NIBE Industrier AB (publ) (NDRBF) Q4 2023 Earnings Call Transcript

NIBE Industrier AB (publ) (OTCPK:NDRBF) Q4 2023 Earnings Call Transcript February 16, 2024 5:00 AM ET

Company Participants

Eric Lindquist – Chief Executive Officer

Hans Backman – Chief Financial Officer

Conference Call Participants

Carl Ragnerstam – Nordea

Douglas Lindahl – DNB Markets

Karl Bokvist – ABG Sundal Collier

Viktor Trollsten – Danske Bank

Axel Stasse – Morgan Stanley

Brijesh Siya – HSBC

Carl Deijenberg – Carnegie

Operator

Ladies and gentlemen, welcome to the NIBE Q4 Report. At our customers’ request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions via the telephone lines.

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

Eric Lindquist

Thank you. Good morning or good afternoon to all of you out there. Thank you for calling in.

Hans Backman

Yeah, hello. Hans here as well.

Eric Lindquist

And we’re going to have a traditional setup here where we comment with a few slides to start with, and then you have a Q&A. So looking at the first slide here, we, of course have, as it says, a very good year all in all but a clear decline in the fourth quarter. And I’m sure that you’re also going to have a number of questions regarding the restructuring program due to the start — there start of 2024 that is weaker. But if we just comment about the year as such, of course, there’s been large fluctuations in demand and we all know why, we try to explain that, the inventory adjustments in the whole distribution chain and now when that is more or less solved, then of course, we see that there are too many heat pumps in the chain out there, which of course makes it very difficult to make any kind of realistic forecast. And the higher interest rates, of course, they also make it difficult for families to buy new homes and invest, and also that dampens the whole consumption, we can say. Nevertheless, we’ve made five larger acquisitions, and they are strategic, of course, turnover some 3 billion krona. So all in all, that’s fairly decent.

But coming back to the structuring program, of course, we’re sure you’re always going to have a number of questions. Looking at the group, at a full year, of course, for the 6.6 billion, that is the highest turnover revenue ever and also coming out with the operating profit of very close to 7 billion that is also the best result ever, and the operating margin is also, as we recall it, the best margin ever, if you look at the year as a whole. Looking at it like fourth quarter, where we see that the expansion or the growth is coming to a standstill and the organic growth is not there anymore, we have acquired some 7%. So the turnover we can say is about the same as last year and of course the operating profit is coming down and also coming down the operating margin significantly. And that is of course now when we see the first part of this quarter where we start to react. And that is also a slide that describes that more in the in the graphic way, where you see now that the Q3 and Q4, particular Q4, that’s always the strongest one that is more flat compared to Q3 and that is of course affecting the profit and we can also see the curve up there that’s getting a little bit of a downturn, and we also going to come back to that in comments, how we look at that.

And if we just look at the pie chart, as we typically do, pretty much the same Climate Solutions is about two-thirds, Element is some 25 and Stoves like 10%. That doesn’t change much over the years. And when we look at the distribution of profits, of course, that is again, pretty much pronounced at Climate Solutions, almost having some 80%, whereas Elements and Stoves have been hitting tougher times a little bit earlier. And if we then continue with the next slide, you won’t dwell too much because we know that we are anxious to put some questions here. We also see that the North American pie is a bit over the 25% now, which is very good, because Europe, particularly on the Climate Solution side, is weaker and the Nordic countries, they represent just a little bit over the 21% or one-fifth, which is our home market we’ve always said.

And if you just add a few comments about Climate Solutions, of course it’s a good overall performance, but fourth quarter, again coming back to that, that is course weaker or a decline. And then we start this restructuring program from the point where we feel that, okay, we don’t like to have any uncertainties internally and neither do we like to have any uncertainties out there, we might as well start doing this, sending clear signals what we’re going to do. And of course, we have not deviated from our firm belief in the future but sometimes things happen and now, there are few things coinciding, and we just have to react. Otherwise, the investments, we’ve done them very orderly since 2020 and they are now soon to be completed. We mentioned that we’ve invested some 8 billion over the last years and the target was some 10 and they’ll be completed, if not 100% this year, but at least the coming six or seven quarters. And, of course, we’ve been striving very hard to launch the new products, particularly on the Stove side, I’m sorry, on the natural refrigerant side and that’s now in existence. Now the timelines have been moved forward so that it’s not that urgent, which is a little bit of a disappointment to us that we came to the market in a very orderly time but they’ve now postponed to first of January 2025, and delay that a couple of years. Nevertheless, the operating margin, for the year as a whole, already mentioned that, that is the best ever.

