NIBE-B.STNIBE-B.ST
LOADING
|||
Operator: Welcome to the NIBE Q3 presentation for 2025. [Operator Instructions] Now I will hand the conference over to the CEO, Eric Lindquist; and CFO, Hans Backman. Please go ahead.
Gerteric Lindquist: Thank you very much. Good morning, everyone out there.
Hans Backman: Good morning from me as well.
Gerteric Lindquist: And just a few things when it comes to the order we are going to introduce, of course, ourselves and some figures afterwards, we have the Q&A sessions, and we will be pleased if there would only be 2 questions per individual and also try to end this Q&A session around 12 because we have other commitments shortly afternoon there. So with that said, once again, welcome to this conference call. And I think that the headline is that we are very proud to be able to present these figures as we are today. We've said several times that the organization that we represent, Hans and I, is very, very strong, very, very proud to have the ability and possibility to lead this organization. So that's the headline. Of course, it's a gradual recovery that we -- as you go through for the group. And of course, when comparing the situation in the world today, compare what it was when we started [Audio Gap] environment like that. And also the increased strength of the Swedish crown from many perspective, is very nice, of course. But when you compare figures, it's a little bit shadowing the real organic growth, which we, therefore, have explained very explicitly when separating it from the currency effects. And we gave a very bold promise from the very beginning of the year that we're going to be back at the intervals of the historic levels for each respective business area. And we are, of course, very proud that as far as we've come, and we are very transparent with where we are as we are with the targets. And of course, those disturbances that I just described, of course, they are causing some hindrances, but we are trying our best to give you some kind of a guidance where we possibly could land at the end of the year. You've seen them. We don't have to dwell so much about it. It's very pleasing, of course, that there is growth there well beyond the 1.2, like 4.6% organic growth. And what's also very pleasing is that we see that the gross margin is going up and the operating margin is moving in the right direction. And of course, moving into the quarter as such, the third quarter, then we see that the gross margin to be improving and the operating margin is now up to 11.3%, which is, of course, what we like when the margin that corresponds well to where we like to be. And if we just continue a little bit about the graphs that we typically look at, I mean we see now that the income is gradually coming back, and that's even more described perhaps in the next graph, where we see the curve is going in the right direction. And when we look at, again, it's an improvement quarter after quarter. And of course, it's a recovery all over, you can say, but in smaller portions, of course, where it's Germany and Sweden and Netherlands, particularly on the residential side, the U.S. remaining stable and also Italy, very much on the commercial side, which is very pleasing to see. We also see that there is a more traditional seasonal pattern, particularly with Stoves and with Climate Solutions. And it is also pleasing to note that all the efforts that we've done during the year despite the action program that we took, R&D remained at the same level and also the sales forces, and that is paying off now, of course. You can't look at things shortsighted. You have to be very determined long term to be successful. And here, we, of course, have now come up to the third quarter when it comes to the margin that is just in the right, can I say, level and the right span. And of course, we are giving a little bit of an indication here on this slide saying that, well, within margin of error, we should be close to the 13%. And that's, of course, again, a very bold statement, but you've been following us. We've been giving you very clearly the intervals. And now with 6 weeks remaining, it's very important we are into a quarter that is typically decent when it comes to invoicing and order intake. So we -- the best thing we can state is exactly what you read there, and that's also stated in the report. We are very cautious not to do anything or mention anything or do any saying here that wouldn't correspond to the report as such. So Hans, of course, is going to dwell a little more on the quarter as such on Climate Solutions. It's a good growth organically, and we've seen that, of course, and the margin here so far just south of 12%, whereas the quarter is coming in above the 13%. So it's a balancing act, a very delicate balancing act for the rest of the year. And coming into Elements, they, of course, at when the whole industry of heat pumps went down all over Europe, and of course, being a main supplier there of components, they also took a dive. They're a little bit behind [Audio Gap] but we also see now that, that is coming along. And electrification in general, of course, and also the rail segment, which is very pleasing to see. Industrial segment is more a reflection of somewhat cautious or subdued market, particularly in Europe. As a comparison, we can say that in general, Europe seems to be a little bit more cautious or subdued compared to the U.S. or the North American market. And if we just look at the same sort of forecast again if we dare to say or what we could offer as far as