to 15.9 almost, and an operating profit that is, of course, substantially higher from the 18.16 or really like 1.7 if you exclude the one-off events. And with an operating margin that is relatively high in our books, 18.2% and to be compared to 14.2% really a year ago, again, if you exclude that.

Just a little bit of a puzzle when you have those big one-off events in our own world because sometimes you almost forget it, and there’s a real, of course. We had a decrease there, an increase there. That’s why we’re trying to be very clear on this. And of course, the second quarter come see even better when it comes to margin, and Hans is going to come back to that in a little while here. Looking at the Stoves.

There, we see that it’s been a softer market for particularly wood pellets and also gas, fire products in Europe, that’s a very small part. That’s really Britain only, whereas demand in North America, that is back on pre-pandemic levels. But wood is growing considerably in Europe and again demonstrating, we believe, that people are concerned about the security and also the reliability on other energy sources, you can say. So one would like to have a backup product and then wood burning comes in. We continue to spend quite a bit on reducing the deposit runs because we know that is a soft spot that we have.

We have to come up with a solution there. And we believe that being one of the market leaders, it’s our duty to really announce that task and to come up with a solution that’s good for the environment necessarily, but also causing or giving the customers comfort.

Again, that’s quite considerably and you’ve seen in the report that we just opened up a new factory in Britain. And we’re quite pleased to see that we don’t only open up factories in so-called low-cost countries but also start to invest or dare to invest in an old industrial or industrialized countries like Britain for instance, in this case. And the operating profit has improved, but at the same time, the margin has remained at the same level.

And there, of course, we spent quite a bit on R&D and also we had to take some costs when it comes to adjusting the organization in North America. And there, again, the two acquisitions. So of course, Solzaima, that gives us a platform for the coming, we believe, pellets stove expansion with continued pellet stove expansion and also the Miles Industries in Canada, that’s again reinforcing our market position, not only in Canada, but particularly in the U.S. Well, those figures, they speak for themselves. Of course, the operating profit is up considerably, but the operating margin is on the same level as I explained just recently.

On the Element side, there, we have been able now to become less dependent on the – good sector but still when that is really coming down, of course, that is hindering us. What we did not expect in this segment, and that happened already in Q4 last year was when America, call it, the President and his Administration, put restrictions on export to China within the semiconductor industry. I think that’s the most dominating negative factor that we’ve had. We’ve been able to compensate with the white goods going down. But coupling that with the semiconductor softer market, that’s been hitting our, of course, margins as you’ve seen.

But nevertheless, that is to come back because now factories are shooting up elsewhere in the world. But of course, they’re going to be a little while before they’re up and running and before they are to be equipped with machinery where we are a fairly large supplies to those machinery manufacturers.

When it comes to acquisitions, as I said earlier, we have Ceramicx Ireland that’s coming on board. And that’s, again, a company directed to the electrification part of the world where particularly the automotive industry is not serviced by this company. When the old combustion engine is not with us anymore and we need heating in, for instance, in headlight as we – as I said before.

And there you see the result slightly weaker than last year. And of course, the operating margin has taken a hit where we had those two segments going down or making – getting softer for us. Looking at the – I’d say, the rest of more detail, I think I hand over as we typically do here to Hans. And after that, we come back trying to answer your questions that you have after this presentation.

Please, Hans.

Hans Backman

All right. Thank you, Eric.

Yes, I’ll try to be quick here, although we will do some deep diving anyway into the numbers. Just one more comment on the group. And for the second quarter, the divested portion there of sales amounted to 3.4% for those of you asking for that number since we’re also punishing ourselves, including that in the growth rate.

So I think it’s fair to state that, of course, as well. Then jumping into Climate Solutions. I mean within Climate Solutions, we grew by these 32.7% in total, of which 4.2% was acquired. But then the divested portion and all of it falls into this business area was 5.5%. And that is, of course, the Schultess washing machine business.

So that leaves an organic growth, including currency of some 33.9%, making us land there then at almost SEK 15.9 billion, up from SEK 11.95 billion. And as Eric mentioned, the drivers has – have been and continuously are the shift towards more sustainable heating solutions in both residential and commercial buildings.