And, yeah, again, operating profit for the Climate Solution is of course on the healthy side with the operating margin of 17.8, which is considerably higher than the previous year. And if we just continue on the Stoves side, there we’ve seen a clear, should I say, good demand and growth in wood burning, where it’s been much softer for pellet stove and gas-fired. [Technical Difficulty] that but also they’re particularly for gas-fired products. And there we’ve had a very — or had a very ambitious investment program, both for the production and such, but also for R&D and now we have launched one generation of new products, and one to come this year. So those programs are also to be completed, soon completed. And then of course, we have had to adjust our organization, due to the variations in demand and that is affecting our operating profit and the operating margin as we’re going to see in the next slide, where we take a dive from the 551 to 533, although we have pretty healthy growth, Hans is going to come back to that, but it’s mainly driven by acquisitions. And your operating margin is down a little bit more than 2% units there.

And on the Elements side, of course, there we are following the whole economy, we can say. As we said so many times, we are pretty much in every individual business sector. And there we also have seen the slowdown in the second part of the year. And that is, of course, one of the reasons why HVAC industry is weaker than before. And the consumer goods segment continues to be weak, but that started a little bit earlier, and that’s typically the first segment that takes a dive when interest rates are going up. And then the semiconductor industry, that’s a different story, because there we talk about trade restrictions in this particular between China and the US. So that is delaying the expansion there but now we see new factories being erected all over in Europe and in North America, so that is just about to start going in the positive direction again. Industrial segment continues to be good and one particular segment is electrification of vehicles. That is very interesting to us and in those markets. There again, we are ready for the expansion, we have invested and that is also soon to be completed, but we’ve had to take some adjustment costs that’s why the operating margin and the operating profit is slightly lower than last year, as you’ll see on the following slide. And there we will take a dive from the 10% to just south of 8% percentage units when it comes to the operating margin.

And I think that’s very quickly what I wanted to say, according to the slide deck, we had here. Hans, it’s your time to shoot.

Hans Backman

All right. Thank you, Eric. I’ll continue with the same speed to open up for the questions in a little while. If we then continue with Climate Solutions slightly more on a detailed level. I mean, as Eric said, we phrased it in the press release as a good performance, but actually, Climate Solutions has had a great performance. It’s the best ever in terms of the highest sales, highest profit, and also margins. Sales for the full year were up by some 20.3%, of which just below six were acquired. But what we haven’t specified in that table is that we also had a minus 2.5 coming from divestments, the portion from — the last portion of the shortest group. And while sales grew by 20 plus percent, profit was up by 29%, very much due to a strong increase in the gross margin thanks to the volume that came in, so to speak. But of course, in Q4 things slowed down and very much as a result of the market, which has continued to decline due to the inventories that we see are out there. So in the quarter, itself, the growth was minus 1.24%, meaning that the organic growth, including the slightly positive currency effect actually were down by roughly 9%. And although gross margin improved, the decline in volume overall has a negative impact and we came in there on 15.9% in the quarter, which of course, was down from the 19 points we had last year, but in a way is a strong quarter.

If we looked at the geographical split of sales, there haven’t been very much changes to that picture. North America has picked up slightly, slightly. And overall, we’ve seen in North America that has been a little bit stronger in general than Europe now during the latter part of the year. If we quickly move on to NIBE Stoves, that business area grew with some almost 19% in 2023, but, of course, a large portion of that came from acquisitions. And as stated before, I mean, wood burning stoves in Europe has been fairly strong and performed well, whereas North America with gas and then pellets, in general, have been weaker. So we came in there at an operating margin of the 11.2, down from the 13.7. And in Q4, sales in total went up by 7%, but that all of it and much more so to speak came from the acquisitions, meaning that the organic sales, including a slight positive currency effects, were down by close to 7%. And with a weaker volume and the continued ambitions we have in R&D and so forth, the margin can in 12.27% there. In terms of geographical split of sales, the North American piece of the pie has increased due to the acquisitions we’ve made now representing almost a third up from basically a fourth of last year.

NIBE Element has basically shown the same pattern as in the business area mainly comes from the slowdown in semiconductors and lately then also the heat pump related HVAC business. And with these being a reasonably high margin business — for the business area that has an impact on the result. And in addition to that the consumer goods segment has seen some weaknesses. But as Eric pointed out, they’re also very interested in opportunities within, for example, electric vehicles and other segments as well. As Eric pointed out, it’s the segment where we are represented basically all over the world. Full year, we were up by some 9% organic including currency was up by 6.3%, but then due to this rapid change in product mix the operating margin came down and we dropped down below 10% and came in just south of eight even. Q4 was rather flat and with this continued unfavorable product mix, so to speak, operating margin came down there to just about 6%. And as you all know, we have a target there of staying at 10 or above all business cycle. In terms of the split of sales on a geographical point of view, so to speak, this is again the most global segment that we have where we’re represented not only in very many segments, but also in very many geographies, which is a strength, of course, when one area is possibly weaker than another.