margin predictions, we say, well, it's going to be some close to the 8%, of course, but we also give a little bit of a buffer for ourselves depending on how the last weeks will look like. And particularly on the Element side, being a supplier or sub-supplier, we know that although the order intake could be good, but for obvious reasons, no customer wants to sit on too large inventories. It's always delicate to do the forecasting for the Element side. But looking at the figures there again, good growth. Operating margin is back at 6.8%. And when we look at the quarter as such, as Hans is going to come back to that. It's again, of course, on the higher level, up to 7.4% for the quarter. Quickly into Stoves. And there, of course, we noticed that had already indicated in the second quarter that, that would be difficult to arrive at the old or the interval of that we have been -- where we've been or where we used to be. So there, we need a few more quarters. And I think that is what we think that is more referred to -- be referred to the overall cautiousness, particularly in the European market. In North America, it's -- the markets are fairly buoyant, but there, we have difficulties with the manufacturing of stoves that's taking place in Canada and then being shipped into the U.S. So there, we take a hit when it comes to the margins. And there, we very consequently say that they're going to take us a few more quarters to come back to the span that we typically talk about between 10% and 13%. And there we see, of course, it's a thin margin and the quarter as such, that is around 3%. So it's not getting any worse. If we were bold enough, we could say that we've seen the bottom of also the stove market with the figures that we've seen during quarter 3 with a margin of 8%, which, of course, is not satisfying, but still is slightly higher than the previous quarter '24. And just a few concepts in here. I mean, Climate, it's a typical graph really on the pie chart here with climate being like 2/3 roughly and then Element and then Stoves. And on the distribution side, profitability, then we see that, of course, Climate Solutions coming out quite dominating here. And then geographically, not that much has happened. North America remains slightly above 30%. The Nordics, slightly below 20% and then Europe, of course, around the 45%. So no dramatic changes really there. So I think with those quick comments, I hand over to Hans, but I have a lot of eager people out there that would like to put questions to us. All right?
Hans Backman: All right. Thank you, Eric. Yes, I'll try to be quick, but not rushing it, but to allow for questions, of course. Before we jump into Climate Solutions here, I would just like to mention from the main report, speaking for the tax rate. Some of you might have seen that the tax rate in the quarter is above 30%. And that is not a new normal as we see it. It's rather a matter of timing differences now, very much related to the introduction of the so-called Big Beautiful Bill in the U.S. where the rules and regulations around capitalization of R&D expenses has changed, and that has led to a couple of one-off effects, but that doesn't change anything in the long run really. That's the major reason for that tax rate going up. If we then move into Climate Solutions, I mean, Climate Solutions definitely shows a very robust performance in what still is a challenging world in a way. It's a very strong comeback from the challenges we faced last year and the profitability level at the time. We've been able now to grow sales with some 7% organically, but then, of course, current [Audio Gap] but due to increased sales and also our cost efficiency programs that we have undertaken, profit has improved by close to 50%, coming up from the SEK 1.5 billion to more than SEK 2.3 billion, landing in this operating margin at 11.9%, mentioned. And on a 12-month rolling basis, we are up to roughly that level, 11.8%. In the quarter, sales grew by some 8% and gross margin improved even further, coming up to 35.4%, up from 32.5%. So that's a good achievement as well coming from the volume that we get. And profit grew by another close to 29% or almost 30%, more than 29%, landing in the operating margin there at 14%. So it's a very robust performance and a robust and strong comeback from last year, showing our ability to adapt the cost levels when market conditions change and also to reap the benefits of a good volume that comes in. In terms of split of sales per geography, there is virtually no change at all from last year. It's very stable with Europe, Mainland Europe being 50%, our home turf here up in the Nordics being slightly north of 22% and North America with a solid quarter of total sales. NIBE Element has also shown a very robust in a challenging world. And here, we are really exposed, as you know, to many segments in many parts of the world. Organic growth here was above 6%. But then again, the Swedish currency took away a large portion of that, landing it in then at 2.9%. Gross margin took a jump up here from 19.8% to 21.1%. So that's a nice improvement. And then the profitability itself coming up with more than 30%, landing in on the 6.8%, which leads then to a 12-month rolling that is around that level as well. In Q3, sales actually grew even more organically, that is close to 9%, but again, with a headwind from the Swedish currency. Gross margin continued to improve and profitability again, and we came very close to at least the lower range in the interval for our historical profitability