And with this better volume that we have been able to achieve, thanks to a less strained supply chain situation, you can say, I mean that has a good impact on our numbers. So the gross margin has improved by some 3.4 percentage units, and the operating profit has increased from SEK 1.8 billion to SEK 2.9 billion. But if we do the comparison there, apples-to-apples, the increase has, of course, been even better, not the 59.2 that you see but rather 70% or slightly above that, landing in and basically all-time high margin of 18.2%.

And this at the same time as we continue to invest quite heavily in our facilities for further expansion. If we jump into the second quarter, sales grew by some 27.6%, of which a portion there of 4.9% was acquired and 5.2 – minus 5.2%, of course, was the divested part, leaving in an organic growth, including some currency of 27.1%.

And in the same way as with the first half year numbers, this has resulted in improved gross margin and, of course, substantially better operating profit than previous year. The increase has not been the 27.7 that you see there, but rather 58.2, if you then again compare apples-with-apples, reaching an operating margin of almost 19%. In terms of geographical distribution of sales, it’s very much the same picture as before.

Europe has grown a little bit more, but it’s basically the same figure. Jumping into Stoves. Here, we grew by 35%. But of course, a lot of that came from the acquisitions of Miles Industries and Pacific Energy over in British Columbia that Eric mentioned. Without those, the growth, including some currency was 14% and – with an improved gross margin.

And then with an operating profit jumping up from SEK 198 million to SEK 266 million being an improvement there of some 34.6%, allowing us to maintain the same margin as last year. And this despite the fact then that it’s the wood part that has been growing and – where gas has been the more challenging part, especially in North America.

And that’s really what we see in the second quarter as well, the impact there on the North American business. I mean, we did grow sales by some 10-plus percent if you exclude the acquisitions, and we maintained a reasonable gross margin. But with an impact there from the companies over in Canada, we had an effect on the operating margin there.

So there’s been a shift in product mix, you can say, leading then to an increase in operating margin in absolute terms, but not in terms of operating margin. But also here, we have continued with a very ambitious R&D program and especially on the particle side that Eric mentioned. The geographical distribution of sales has, as a consequence of this, shifted a little, the North American activities – well, including the acquisitions have, of course, increased.

But if you were to exclude those, it’s the European business that has increased slightly. And this also as a result of the product becoming a complementary heating source to other heating systems in the house rather than being this decorative product, you can say that it has been before.

We quickly then move ahead to NIBE Element. Within the Element business, sales grew by some 16%, and a small portion there was acquired. Main drivers, as Eric mentioned, have been segments with sustainability profile, whereas then the consumer goods business and especially the semiconductor business has suffered, and the latter especially due to political decisions in North America. In summary, sales came up from SEK 5.1 billion to almost SEK 6 billion. Gross margin was slightly weakened since the semiconductor business, especially is a good profit business for us, you can say.

And we came in there with a margin of just below 9%, whereas we have, as you all know, a target to be at least above 10%. And in the second quarter, this was also pronounced. You can say that the effect of not having the semiconductor business onboard as usual had an effect there leading to a slightly lower operating margin compared to previous years. But it’s also fair to say that we consider the semiconductor business to be a – or the weakening there to be a temporary thing, that it’s going to come back. But it takes, of course, time to adjust to political decisions.

Yes, I think we move ahead to open up for the questions eventually. But just a few more slides first, of course. NIBE Element is our most global business, and there have been no major shifts there in terms of the sales per geography. A quick look at the balance sheet. Again, this is more a consequence of our ongoing business than any other major changes when Climate for Life comes on board now and some of the other acquisitions, that will, of course, have an effect on the balance sheet.

The one item that sticks out here are the nonfinancial current assets, and that equals very much inventory, and I will address that in a minute when talking about the working capital. On the liabilities and equity side, the equity part especially is increasing due to the profits that we are achieving, leaving us with a very stable balance sheet. A quick look at the cash flow analysis. We have been able to increase our operating cash flow by some 30-plus percent. And there is still a negative impact from the change in working capital, but it’s much less than last year.