A quick glance, then just at the balance sheet, and then cash flows and some key figures here. The balance sheet was fixed [Phonetic] out there, and it was the same in our last few reports are the tangible assets and that means very much inventory. As you know, we have been sourcing a lot of components post to COVID period and during this year, when things became, so to speak, better for us, we’ve also been able to build finished goods inventory. But we’re obviously working on bringing these down even more. They have come down slightly, but there is more to do. On the equity and liability side, it’s possibly the long-term liabilities that stick out a bit, having come up from the 6.4 billion to the 16.9 billion, very much related to the acquisition of a very important to climate for life company in the Netherlands for us.

And if we then jump over to the cash flow analysis, we’ve actually generated one of our highest cash flows ever as well there with the 6.5 billion, but obviously with a change in working capital, where we have been building inventory, and then also continued our very ambitious investment program, the operating cash flow has been basically zero. And then on top of that, we have the acquisitions made during the year with the CFL group in the Netherlands, sticking out as the biggest one.

A very quick glance on the on the key financials, I mean, working capital has come down slightly, but not enough. Especially if you ask me as the CFO, we’re continuously striving for bringing that down, so of course a little bit easier said than done, when the market within Climate Solutions currently has inventory in the system already. But overall, the key numbers are very fair, so to speak; interest bearing liabilities being at 70%, net debt-to-EBITDA at 2 roughly, and an equity assets ratio of close to 45. But obviously, we are affected as well return on capital has come down slightly as well as the return on equity when things develop a bit slower, so to speak during the last part of the year.

But summarizing our key financial figures from the ones we really follow and have as our targets in the in the annual report and for our companies. We see here our development ever since we went public back in 1997. Where we see the equity assets ratio, return on equity, operating margin, and net margin, which have developed quite favorably over time step by step by step and we’ve been through both one or the other challenges during these years I’ve ever said.

And by that I think we open for questions or would you like to add something?

Eric Lindquist

No, that’s perfect. Your shoot out there, please.

Question-and-Answer Session

Operator

Thank you. We will now begin our question and answer session. [Operator Instructions] And our first question does come from the line of Carl Ragnerstam from Nordea. Please go ahead, your line is open.

Carl Ragnerstam

Good morning. It’s Carl Ragnerstam from Nordea. A few questions. Firstly, looking into the volume drop in Climate Solutions in the quarter, what portion would you say is distributors and installers taking down inventory and how much would you say is end market demand? Secondly on that as well, you mentioned in the report that you saw an acceleration during the quarter, is it fair to assume that this was inventory driven or is it also a combination of end market demand getting little bit worse?

Eric Lindquist

Hi, Carl. We believe it’s a combination. Of course, the higher interest rate, that has an effect on new construction and people’s readiness to buy any merchandise, but of course, also heat pumps. But there is a clear, of course, signal also from the distribution chain that they are still overstocked and that is, of course, damaging our outputs as well as all the other manufacturers. So that’s a combination.

Carl Ragnerstam

Okay. That goes also with acceleration, I guess, or during the quarter.

Eric Lindquist

Yeah.

Carl Ragnerstam

Okay, I’m also curious to know a bit more about your guidance for first half and full year 2024 where you stated it will be weaker. I mean, could give some light on what magnitude of weakness we’re talking about in first half, for instance? Would you say that it’s a similar organic growth path what we saw during Q4 or that acceleration might continue a bit during Q1? How do you see that?

Hans Backman

Well, I don’t think that we can inform you so much more than that’s written in the report. But, of course, as we tried to say, as we tried to have said, so many times, our reports, they present to our best ability a story — a true story of where we are, where we are heading. And of course, when we talk about the weaker second half and possibly into 2024, like half year ago, that is of course something that is now moving ahead, as we see with a week 2024 to start. We don’t have a crystal ball, I apologize, for the remainder of the year. And we feel it’s appropriate to not promise there’re going to be any dramatic improvements in the second, half, I guess you should read it like that. We like to be prudent in our guidance and that’s as far as I think that we can explain that.

Carl Ragnerstam

And if you look — I mean, we only have one and a half months here during the start of the year, would you say that the situation is even tougher during the start of the year that it might continue, as you saw during December?