ranges there at 7.5% and a nice step in the right direction. Neither here have we seen any large changes in terms of split of sales per geography. So that's basically how it looked last year with North America being a very strong portion of that business. I would say when it comes to Stoves that despite these very challenging market conditions that they have experienced, first, an overconsumption, you can say, during the COVID period when everyone renovated their homes and then when Putin invaded Ukraine, leading to a lot of people wanting a freestanding and alone off the grid type of heating system. And after that, a period with low energy prices, higher interest rates, low new build. Despite all of those challenges, the business area has defended its position quite well. Despite, I mean, an organic decline there of 8% and more than 11% when you include currency, they have been able to generate a profit here and continue to spend time and money on interesting products and market activities for the future. Here, the -- yes, performance for the last past 12 months is just above 4% and far from where we're used to being, but not that we see that there is any in coming back to a stronger performance as soon as the market returns. And I think we see that a little bit in Q3. Here, sales dropped organically by 1.6%, so much less than before. With currency again, it's obviously a drop there, which is much larger than that. But despite this drop then of 7%, we were able to defend the operating profit from last year. So it remained on the same level, generating a margin there of 3%, which shows the ability also here to take out costs and of course, keeping a portion of them on board or a good portion to be able to meet an expected better demand going forward. In this area, we see a small shift or a clear shift in a way in the distribution of sales in the sense that North America has increased up to 37% from 32% of last year. That's the major change. And that shows that North America has actually, from a sales point of view, been quite decent. What then has hampered the picture for us is, of course, that we have our manufacturing in Canada, and this is where the tariffs have hit us from a profitability point of view. Moving then into the balance sheet. There are no major changes here. We have a fairly stable balance sheet. We've been able to amortize both on intangible and or depreciate rather -- intangible and intangible assets. The investment level has come down a little as well, which we will see on a slide later. On the liability side, you can see that both the interest-bearing -- long-term interest-bearing liabilities and the current interest-bearing liabilities, both have come down, which we also will see the effect of when we look at the net debt figure soon. The performance then and what we have on stock, so to speak, has an effect on the cash flow. We have had a good cash flow from the operating activities of slightly more than SEK 2.9 billion, up from just below SEK 1.8 billion for the corresponding period of last year. Then you see a change in working capital, which is negative with SEK 1 billion. That is solely related to an increase in receivables. It's the exact same situation we actually had -- inventories have been reduced and accounts payables have contributed in a positive way. So it's a result of us invoicing more, and we've not changed any payment terms really. So this should come eventually. And on the next line, you see that the investment in the current operations has decreased by some SEK 500 million, then leading to an operating cash flow, which is plus SEK 420 million rather than minus SEK 450 million of last year. And then we've had some amortization of loans and things affecting the change in liquid assets -- the currency change, we cannot do much about. A few comments here on the key financial figures. The -- we have a fairly decent amount of cash on hand, the unappropriated liquid assets. The number there is actually correct. I mean, the SEK 5,119, which was the exact same. But if you look into the report on Page 13, I think it is, you see that the composition is different. But it's a good portion of cash there. And then interest-bearing liabilities have come down and the net debt is now [Audio Gap] which is very pleasing to see. We typically amortize our loans and liabilities effectively after acquisitions. And what took a little longer this time was, of course, the acquisition of Climate for Life, one of the largest acquisitions we've made and then a market that took a very strong downturn after that. But we're definitely heading there in the right direction. And the equity assets ratio is solid as well, being above 45%. Just a quick comment there on the working capital. If we look upon it, excluding cash, it's also been improved from last year with more than a percentage unit. We are still targeting 20% as an intermediate target. So we still have some work to do imminently moving in the right direction. And moving in the right direction are also these key figures, although they are, of course, not where we want them to be yet, but they are heading there. Return on capital employed, now 9%, up from [indiscernible] return on equity also above 9% there, up from just below 7% and a profit per share that has increased just like equity per share. So things are slowly but surely moving in the right direction. And as always, we don't comment upon the share price, especially not today, I think I think. By that, I'm done. So, if you want to add something before we open up.