And of course, this is a consequence of us now being able to get more components on board and manufacture products and get them out the door. But we are also, during the first half year and especially in Q2, building inventory for the sales that are to come now after the summer break. And as you see, we’re also continuously investing in our current operations. And there, we have several activities ongoing as have been mentioned before. A few key financial figures.

I mean, we don’t need to address the investments again. I just mentioned them, but we have a good portion of cash sitting in our books. The interest-bearing liabilities to equity have decreased. Net debt-to-EBITDA have remained stable, and we’ve been able to increase our equity assets ratio even more. But then just quickly looking at the working capital.

I mean, it has come down, as you can see. If we exclude the cash and bank part, it’s come down from 23.1% to 22.3% of the balance sheet, which is a move in the right direction. It’s, of course, still very high and we are looking at reducing that even further, of course. But now we have been able to build inventory in a different way for sales that are to come. And then we still need to, of course, be better in this.

During the pandemic or post-pandemic period, we were sourcing intensely to just be able to deliver because that was a major hindrance and believe that was not just for us as a company, but for many companies.

So all in all, on the key financial figures, I mean, they have been improving and are reasonably healthy, you can say. A return on capital employed, that’s now at 18%. A return on equity, that is close to 18% and coming close to our target of 20%, an improvement in net profit per share and of course, also the equity per share, which I think leaves us with a very healthy balance sheet for further growth and whatever challenges there may be also in terms of shifting to other refrigerants and so forth. I think we have the financial strength here to take the next steps.

By that, unless you want to add something, Eric?

Eric Lindquist

I think that you covered it – perhaps too lengthy. So nevertheless, now we have…

Hans Backman

I tried to be quick, so we can have some…

Eric Lindquist

Q&A, yes. Thank you, Hans. All right. We are ready.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question comes from the line of Karl Bokvist from ABG Sundal Collier. Please go ahead.

Karl Bokvist

Thank you. My first one is just – or if possible, I believe during the last conference call, you did mention that the heat pump business grew about 40% or something in the first quarter. I was just curious if it would be possible to hear about the growth rate now in the second quarter?

Eric Lindquist

Okay. Well, I think that the growth rate, I’d say, would be perhaps between 25% and 40% in the markets where we are present and in some markets, it’s been like in Italy, I think that that’s been quite considerably lower. So I think it’s difficult to give a figure, but we are – where we are present it has been just behind the growth that we see in our own figures. But it’s come down, of course, in general, you can say from the first quarter when the uncertainty became more obvious when the subsidies sort of got a little bit of a hit there. And I think the most significant one was perhaps Denmark.

We’re now discussing them to come back. We don’t know the details. And of course, in Germany, when they came to standstill just before the summer holiday, and they are being to be discussed now in the parliament as we understand, in the beginning of September.

Karl Bokvist

Understood. And then the – well, not only you, but I mean your North American part of climate grew very strongly. And then it seems like American HVAC and heat pump manufacturers are quite optimistic on next year with subsidies and IRA package and so on. How do you foresee your heat pump business in the U.S. next year?

Eric Lindquist

No. We are positive. We’ve been waiting a long time. I mean, in a way, you can say that we started our investments in North America 12 years ago, and then we came in with – – it was Enertech Global and then WaterFurnace 14 and Climate Mass 16 . So of course, we’ve been a little bit disappointed, it hasn’t moved faster.

I think now when the bold decision was taken by the current Administration, that now they are very determined for 12 years, they’re going to back this industry. Of course, that’s a totally different signal than before when we had like three or two – two or three or four years horizon. So we are positive. But at the same time, I mean, we know criticizing politicians. They live in a different world.

I mean, as we mentioned in the beginning of this conversation, all of a sudden, Chinese export was banned by the same Administration that hit Element. Now we hope that this 12-year period will remain disregarding Administration. But if we look now, it’s positive – very positive, I would have to say. And of course, our three companies in the U.S. and the one in Canada, they prosper from this. And not only our industry, but also the people engaged around it. They dare to hire people and the whole drilling – energy drilling industry is growing. So that’s positive. It’s taken a long time.