Eric Lindquist

Well, how should we answer that? If we walk into precise figures, I think we release more than we are able to, but we understand your question, definitely. And I think that’s a good guide that you can get from us because the picture is not totally clear to us either. It’s very difficult to even ask distributors and installers where the inventories are and I guess we’re trying to give you the best guidance possible. But as far as percentages and stuff like that we have to stay out of that. From orders — again, from a [Indiscernible] point of view to all our shareholders, because we don’t like to release anything that’s not written in the report, but we tried to indicate to you now that the first two quarters will continue to be, as we said even in the Q3 report. And I think that’s a little bit clearer than we used to guide due to difficulties that we had in the market. And when I say we, I think that’s the whole industry and it is to continue. It’s a little bit of a surprise, I guess, to all of us that the demand out there has taken such a hit as it has due to the higher interest rates and due to the gas prices going down again, and we also have a little bit of a sentence there or a sentence regarding the willingness to support our industry. And now we are not preaching for our own company, but it’s sort of a sustainability issue are we really heading in the right direction or are we returning more to gas driven society again, when prices are down. So that’s a fundamental and very important issue but I won’t dwell too much more on that.

Carl Ragnerstam

That’s very good. The final very quick one is on cost saving, if you could help us on the ramp up of the cost savings, you said it will be fully effective in 2025? Is it early 2025, you mean by that? And also, if you could give the cost savings by segment or perhaps geography as well?

Eric Lindquist

Well, I mean, to start with, that’s not something we’re going to start doing in December. Of course, that will take a gradual breadth of your organization, as we negotiate and as we fulfill this. It’s not that something we can wait, we’re going to do it as quickly as possible but also as responsible as possible, that’s what we say. And when we say that when we hit 2025, of course, all costs should have been driven out to the organization, if I may use that word. So it’ll be a gradual, say, introduction of the program that you’re going to see, and 2025 will be totally clean from this.

Carl Ragnerstam

Okay, very clear. Thank you so much.

Eric Lindquist

Thank you.

Operator

Thank you. And one moment please whilst we take our next question. And our next question comes from the line of Douglas Lindahl from DNB Markets. Please go ahead, your line is open.

Douglas Lindahl

Hello, gentlemen, thanks for taking my question. I wanted to come back to the outlook comment here. My impression is that you’re getting a bit more vocal about the difficulties you see in the industry. To what extent is this really market that you’re seeing that is becoming increasingly weakened or to what extent is this you becoming more vocal about these things? Meaning you have changed your communication to some extent, would you say?

Eric Lindquist

I think that perhaps we’ve been too conservative in our communication. We have not really been so well trained media wise or communicating with you folks out there. Perhaps we’ve been to home woven in a way, and we apologize for that. And we try to give you as good as possible guidance, and we are happy or pleased to know that you know that we are changing gradually a little bit. But it’s not so easy, we have our habits, and we’ve invested for so many years, and we try to – despite, particularly in my age, we try to be a little bit more modern without being extremely modern.

Douglas Lindahl

Thanks. I appreciate the difficulty and forward-looking commentary in general, so I can understand, so interesting to hear that. Just coming back to your expectations on the weaker market there in 2024 and given where inventory levels are, how should you — or how do you expect this to sort of play out for Climate Solutions margins for 2024?

Eric Lindquist

Yeah, well, I mean, isn’t that fairly, of course, if the market continues to be weak, of course, no one can maintain decent margins without taking actions. And as before we are working all by us from a relatively decent level of profitability that makes you safe when it comes to — or certain when it comes to analyzing things for certain period, but when it now continues into the first part of this quarter, of course then [Indiscernible] realistically, this will not change, we have to do something about it and we do it from a very solid platform. We don’t like to wait until this very obvious that we have to do things. I mean the fourth quarter is not ideal, is not pleasing to us, but for many outsider it is not like too bad, if we shouldn’t judge ourselves. And we think that’s neater [Phonetic] way of reacting. You analyze things, you work from a profitability platform and then you act and that’s exactly what we’re going to do now.

Douglas Lindahl

Okay. So continue difficult margins, I guess then.

Eric Lindquist

I understand your question Douglas. Now don’t misinterpret this, but I mean, you also know that it is so important quarter four, I mean the when the market — when revenue goes down, no company in the world can really continue to maintain the margin, okay.

Douglas Lindahl

Obviously, yeah, it’s just the context of your inventory levels. But on the cost cutting program, thanks for being vocal about that and explaining that. I’m just trying to understand, so 500 people are affected and if the market sort of bounces back in 2025, will you rehire these 500 people, or are these structural costs that you’re actually taking out?