Gerteric Lindquist: No, I think we open up now. And as we say, about 2 questions per individual and then we take it from there. All right.
Operator: [Operator Instructions] The next question comes from Uma Samlin from Bank of America.
Uma Samlin: Two for me, please. So first question is on the Nordic market. I was wondering if you could give us a bit more color on the lower growth in the Nordic this quarter. It seems like it's minus 1.5%. So what is the main drivers there? What are the trajectories do you expect in Q4?
Gerteric Lindquist: Okay. So we should [Audio Gap] in general or you're referring to Climate Solutions now or you're talking about the whole NIBE group?
Uma Samlin: Yes, the whole group is the one that you have reported.
Gerteric Lindquist: Yes. Okay. That's fine. Well, I think that, of course, the contraction is substantial, as we said, in the Nordic when it comes to Stoves. That's very obvious. And also, we noticed that the industry as such is not that strong in the Nordic region when it comes to the heating element. And I think what's keeping it up at a decent pace is still the Climate Solution. So I think the consumer -- so cautiousness when it comes to Stoves, that's certainly an observation. Also that the industry in general is not that strong in performance, which is heating element where heat pumps are keeping up fairly decently.
Uma Samlin: Okay. That's super. My second question is on your margin guidance. So I guess if you assume that Climate Solutions will reach the corridor of 13% to 15% for the full year with some margin of error, let's say, around 13%, does that indicate, I guess, significant upside in your EBIT margin profile in Q4? Would that be then like trending more close to 15%? So what would you expect to be the drivers of the step-up in Climate Solutions margins in Q4?
Gerteric Lindquist: Well, I think that to start with, as we mentioned, the seasonal or the seasonality is back. So here is a little bit weaker and the second half is a little stronger. That's the traditional pattern that we've had prior to pandemic and the -- and those years with crazy, if I may call it, energy prices. So of course, quarter 3 and 4 traditionally should be stronger. And it's very difficult to predict anything, and we try our utmost to give you some kind of an indication that if we now say, as we say, regarding Climate Solution, of course, that is the best hint we can give you. It's impossible to say it's going to be so and so common. I think that's as far as we get -- the Stove side, of course, we saw after Q2 that it would be difficult, very difficult to arrive at within the span. And that's also clearly indicating now. That doesn't mean that we wouldn't have an uptick again. It's just that they came into this downturn a little bit later. First quarter '24 was not bad at all, whereas the other ones were really taking a hit. So it's more a matter of that has staggered a little bit when it comes to sales and profitability.
Operator: The next question comes from Karl Bokvist from ABG Sundal Collier.
Karl Bokvist: The first one is just a follow-up to the margin here and especially if we think about Climate because historically, the fourth quarter's margin is on average lower than the third one. So if possible, if we take aside the seasonality effect here, I see volume is one thing, but what other drivers do you think could help the margin in the fourth quarter help you approach the full year target that you guide towards?
Gerteric Lindquist: Things that are moving in the right direction when you talk about the strengthened productivity. I mean, that continues quarter after quarter. Productivity is one factor and also the ambitious program that we have across the business areas, Element and Climate Solutions. So I mean, there are no magic factors, but there are some factors that we feel will continue to assist the profitability.
Karl Bokvist: Understood. Yes. Understood. The second one is on the receivables point that you mentioned, Hans. Historically, the kind of balance between receivables and payables have kind of yielded a net neutral situation. But the last couple of quarters, the receivables have increased more than the payables. So how long do you think this kind of gap will be before they normalize?
Hans Backman: That's very hard to predict. I think the result of the increase in the receivables is a consequence of the seasonality kicking in and with us invoicing more, so to speak. And typically, the invoicing takes place in the latter part of each month as well. So it's typically weaker in the beginning and then a lot happens and that you don't collect it until the next period. On the payables side, we have a little bit more deliberately than before, begun reviewing payment terms without treating our suppliers bad in any way, but to make sure we have competitive terms. And when it's going to level out, it's hard to predict.
Operator: The next question comes from Christian Hinderaker from Goldman Sachs.