Karl Bokvist

Understood. My final one is just on the refrigerant side, as you touched upon briefly. But could you just give an update on kind of your ambitions with regards to how large percent of your portfolio will be running on by current standards, compliance refrigerants and by what time?

Eric Lindquist

I mean we can say that our exhaust their heat pumps and ventilation heat pumps, they are already 100% switched over to propane. And that means that the models that we already came with, without inverters, they came late ’90s. We never changed that. It’s been propane for all these 25 years. So it’s a tremendous experience.

Now of course, all our inverter-driven ones, the 750, the 735, which is our latest model that, of course, driven by – or using propane. Then on the water side, we switched over there as well. But there’s been a lack of compressors suited for – on the larger capacities. So there, we are to switch over in a few quarters to come. And on the ground source side, there, we are working again on an immediate solution and with the aim, of course, of having that assortment ready ’25.

Now, it’s a little bit uncertain where they’re going to be ’25 because a lot of lobbyism saying they’re going to be difficult for many manufacturers to comply with the 1st of January ’25. That’s our target. That’s how we work. We will be there with our full assortment at the beginning of ’25. But as you know, the legislation of the bill has not been passed in the European Parliament yet.

It also take place in 1.5 years. We – the rumors are suggesting they are going to be deferred a year or even two years, but that’s rumors. But we will stand there in our first quarter ’25 with a full assortment that’s switched over.

Karl Bokvist

Understood. That’s all for me. Thank you.

Eric Lindquist

Thank you.

Operator

The next question comes from the line of Douglas Lindahl from DNB Markets. Please go ahead.

Douglas Lindahl

Hello, gentlemen. Thanks for taking my question. I wanted to follow up on the previous question a bit where you gave some useful information on the heat pump growth rate in the quarter. I’m assuming you’re referring here to sales that you have – that you are seeing for your business. But I wanted to get a better picture on the sort of underlying demand that you see in the market. And you talk about slowing pace in terms of the heat pump market in general. But can you confirm that you’re still seeing positive volume growth when you talk about the sort of order intake side rather than the sales side? That’s my first question – in Europe.

Eric Lindquist

Well, I cannot comment upon the market as such because we don’t have those figures. The figures we have, that’s what is reported as being invoiced. The order intake is not possible for us to judge when it comes to the industry as such. And, of course, that’s a typical reaction, if you say, in Germany, where there have been a tremendous demand and still continue to be a decent or a good demand. But of course, when people hear that the incentive is going to be lesser or there’s an uncertainty, we wait.

That’s how we react with individuals. We all react the same way. And that’s why we’ve been trying to communicate. Again, we don’t like to criticize any politicians, but we like to advise them that if they are to change, they should say, well, we might modify them. It might be different, but don’t hesitate to continue because we’re going to subsidize or continue to help those who are willing to do something in the interim.

That’s exactly what they did, we must say, in the U.S., where they took away the subsidies. And that, of course, was a big blow because no one knew whether they were going to come back or not. But they came back and then they say, well, okay, we reinstate them. And to be fair to those who were bold enough to invest, they’re also going to get the subsidies. I think that’s the request we have. So we don’t have these stop and go, stop and go events all the time.

Douglas Lindahl

Okay. I see. I guess, moving onwards then. I was curious to see if you could give any sort of comments on the underlying volumes and the underlying pricing for Climate Solutions, specifically here in the quarter, if not specific maybe in broad strokes? Any comments on that would be useful.

Eric Lindquist

Well, I think that, of course, it’s a volume increase naturally, as you see it and I think that everyone talks about inflation and so forth. I mean it’s not our style really to increase prices unnecessarily. But I think also the picture that you get now in Q1 and Q2, that’s really the full leverage, you can say, when we are in balance because even if we invest quite heavily, of course, when you start to increase volumes, I mean, we still have one CFO and one CEO, just to make it a little bit on the joking side. Of course, we get a leverage as you see also on the gross margin. But we are not going to increase prices to try to squeeze the last thing out of the market.