Eric Lindquist

No, they are the structures taken out, but of course, if the market would bounce back and other 30%, 40% of the course there — I mean, we can live with the same staff. But they opted to taking out assuming that we’ll have no dramatic jump. But of course, as we see it now, the heat pump market will continue to grow. But now we feel that we have to adjust because we were equipped, if I may just call it, to a larger volume. We — also the industry thought that now, we will rebuild Europe, particularly and the ventures in North America with heat pumps. And of course, you take on board people that are not — this is a very, very sensitive and difficult situation that we are. I mean, that’s the last thing for me — I mean, I spent my whole life here, and to even suggest that we’re going to reduce people. So emotional, but professional part of the job is to do justice.

Douglas Lindahl

Yeah, I understand. It’s not easy, I clearly understand that. And just to move forward in the questions. On pricing, we haven’t touched upon that topic yet. Are you seeing any changes there in the markets? Are you adjusting your prices? Are you seeing competitors doing anything on pricing, obviously, for heat pumps specifically?

Eric Lindquist

Yeah, well, I’m sure that there are movements out there in the market in a limited way. But our frank assessment so far is that we haven’t seen any major downturn in pricing, but having said that, we all know that in some markets and some segments of the market they are always going to be intense.

Douglas Lindahl

And how are you acting in this market or are you planning to act?

Eric Lindquist

Well, we try to maintain our product to — our message to the market where we are producing products premium kind and, of course, if you like to buy products of a lesser sophistication, we also have an assortment of that kind, but we don’t participate in the very low range of products. I guess that’s your answer to that.

Douglas Lindahl

Thanks. And then maybe a question for Hans, I noticed that eliminations here in Q4 was positive on EBIT. What’s the reasoning behind that?

Hans Backman

That’s the same thing we do every year when we run through the contingent liabilities for additional purchase prices. Because that’s included in the budget, in the three year plan and we need to adjust the liability that we’ve set aside and sometimes we have to set more aside, sometimes we have to release a little and the net effect this year, following the market development, you can say was a net effect of a release.

Douglas Lindahl

Okay, that’s it for me. Thank you so much.

Eric Lindquist

Thank you.

Operator

Thank you. And one moment while we take our next question. And our next question comes from the line of Karl Bokvist from ABG Sundal Collier. Please go ahead. Your line is open.

Karl Bokvist

Thank you, and good morning. Most questions have already been asked, but if I may, at the start of 2023 you did provide some details on the organic growth of your heat pump business. What was the organic figure now in the fourth quarter?

Hans Backman

I think you are asking for the organic growth of heat pumps in Q4?

Karl Bokvist

Yes. Yeah, sorry. Exactly.

Eric Lindquist

Okay, well, I mean, I will have to return to that picture. Did you have that Hans?

Hans Backman

Well, I mean, in Q4, we had an organic growth in total for Climate Solutions.

Eric Lindquist

What is the contraction of the organic side?

Hans Backman

Currently at minus 9.3, I think I mentioned that.

Karl Bokvist

Yeah, no, it was more about, both in Q1 and Q2, you explicitly said that the heat pump part grew organically by, I think, it was 40 in Q1 and then a bit above 30 in Q2. And then I was just curious to see if it would be possible to say, what’s the heat pump business, how that’s developed organically now in Q4?

Hans Backman

I don’t think we recall giving that number explicitly, but maybe you’re right, if you’ve taken notes on that, but that’s not typically we talk about those specific segments.

Karl Bokvist

Okay. All right. Understood. Then just on the one-off cost that you will book in Q1. I was just curious if you could give some details on which costs — you called alignment costs and so on in Q4 now that we — are worth highlighting or if any magnitude, would it be possible to give?

Eric Lindquist

Okay. Please Hans.

Hans Backman

I mean, we didn’t have any one-offs in that sense in Q4. The one thing that might stick out is the one that Douglas just asked the question about, and that is on group level, where we do the yearly adjustment for the continued liabilities for the additional purchase crisis. Apart from that, there are not been any specific one offs in either of the business areas, or on group for that — group level for that matter, either. It is just the yearly adjustments that we make.

Karl Bokvist

Okay, understood. Yeah. So, no, it was more about the commentary when you align the capacity and so on, if there’s any particular costs that we might not see in Q1 or Q2. So if I understand it correctly, it’s more about an ongoing business decisions that you’re taking.