Christian Hinderaker: I'm going to follow up on the working capital side, if I may, and on inventories, 23.9% of last 12 months revenue. I appreciate we're improving quarter-on-quarter, but still above the sort of long-run average. I guess, firstly, do you anticipate a seasonally strong Q4 for inventory? And then longer term, how do we think about the inventory level required to support growth either as a percent of sales or perhaps on an inventory days basis? That's the first one.
Gerteric Lindquist: Well, I mean, as Hans mentioned, of course, we like to drive down the inventories. And I think that there's been a little bit of cautiousness here now from sales because we don't like to have any disturbances when it comes to deliveries. We know that everyone is on the tip toes out there. And of course, it's very tempting to say we are -- now we're going to bring down the inventories. And I think that we and our colleagues, we really have to restore our, should I say, reputation in the market by really delivering promptly. And I think that the discipline is coming back. And I think the next step is keeping the discipline and then very diligently moving down inventory levels further. So there is a cautiousness on our side and also our colleagues, I'm sure, that no one wants to sit out there saying that, now we have like so many more weeks of delivery. That is no, no go for us. And I don't think that's -- I think that's pretty much a symbol for the whole industry. And that was my immediate answer...
Hans Backman: No, no, absolutely. It's very correct. And if I just may add, I mean, what we are taking down also step by step. It takes a little bit longer, but it's a deliberate work to do it, level of component inventory. We -- as you know, we had delivery issues, so to speak, during COVID because we couldn't get products on board to the extent we needed. And when we could source something, we sourced it to the extent possible. And that inventory, given the strong shortfall that came afterwards, is now being used step by step and being reduced. So -- but without, as Eric is pointing out, disturbing any production that we have throughout the group or deliveries to the customer.
Christian Hinderaker: Okay. So just to be clear, the pre-2020 levels is probably an unfair number to think about in the immediate term?
Gerteric Lindquist: Well, I think it's the reverse picture. Then there was an enormous demand or if I say, quite a heavy demand. And then we were lagging. And then, of course, the figures turned out to be very nice, perhaps a little bit bigger than -- or better than we really deserved being viewed for or criticized for, evaluated for. And now we come from the other side. Now sales are picking up, we are cautious. So I think that we have to take it step by step and bringing it down perhaps to '20 at least and then take it from there.
Christian Hinderaker: My second one is on the action program. In the Q4 presentation last year, you gave a summary of the potential split for those savings by segment. I suppose, firstly, is it fair to assume that the 73% of savings have come in Climate Solutions as was set out in that slide? Or has there been a sort of readjustment as we move through the year?
Gerteric Lindquist: No. Hans, you...
Hans Backman: Yes. No, I think that the calculations we made at the time and as the program evolved, so to speak, they were pretty accurate. And that's what we see has come in as well. And given that the stretch in the return to normality has dragged out a little, we've undertaken a few more saving actions. But that's all kicking in now, you can say, according to the program. And then -- well, running a business, you always have cost reduction initiatives. So it's -- but it's mainly related to the program, kicking in as we planned.
Operator: The next question comes from Johan Sjöberg from Kepler Cheuvreux.
Johan Sjöberg: I have a question starting off with the Climate Solutions, Eric, if you could. You talk about sort of demand being back to -- or demand for next year, you're talking about external consultants and they share -- or you share their view upon sort of the growth. There are a lot of reports out there on the heat pump market in Europe, especially. Could you sort of give some sort of ballpark range what is the sort of the underlying assumptions you are looking for or basically the consultants are looking for, which you agree with?
Gerteric Lindquist: Well, as you say, there are so many reports out there. And some are very biased and some are more -- I don't know where statistics come from. But I think that you can get reports anything from 5% to a few double digits plus, like anything from 5% to 12%, depending on which report you read. But the common denominator is that no one foresees a decline any longer, but rather growth, but in various sizes or various numbers, whether it's 5% or 7% or 11% or 12%, it's very difficult to predict. But what we take away from all those reports is that we -- the tide has turned. We are back on a market that is getting or growing again, which is very pleasing. Then, of course, it's up to all the colleagues out there, including ourselves to do as much as possible out of those figures. But perhaps, as we said before, we all love when the growth figures are phenomenal, but not necessarily do the customers always benefit from that. I think that we believe that a growth in an orderly fashion is better for everyone because then the installation work is done professionally and the distribution flow works much better. So those figures indicated that I think that would, to us, mean that it's a healthy growth possibility, but still in a way that they're going to make things materialize in a profitable and decent way for us as manufacturers, but also for the installers out there and for the end users.