What you see is that we are fairly much in balance with the price increases that we’ve been hit by although it’s taking a long time for us to compensate for that. And on top of that, of course, the volume has helped us tremendously to come up with a better margin and at the same time, continuing to be cautious with costs. I mean that’s – I think that the pandemic, in one fast, this change is forever. [indiscernible] use that word. We all travel much, much less, meaning that we also stay in hotels much less.

I think that’s not only for our industry. I think that society has changed. And I dare to say that we don’t even travel – yes, I think we reduced it with at least 1/3, possibly more, where Board meetings are perhaps cut in half. So combination of being in balance with the price, getting a better leverage out of the production, of course, we’ve been idling here, having all of the – being overstaffed, as we said so many times in production. And then we continue being cautious, of course, that’s all ending up in a better margin.

Douglas Lindahl

Okay. But on the pricing impact, can you confirm or deny that it’s double digits in the quarter for Climate year-over-year?

Eric Lindquist

I wouldn’t say that.

Douglas Lindahl

Okay.

Eric Lindquist

Yes.

Douglas Lindahl

So my final question is on Elements. You already gave some helpful insights into the semiconductor exposure there. But it seems as if the underlying growth is slowing, still. Is it mainly the consumer goods business behind this? Or what’s your – if you could elaborate maybe a bit on that would be useful.

Eric Lindquist

Consumer and semiconductor.

Douglas Lindahl

So them, two combined.

Eric Lindquist

Yes.

Douglas Lindahl

Okay. Thank you.

Operator

The next question comes from the line of Viktor Trollsten from Danske Bank. Please go ahead.

Viktor Trollsten

Thank you, operator. And good morning, everyone. The first, yes, Eric, you said that you expect to go back to a more normal situation in Climate Solutions in the second half. What do you mean by that?

Eric Lindquist

Well, we believe that we cannot have months and months of delivery times. We have to have a realistic delivery time of a few weeks from the time we get the order. I mean, we also – we sell through wholesalers. And I think we don’t like to be abused. Wholesalers, they have to have their inventory.

They cannot expect us to deliver within a week. But now we’ve been dragging our feet. It’s been a terrible situation. I mean we have never been through anything like it, as we said so many times during our 70-year existence. So coming back to a normal situation, meaning that we can respond within the ordinary delivery times.

That could be an exception, of course. Make sense, I’m going to have that, I’ll need that heat pump up, but that’s where we’re going to come back to. And that means that we talk about delivery times of weeks rather than several months and sometimes you’ll be talked about half a year, as we all know.

Viktor Trollsten

But how do you see that impacting growth and potential margins then? Because I guess you are in a massive ongoing investment sales. You’re basically ramping up the new – et cetera, I suppose. So in terms of growth rates, what would the normalization mean for Climate Solutions?

Eric Lindquist

Well, now you’re touching forbidden ground. I mean we’re not trying to – we cannot give you more – but of course, when we write like this, that we have massive investments. If we didn’t believe in the market, would be as people in small one, would we then invest that heavily, isn’t that a very heavy signal to you folks out there that we are massively investing and we are massively believing in the future. How clear could we possibly be?

Viktor Trollsten

Yes. I guess you’re touching upon my second question, actually. If your view on the investment program has changed anything in the last, let’s say, quarters, you are now mentioning some regional weaknesses. But I guess you just answered that, that you’re not viewing your investments, anything different.

Eric Lindquist

Not a bit.

Viktor Trollsten

Good to hear. And then coming back on the order side, just what we are hearing from the industry, obviously, demand has come down a bit from the crazy high level season in the last couple of quarters. But what we’re hearing is that orders are still well above sales levels. Would you agree on that, that demand is still higher than current sales?

Eric Lindquist

Yes. Well, again, it’s a very, very difficult question. But if we are to meet the targets that everyone is talking about, and just to give it a broader, I’m not trying to play hide and seek. But I don’t know anyone that would like to give you a more detailed forecast. But the industry talks about 2030 arriving at a volume – anywhere between 7 million to 8 million to 9 million units.