Hans Backman

Within stoves, I think Eric mentioned that we have within our North American businesses made adjustments to meet the new demand they’re following, the gas prices haven’t come up and demand has declined, but that’s more in the ordinary course of business adjusting.

Eric Lindquist

And also on the Element side.

Hans Backman

And Element, absolutely.

Karl Bokvist

Okay, understood. My final one is just on a bit touching on Douglas question there. But have you also seen any kind of campaign efforts or, by extension, lower prices in the premium segment among your competitors or within the industry?

Eric Lindquist

Not to our knowledge, no. I have to say to our knowledge. Otherwise, I mean, we’ll bring that about if there will be a major thing if something would happen in the market. Well, of course, we can be — although we try to be a little bit more transparent and guiding, we are not — we’re at a point now where we’re going to try to explain everything every quarter, but a little bit more open, we hope.

Karl Bokvist

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

Eric Lindquist

Thank you.

Operator

Thank you. And one moment whilst we open the line for our next question, please. And our next question comes from Viktor Trollsten from Danske Bank. Please go ahead, your line is open.

Viktor Trollsten

Yes, thank you, operator, and hi, Eric and Hans. Thank you for taking my question. So basically, I would like to delve a bit into your comments. I do fully understand that it’s difficult to make any forecast in this market but you do said that your assessment is that the performance in the first half will be weaker, of course, and then possibly for the full year also. And I’m just trying to understand what that really means because I guess just for the sake of proving my point, if we said that organic growth in the first half year is minus 10% and then you say that it is possible for the full year that it was going to be like 2023. I guess that suggests that we return to growth in the second half. Is that how we should read that comment, if you do understand my question?

Eric Lindquist

Yeah, tell you, when you try to write such a sentence, as I’m sure you’re fully understand. You know that if you don’t write anything, you’re going to say, okay, what’s going to happen in the second half of the year, why don’t you comment that and now when we say possibly, that is a way of guiding again. We don’t have the miracle tool or miraculous tool to say that as of July 1 now when we assume that the two first quarter is going to be very — to a point quite weak, and then everything on a bit jump to the better. I mean, that’s also unrealistic to say, so I guess it’s a cautious comment. We’re all waiting for improvements. I mean we are ready, that’s what the whole statement is. We are ready for the growth but now we see this and we just said, well, something is going to happen. Help us out there politicians and when it comes to reducing interest rates and also when it comes to the willingness to assist this industry, not only us, but the industry, the heat pump industry, we need some help against the lower energy prices that continues to pollute the world with Co2. That’s the whole issue.

Viktor Trollsten

Yeah, but I’m sorry, if I’m a bit slow here, but do you understand how I interpret the comment that you made? I fully understand that it’s difficult to make any forecast and you don’t have a crystal ball, etc. But it does implicitly mean that are you rather saying that the second half, perhaps does not fully compensate for the first half, rather than you’re saying that the second half will be as weak as the first half. I’m just trying to understand what you are clearly saying.

Eric Lindquist

You are elegant with your questions, Viktor, but I think that — I like the arm wrestling with you, but I think that’s all for the answers, right, recording the second part, if I don’t hurt anyone by saying that.

Viktor Trollsten

No. Okay. Okay. No, I understand. And then secondly, and perhaps difficult to judge from just one quarter but if I read it correctly, it seems that your European volumes in Climate Solutions is down 25% organically in Q4, which actually is much better performance than if we compare with the overall interest that’s, let’s say, minus 50%. So I guess the philosophical question is, are you fiddling that you can get back market share in this sort of market that you perhaps lost during the components shortness period? Is that a trend that resonate?

Eric Lindquist

Well, I think that question is reoccurring. I think we should come back to this slide where we present the fourth quarter, so we don’t have any [Indiscernible]. If you just have patience to wait a second?

Viktor Trollsten

Yeah, of course, of course.

Eric Lindquist

I think that might be clarifying to all of you out there. There we have.

Viktor Trollsten

That’s the one.

Eric Lindquist

There we had the fourth quarter and we say that the growth has been minus four and, as Hans suggested, is acquired as eight, so that takes us to – yeah, mathematically, justice out of the 10. And I don’t understand why you say that it’s been like 25, this is the situation that it’s — the growth has helped us, of course, or the acquiring company, particularly Climate for Life has helped us. But the gross margin remains at a healthy level, which is very important and that’s why we say, well, it’s not the gross margin that causes this, it’s the overhead that’s too big, because we were planning for another turnover. And I don’t know where you are – isn’t that picture clarifying your previous question Viktor?