Johan Sjöberg: That's very clear. And also just looking at the different segments in Climate Solutions also. I mean, looking at sort of what is heat pumps and of course, the different segments within the heat pump and also you got the water boilers. Is it a big difference between the growth rates right now between sort of -- if you take sort of the bigger sort of subsegments, not going out to sort of add to water or anything like that, but more sort of between the different bigger segments within Climate Solutions, it's a bigger -- it's a big difference in growth right now?
Gerteric Lindquist: Yes. Well, I think that the water heaters, if you talk about them, they have a more modest growth, and that goes for all over, of course. And that's pretty much -- construction is down -- new construction is down, and that's where you typically, you install those and when you build new houses and so forth, although the houses themselves, they might have heat pumps or district heating. But you have those modules there we typically have 1 or 2 of those water heaters. When construction is down, it's also down. So the water heater market is very, very cautious, a few percentage units, but doesn't have the same growth at all as the heat pumps, but stable, decent margin. So it's not something that we should neglect by any means, but the growth pattern is strictly on, you can say, on heat pumps.
Johan Sjöberg: Got it. Hans, also a few questions for you, if I may here. You mentioned in the report the impact on sales from the currency. Could you also talk about the impact on EBIT just to get sort of a feeling for the dilution, if any, from FX in the quarter, if that's something you can provide us with?
Hans Backman: Yes. It's roughly the same. I mean the margin is not influenced to a large extent. Of course, you can convert less dollars or euro or what have you at a poorer rate, so to speak, or stronger or weaker rate, which has an impact. But in percentage-wise, it doesn't deviate too much from the effect on the sales side either.
Johan Sjöberg: Okay. And also your comments on the Stoves business also, the tariff, of course, impacting -- of course, impacting even more now when you have a higher share of sales in the North America coming from Canada. But what are sort of the impact from tariffs in the quarter, if that -- just give us some sort of feeling? And also what are your -- how can you mitigate that? And how long time will it take before you can mitigate these tariffs?
Gerteric Lindquist: It is substantial. We won't dwell on any [Audio Gap] of course, partly will be taken like -- in any case, will be taken by price increases. But we -- at the same time, we've said we're never going to put our position on the market in jeopardy by being ridiculous in that. We just have to trim and trim and trim and be more efficient, try to come back to a margin that is decent. So we have taken quite a bit of a hit during Q3 and of course, during the whole year, and we don't expect that to improve, but price increases takes away a little bit. And then we just have to be more efficient and streamlined. Those are the only 2 recipes. And then thirdly, you could possibly -- but that's more of a guess. I mean the American manufacturers might be tempted to increase their prices when they see that's difficult to import from other countries. But that's a speculation. I wouldn't dwell on that. So we are between a rock and a hard spot, as I say, but we're going to come back to a decent margin by streamlining and doing everything possible without jeopardizing our position in the market. That was a long answer to you, but because that is a little bit of a long answer to us. We are, of course, doing our utmost just to keep and increase our position in the U.S. because we are well positioned. And now it's really up to productivity and doing everything we possibly can to combat the difficulties with those tariffs. That was a long answer. That's it.
Operator: The next question comes from Anders Roslund from Pareto Securities.
Anders Roslund: Yes. I was curious about your thoughts about next year for Europe and heat pumps. I mean this year have been characterized by de-stocking coming to an end, and now it's the true market growth we are looking for. And at least in Germany are sort of coming with some growth into next year. How do you see structurally on Europe for next year?
Gerteric Lindquist: No. As I said there, we assume that Europe will grow overall. And of course, Germany is going to be one important contributor to that growth. And then, of course, there are -- it's important to distinguish between those applications and the number of heat pumps really being installed because you have a sort of a period once you have the application in and is approved, you don't necessarily start to install the week after. You have an allowance or is it like how many quarters was it now like -- many months...