And that means to arrive there in a manner that would guarantee quality, guarantee installation capacity and so forth, then we would need to grow like 15%, 20%, 25% per year as an industry to arrive there. Otherwise, that’s never going to be fulfilled. And now it’s been pinpointed as one of the major sectors to decarbonize. And all the people that we talk to, they are very convinced that this has to happen, and I’m not talking about colleagues because sometimes an industry can be sort of over positively to the – stimulated. We firmly believe in that.

And that means that we’re going to double every four years as we see now coming eight or nine years. And that means that we have not fulfilled, by any means, the demand by decarbonization when it comes to buildings. That is just the start. And we see that in Sweden now and a little disruption is going down and everyone is so worried about that. And that is, of course, not good because the building industry drive this thing.

But new construction is about 15%, 17% of the Swedish market. So 85% or at least 80-plus would be retrofit because of the massive installation that we started to go through here ’98 and onwards. And they’re going to be the same in Europe. Once we have rebuilt Europe into heat pumps, going to last well into the 2030s, then the massive investment that we see now, they will be ready for replacements in 15 years. So this is a total.

The ball game is totally changing. And we don’t understand the nervousness when one or two quarters would be a little bit softer because we are in for a major change. I don’t know how we should explain that. But whether we are the only ones in the world believing in this, but it doesn’t sound like that.

Viktor Trollsten

No, no. I can – but I guess the market gets a bit nervous when you speak about normalization and then we look at historical growth rates in climate, that’s, let’s say, 5% pre-COVID, but I guess that’s the wrong way of looking at it then.

Eric Lindquist

Well, we are only human being – but we have a – – of a drive, I can tell you that. And we’ve been through all these different situations and difficult ones. We have Lehman Brothers, we’ve been through IT crisis and now we are facing this, and facing this is a phenomenal growth pattern behind here. How the heck could anyone question the possibilities for us to grow now? It’s hard to comprehend? Excuse me, I’m getting a little bit – here.

Viktor Trollsten

No, but it’s good. Thank you very much for your answers. I’ll step back. Thank you.

Eric Lindquist

Thank you.

Operator

The next question comes from the line of Carl Ragnerstam from Nordea. Please go ahead.

Carl Ragnerstam

Hi. It’s Carl here from Nordea. A couple of questions from my side as well. I mean, with the changes in subsidy programs in Germany, Poland, Italy and Denmark, could you perhaps quantify your exposures to these markets on heat pumps? And also with the coming demand in the, hopefully, very short term here, do you see a risk of under-absorption in production as well since you add new capacity? Or do you still rely on, I mean, healthy order intake and that backlog to compensate?

Eric Lindquist

Yes. No, we try not to build too much inventories. I mean, as Hans said here, of course, we’ve been trying to compensate for deliveries of components and material to be ready. Because if you have 95% of the material, you’re going to still miss 5%, nothing going to happen. I think that’s what most of the manufacturers, not only in our industry, been doing, they have been trying to compensate.

So when you get the two crucial components, then you’re ready to produce. But of course, there’s no way to live in the long run. And we – of course, we could specify to the very nail our market shares and so forth. But that’s – I don’t think that’s our profile to say, well, now we have so much in Poland or so much in Germany. As a rule, I think that we have such a broad presentation, and that’s something we decided to change 1992 because then we were so exposed to the new construction industry in Sweden with a very narrow assortment.

Since then, we have been working for 30 years, consecutive years, trying to not to be too dependent on one particular country. And then that’s why we suggest that we don’t like to be dependent of one country to 20%, 25% because then you’re too vulnerable. First, we would like to sell as much as possible into one country. But our philosophy is to have as broad as possible of a penetration. So I mean, I know that you don’t like that answer, typically, but I think you also – I don’t think you expected anything else.

Carl Ragnerstam

That’s fine. And also a bit on pricing. You like many others in the industry raised prices quite a lot here over the past two years. I mean, with maybe more – I mean, moderately growing market and then also raw material prices coming down, freight rates stabilizing, what’s – so what is your view on the pricing landscape here over the coming few years, maybe not tomorrow, but in the coming few years here? I mean do you notice any gradual increasing focus from installers, wholesalers or end consumers on pricing or…

Eric Lindquist

Well, I mean, here, we can philosophize, I think that we’ve been tremendously hit by the shortcomings of, of course, shortages of components. I think that the supplier – subsuppliers, they’ve taken that lesson and they have invested on their term to be engaged in growth. And that means like someone said me before, now you’re investing, I mean, how should we pay for that. When you invest, of course, you assume that the market is going to go up and not necessarily say, well, now we’re going to try to make less money because we’ve invested too much. I don’t think that’s anyone’s idea.