Viktor Trollsten

No, but in the report you also gave sales per geography. So in Europe, for example, you did the 3.8 billion in sales in Climate in Q4 and then, of course, you have some acquisitions, and we have some currency in that. So year-over-year effect in Europe, in Climate Solutions implies about 25% down; US, for example, is growing 10%, so I’m more curious of the geographical development.

Eric Lindquist

Okay, so that’s how you calculate somehow. I see the graphs, okay.

Viktor Trollsten

Yeah. I don’t mean to push them out away. I’m just curious about — North America obviously continues to grow in Climate Solutions, not perhaps surprisingly, given the trends there but in Europe you performed quite well, at least versus my expectations and what the industry setting overall in Q4. So I guess that’s my — where I’m coming from.

Hans Backman

I think it’s a fair statement to make that we have regained some market share now when we’ve been able to deliver again. We were in a squeeze there not being able to get products out the door for a while.

Eric Lindquist

That is true. We don’t like to pat ourselves too much on the shoulders because we are right in starting gear and how to improve results. And of course, it’s always a race for a better market chance and it’s been so painful during 2022 and particularly when we couldn’t deliver. And that’s, of course, another reason why we will also try to explain that Q4, as you compare last year was extraordinary strong, as you see, with a 42% growth versus the previous quarter like 21%, which wasn’t a bad quarter, either. The operating margin last year was like 19.3% in that quarter, and that is suggesting, of course, that they were coming out products to the market that had not been delivered previously. And so it also — that’s also the case, Q1 and Q2 of 2023, that’s why it’s a bit difficult to compare the market this year. Okay, that’s a long dwelling. There are many more people over here. I hope we answered you, Viktor, and I hope we are still good friends.

Viktor Trollsten

Yeah, absolutely. Absolutely. I will step back. Thanks a lot.

Hans Backman

Thank you.

Eric Lindquist

Thank you.

Operator

Thank you. And one moment please whilst we take our next question. And our next question comes from the line of Axel Stasse from Morgan Stanley. Please go ahead. Your line is open.

Axel Stasse

Hi, good morning, everyone. I have a couple of questions, if I may. On pricing, you mentioned that some segments face pricing pressure. Could you maybe please elaborate on the specific markets? And in the specific market where you see some competitors, for example, cutting their prices, how much NIBE has actually cut their prices? And then a follow up question on this one is, do you expect some countries, additional countries, in the next coming months, for example, where you could see from distributors putting pressure on your pricing strategy?

Eric Lindquist

Well, the first question, I think the answer from my side or from our side was that we haven’t seen any major pricing issues. But what I said was that because we don’t know everything and I’m sure that in certain market segments, in certain countries, that could be price fighting. But I have also said once that we work in the premium segment and of course, why do you have the premium product, well, that is to have a decent price or a good price for that. But if a customer would be more interested in a product of a lower specification, of course, we also have that, but we do not participate in a very low range on heat pumps. That’s what I said. And then, as far as the forecasting for what’s going to happen in Q1 into Q2, that’s impossible to forecast for us.

Axel Stasse

So you are not, I would say, afraid for now, from all these players cutting their prices, right.

Eric Lindquist

Afraid, you shouldn’t be in business if you’re afraid. Everyone has to be, of course, observant and we are very cautious whatever happens in the market. And until recently, it’s been the shortage of components that’s been hindering us. And we firmly believe that we have a strong position in the market. And when you say about fear, I mean, anxiety and fear doesn’t take you anywhere. That’s our standpoint.

Axel Stasse

Okay, well said. Thanks. My second question was about your flexibility in terms of costs, and how you feel you can protect your margins. So you announced this, this cost cutting plan? Would you be ready to cut some more your cost base if you think volumes are way weaker than expected going down 2024? I tried basically, to understand how much room you guys have here to protect your markets basically.

Eric Lindquist

Well, I don’t think that we can dwell more on that with all respect, Axel. I think that the guidance we’ve given you and whatever shock absorbers we have, I think that’s something that we have to keep to ourselves. Now we give a clear message to the market that we’re going to take the cost down and from what the judge in the markets, and we have to take it from there and I think that that’s where we have to stop when it comes to answering your question. Okay?

Axel Stasse

Okay. Thank you very much. Can I ask a last question about your leverage? So leverage now two times and you announced you wanted to do some further acquisitions in 2024. So I want just to ask, what is your sound leverage level according to you? Is it 2.5? Is it slightly more? What is your objective, your aim here?