Hans Backman: Yes, yes, I don't recall exactly.
Gerteric Lindquist: And then, of course, the true figure is around 40% -- or well above 40% that's been installed, partly taken from inventories, of course, and partly from producers directly. And we believe strongly that there will be a real organic growth for the manufacturers next year because now we should be out of the inventory, has been dampening things. So the overall picture, I mean, now again, sitting here or standing here on the 14th of November making predictions for '26, but if you ask us, we look at the European market in a fairly positive way because also that the interest rate die or at least they come down, that is also sending a report to consumers or sending a signal to consumers that, okay, now it's more decent. They can start to build homes, which is very important when you start to build homes in a country. That's a driver for the whole economy. So without too many other disturbances, but then you never know about Europe what's going to happen. We believe that it's going to be a stronger year '26 than this year. And then, of course, that is a prediction. I don't know whether I answered your question, but I tried.
Operator: The next question comes from Christian Hinderaker from Goldman Sachs.
Christian Hinderaker: I boldly went back in the queue, so I'm surprised to be fit in for the follow-up, but I appreciate it nonetheless. Yes, I wanted to ask the Selmo acquisition you made in Italy during the quarter, I guess, interesting in terms of its components, focus, smart thermostats and so forth. How should we think about that transaction and the scope of your broader M&A priorities looking forward? Is that illustrative of the type of deals you're looking at? Or are you still balanced in terms of also reviewing sort of OEM type transactions?
Gerteric Lindquist: I think that we have received a number of questions earlier on today in other forums, and we say we're always working on acquisition. Nothing has come down. Of course, '24 was a year when there weren't that many signings carried out. But I think this is a decent acquisition for Element with a turnover around EUR 20 million. It's not gigantic, but it's profitable. It's a company that we've known for a long time. It's a company that we've been working with for a long time. We don't foresee any [Audio Gap] issues if I had to say that because we know the founders and has a very good relationship. So it's one of those add-on acquisitions that we really like to do, family-owned companies, and they remain helping us, it's perfect. I don't know whether I answered that question fully, but we have similar activities within Stoves and within Climate Solutions, ideal partners and that we try to trim and try to bring on board. But everything is timing, just like anything else in life. And this Italian acquisition was something we've been discussing with them for a long time. And then all of a sudden, they say, we are fine. Should we really -- now we really go and then we are ready. An acquisition takes more than a quarter or 2 in our world, we like to come in on a friendly basis, not coming in as an intruder or -- yes, exactly like that. We like to come in as partners, and it takes time to develop that over years. So those are the most successful ones in our book. Okay?
Operator: The next question comes from Carl Deijenberg from DNB Carnegie.
Carl Deijenberg: I was a little bit late, so apologies if this question has already been asked. But I wanted to come back a little bit on the topic of pricing. I mean we talked about this for roughly 2 years now. And I guess earlier this year, we were talking about inventory reductions amongst the distributors and increased campaigns on the back of elevated inventories. But now we hear, I guess, also from some of your listed peers that pricing environment on the hydronic side seems to have been improving here a little bit towards the latter part of the year. So I just want to hear your view here on sort of pricing in general and maybe if yourself have done any sort of definite price adjustments here in the latest months.
Gerteric Lindquist: Well, I think that's one area we've been very cautious that we are one of the leading actors because to sell premium product, you can't devaluate the value because short term, they just deteriorates everything. So coming back again to the overstock situation, we had some of that. We've been very cautious of reducing prices. And therefore, it might have taken a little bit longer to reduce those inventories because you know that if you sort of spoil the market with lower prices, then that is very contaminating. But further on in the distribution chain, and I'm repeating this again, of course, when our distributors or installers have been sitting on inventories, knowing that also might have been refrigerants and stuff like that, they see a new wall coming towards [Audio Gap] well, and they have to be gone. Of course, it's very tempting just to free the capital tied up. And our own method has been sit still in a boat, be very cautious. And as far as price increases are concerned, monitor that very, very cautiously again, being very observant. Of course, we agree what you say. We also see that there is some signs of price increases in the market, which is very natural once it's been stabilized as it's been. And I think no one is the winner in the price war, just like any other war, all are losers.