Hopefully, with all the programs going on now that inflation is going to be sort of hindered and controlled where we come back to, if I may call it, a more normal situation. Normal, we haven’t had a normal situation perhaps for 15 years ever since the Lehman Brothers situation. Negative interest rates, we do not believe would be a good thing in the long run. It should be, of course, on a realistic level. So that’s a long story about the pricing.

Of course, there are going to be some manufacturers behave or I don’t know who will do that to try to decrease prices for some reason. But we’ve never heard anyone that’s really, in the long run, has gained any market share to make more money by decreasing prices. I mean that’s a very simple model and you don’t have to participate in Harvard to study there to understand that that’s the wrong avenue.

But the coming price increases on the other hand, will be more moderate, we believe. If inflation is coming down, there’s no reason because if you look at it, and I don’t know whether you read the article in The Economist, not the last issue, but I think it was the issue before, they said that it’s nonsense that the manufacturers increase prices unnecessarily and cause inflation.

There were other factors doing that. And we fully explored that analysis. Our history has not been to increase pricing, but rather absorb a few of the price increases that we have gotten by own productivity. And that’s how we’re going to conquer the future as well. Now I’m stealing your time or the other’s time perhaps.

Carl Ragnerstam

No, it’s very good. Thank you so much. I step back here. Thank you.

Operator

[Operator Instructions] The next question comes from the line of Carl Ragnerstam from Nordea. Please go ahead.

Hans Backman

He just put his questions.

Operator

My apologies. Christian Hinderaker from Goldman Sachs. Please go ahead.

Christian Hinderaker

Yes. Good morning, everyone. Thanks for the questions. I’ve got three, and we’ll go one by one, if that’s okay. Just wonder, following up on the regional conditions in Climate Solutions, the market, et cetera. You touched on this a little bit earlier, but eager to understand not just in heat pumps, but more broadly, how affected you’ve been by the construction slowdown in some of those regions?

Eric Lindquist

Well, I think that’s – when it comes to interest rates, everyone or most of people have the same reaction in any country. So of course, the new construction is important, but to various degrees when it comes to our assortment. But I think the most obvious example is here the Element decrease in white goods.

Because when you build a new house, a new flat, of course, the flat or the house is always equipped with dishwasher, a cooker and dryer and all those – and on top of that, if people say, well, now is a bit – it’s not the right time to replace a dishwasher, they also wait. So there is like you hit twice, whereas when it comes to saving energy, that’s more something that no one can predict really about energy prices.

We better do something here to come back to a realistic level and also if you’re going to sell the house or sell the apartment, if the condominium want to have a decent way of climatization here. So I think that’s a different situation. But of course, new construction is going down. That’s – I don’t see any market that’s really increasing the construction and new build in Europe, okay?

Christian Hinderaker

Understood. Thank you. And secondly, maybe I’m just interested, we talked a little bit about pricing and obviously volume dynamic. But given the higher rates and sort of macro sensitivity in the back half of the year, how should we think about mix or any risk of down trading? Is that something that you’ve seen in terms of category sales in the second quarter?

Eric Lindquist

Well, I mean, I think I gave an indication there to previous answer that it’ll be more renovation, it’ll be more of that category rather than new construction. But when we talk about the volumes, like arriving at 7 million, 8 million units per year in like eight years depending on who you talk to. Of course, that is predominantly rebuild. New construction in Europe is, of course, perhaps even a good year, it’s much, much lower, could positively be around if even 1 million new dwellings for heat pumps.

So that’s – it’s a smaller category, but it’s an important category in the sense that, that sends a good signal to people, okay, in new build they install this category of heating, just like when we went from wood to oil that also started in new construction.