Carl Deijenberg: Fair enough. Then I wanted to ask also a little bit coming back to the balance sheet and sort of gross margin development. I mean, quite a good rebound here in Q3, but still, as you evaluated earlier on, you're still in the situation where inventories -- your own inventories are on the way down. And I just wanted to ask a little bit on the sort of internal production rates for you. Obviously, you've been adding capacity quite dramatically in the last couple of years. But would you say that sort of the shipments you are delivering on right now is the sort of utilization in sort of your base production sort of excluding the capacity expansion, is that fairly much 1:1 right now? Or are you still suffering quite tangibly on the gross margin from some utilization?
Gerteric Lindquist: Well, I mean, we can't avoid depreciation. I think that's kicking in, of course. So of course, they're going to be lesser than what we sell. That's very obvious. But at the same time, on the other direction, those new facilities that we have, that's also offering better productivity. So it's not so easy to say that, okay, now we sit with a tremendous depreciation. Of course, it's going up. But they're also built for a reason, not only for volume increase, but also to do things more rational. So that's working in the other direction. I don't know whether I answered your question, but there was...
Carl Deijenberg: No, no, no, but -- yes, yes, yes, absolutely. No, but I guess, I mean, my question was a little bit, and I understand there's multiple variable components to it. But I mean, assuming if you would see further volume support next year, it sounds like you could still have some upside on that gross margin development even now when we look at Q3, where you saw quite a good development year-on-year at least.
Gerteric Lindquist: I think that we have to give you right there, yes. Correctly, so...
Operator: The next question comes from Karl Bokvist from ABG Sundal Collier.
Karl Bokvist: But I just wanted to go back to one thing that you've been very good at in the Nordics, which has been kind of heat pump products towards new buildings or new residential buildings. And if we think about both Nordics and Europe potentially seeing a bit of an uptick in new residential construction, how have you worked with that kind of product assortment in other areas than Sweden?
Gerteric Lindquist: No, I think that if you talk about the exhaust air heat pumps, we've been working with that as well, but that comes to legislation -- the construction legislation and also preferences for what you can do. And I think that we see very positive view on our next generation of heat pumps where you also can -- like I'm talking about the exhaust air heat pumps now in well-insulated homes, that we also have a cooling capacity. When you come a little bit further south, then there's been a question, could you also possibly cool our facilities in the summertime. And I think that has given us quite a stir in demand. So that's one way of mitigating that. But of course, when you have lower standards, then you have to adapt to that when it comes to building standards. Here, we have a very tough situation up -- for instance, Sweden or that's pretty much the same, in the Nordic markets, you can say that you can only use 40 watt per square meter a year, and that limits your amount of energy of 6,000 kilowatt hours per year in house, and that's including tap water. So of course, that is -- that's quite a challenge. But that's also something we can -- we use when selling that to house manufacturers and customers when we go in other countries, ventilation and heat pumps in Holland or Netherlands, for instance, that's very, very important. So they are tagging along the same lines. And also in Germany, that is pretty much the standard that you have to recapture the ventilation air or the energy in the ventilation air. So the larger heat pumps, they are typically for renovation when you have -- when you're replacing a gas burning boiler or an oil burning boiler with an output of some 16, 20, 18 kW, then, of course, you have to have a larger heat pump and then you talk about a different vehicle or a different animal, but you still supply the same sufficient amount of energy to the radiators. But then you talk about refurbishment. I hope I answered your question.
Karl Bokvist: Yes, partly one, I mean it is just that you've built up a strong position in the Nordics. And I mean, as you expand in the other countries, how you work to kind of get close to that level of relationship with the important stakeholders, house builders, et cetera, so that you're in their blueprint, so to say.
Gerteric Lindquist: Yes, yes. Of course. And also working with house builders and giving them the upper hand, the advantage of using our products and demonstrating what can be achieved having the Nordic market as references.
Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Gerteric Lindquist: Well, once again, thank you for the disciplined way you've all times, you would like to have very, very much of a decimal, comma and so forth. And we, of course, couldn't do that. But I hope we've put some flesh on the figures in the report. So once again, thank you for calling in, and we see you, if not earlier, beginning of next year when we report the full year. Thank you again.
Hans Backman: Thank you, everyone. Thank you. Bye-bye.