But eventually, everyone caught on, there was a tremendous era changing to oil from wood. Just an example of this country, took 20, 25 years. And in a similar way, it took another 20 years to change Sweden from oil into heat pumps. But that, of course, was not the new construction that was driven by the tremendous amount of dwellings, the houses already existed. All right.

Christian Hinderaker

Thank you. And then just finally, a question relates to the decline in the consumer segment. You’ve talked about customer destocking. Just wondering how big of a growth contribution that had from destock? And then also what your sense is in terms of channel inventory levels and whether there’s any other product categories or segments that the stock could be a risk? And also just more broadly or sort of at a higher level, how much visibility or control do you have in terms of understanding your customer inventory levels?

Eric Lindquist

Well, I think the last question there is no one will really want to admit that they had overstock. I think that’s the human brain in a way because that’s a misjudgment. But at the same time, as I said before, we are overstock on components. I think the whole industry is overstock on components. We wouldn’t like this massive increase, although it’s less than as Hans explained.

But of course, that’s built on our assumption that even if those companies are going to come out of the wood works now being so much better, we like to make sure that we have the ability to deliver. And I think that’s exactly like many stockists. When you sell directly to the consumer or to the business to business. I think there’s a lesser risk of having that. But of course, when you sell like over stockist or a wholesaler, there is always a risk that they’ve also seen the difficulties delivering and they have ordered a little bit too much. But I’m now talking in general terms, we don’t have that visibility really. All right?

Christian Hinderaker

Okay. Thanks very much.

Eric Lindquist

I think that we have come now to – if I’m not impolite, we are five after 12. And we tried to – two very quick questions then. So we’re not impolite to – there’s a lineup here of some – someone from Hongkong and Shanghai Bank. Yes, please? If you have these two questions, then we’re willing to take them. Quick ones. All right? We take two more questions, please.

Operator

Thank you. The next question comes from the line of Axel Stasse from Morgan Stanley. Please go ahead.

Axel Stasse

Good morning, everyone. Thanks for taking my questions. I have two. The first one was linked to the numbers of growth you have mentioned for the Climate Solutions division. I just wanted to understand how we can link this with Germany, for example, which has announced this number of applications that has dropped significantly in the first half of the year? And I just wanted to understand how you guys have seen this impacting your business in the first half of the year in Germany? Yes, a bit more clarity and visibility on this would be highly appreciated. Thanks.

Eric Lindquist

Well, what should I say? I – we believe without being 100% sure, not even – perhaps even 69% sure, that the companies – the European companies in general, they have all had difficulties. We believe we can now talk about ourselves as a group. And I think that companies producing elsewhere, they have had a little bit of an upper hand when it comes to deliveries when the European manufacturers are coming back. It seems like they’ve been lesser hit by a slower pace. I think that’s as precise as I can be.

Axel Stasse

Okay.

Eric Lindquist

All right?

Axel Stasse

Yes. Okay. Understood. And last question, I just wanted to make sure, have you seen a change in sales split across your heat pump product portfolio? Can we still assume that geothermal is representing more than 50% of your total sales in Climate Solutions? Or has this significantly changed over the last couple of quarters?

Eric Lindquist

I think that it’s very important that everyone out there fully understands that we follow each market. There are a few markets in geothermal would be the largest. That’s when you had the severe climate like up in Sweden, Finland, in some East European countries. But, of course, new build, that’s again is the requirement of the energy or I should say, output is so small. So then you need smaller modules and the ventilation heat pumps would be quite sufficient.

But to change the gas or oil burners or boilers there for us to offer is by far the larger segment and we follow a suit. That’s why we have the free assortment, not trying to convince everyone in France or in Germany, you should have this assortment. So we follow very much each market. So that is the wrong assumption that you have there.

Axel Stasse

Okay. Understood. Thank you very much.

Eric Lindquist

Thank you, everyone. Now with time running short. We appreciate your questions. As always, we try to be as sincere as possible, but sometimes we have to crack a joke and we cannot answer every questions, even if you would like to. Thank you very much.

Hans Backman

Thank you. Bye-bye.

Operator

Thank you. Ladies and gentlemen, thank you for your attendance. This conference call has been concluded. Thank you.