Eric Lindquist

I mean, Hans should answer that. During some heavier or larger acquisitions, we’ve been up to between 3.5 and 3.8 and then we work it down there quickly. And you are more appropriate to answer that question, Hans, but during the larger acquisitions in the last 10, 12 years, we typically take it down in six to eight quarters down to 11. Of course, where we are now, at two, we are fairly comfortable with that. And, of course, when we are down to one, then you wonder, do we acquire enough. So it’s been a little bit of a standstill, when the pandemic hit us, but of course that’s typically something we are looking for every — not every hour of the day, but all the time.

Hans Backman

If I just may add, just a little. I mean, we never want to jeopardize an event in anyway, of course, but we have deliberately not set a target or a roof for that matter, because we want to have the flexibility if something interesting comes about. And as Eric mentioned, we’ve been up to about 3.5 and just below 4 at some — certain points. But if you look back at us over a 15 year period, we’ve been at an average of 2.2, roughly, despite all the acquisitions made. So, at 2.5, you can say is, of course, a level given that we have bonds on the market so. That’s roughly the answer.

Axel Stasse

Thank you very much.

Operator

Thank you. And one moment while we take our next question. And our next question comes from the line of Brijesh Siya from HSBC. Please go ahead. Your line is now open.

Brijesh Siya

Hi, good morning. I have a couple of questions. To start off with, Eric, you talked about — in the guidance about first half and second half. Sorry, I’m coming back again there. It was not clear whether you were talking about first half being weaker on an organic basis, because you had quite a few acquisitions in the second half, so just wanted to check that one. If you could help us understand whether your comments are related to organic or its overall business?

Eric Lindquist

I apologize but could you repeat the question? Are you going to have a guidance on which period?

Brijesh Siya

So you talk about 2024 first half being weaker and could be for the full year. When you make that comment, is it on an organic basis or it’s on a — including scope impact? I’m asking this because second half of last year had a significant scope impact?

Eric Lindquist

Well, I should answer that. I don’t know whether I fully still comprehended the question. But as I said before, I think when it comes to guiding as good as you possibly can, we’ve been trying to guide like [Indiscernible] more and now when we are middle of February, we felt it was decent to suggest that there is no guarantee that the second half [Indiscernible] first quarter that they are here wouldn’t be affected. But that’s not of course a forecast. That’s more a cautiousness. That’s my answer to that but it is correct answer, I don’t know, whether I understood the question correctly.

Brijesh Siya

Okay, I’ll probably — that’s fine. And the second one is on the subsidies, which are all been announced and we had the Germany one being sorted out. Do you see any signs of that subsidy schemes kind of now giving you a higher volume, or at least sequential volume improvement, anything you see in the market, which suggests that things have changed?

Eric Lindquist

Well, Germany is one of the countries we don’t have to inform explicitly we are bad. I think Germany is holding up fairly decently but of course, the programs that we thought or the industry thought were to come about was more generous, presented last summer. It’s more that the gas being banned, as you know, already this year and it was thought to be bad a 2025 that is to be — that is what it looks now for another three years until 2027. I think that’s the most or the — it is a hindrance to all of us and to the industry rather than the subsidies because that gives in tougher times of course people think in many cases the easy way out and they continue to install a gas burning boiler. Okay?

Brijesh Siya

Understood. And probably last one on M&A. There are quite a few possibly family businesses running which are kind of both boiler as well as heat pumps. So given the market scenario, do you see enough opportunities out there, given [Indiscernible] you’ll be probably interested to consolidate the market, which would help in the long run? Do kind of see any interesting targets there?

Eric Lindquist

Yeah, I would be — it’d be foolish to say that we don’t see any good targets or decent targets. We really do that but I think there we have to stop the guidance because the answer to question is, yes, we do that.

Hans Backman

And have always done. We always look at positives, that’s part of the DNA center.

Brijesh Siya

Understood. Anyway, good luck with it. Thank you.

Eric Lindquist

Thank you.

Operator

Thank you and one moment whilst we take our next question please. And our next question comes from the line off margin to [Indiscernible]. Please go ahead. Your line is now open.

Eric Lindquist

Okay.

Unidentified Participant

Hello. It’s [Indiscernible], it is not Martin. First of all, can I take two questions in Swedish?

Eric Lindquist

Absolutely

Unidentified Participant

[Foreign Language]

Eric Lindquist

[Foreign Language]

Unidentified Participant

[Foreign Language]

Eric Lindquist

[Foreign Language]

Unidentified Participant

[Foreign Language]

Eric Lindquist

[Foreign Language]

Operator

Thank you. And one moment please whilst we take our next question. And our next question comes from the line off Carl Deijenberg from Carnegie. Please go ahead, your line is open.

Carl Deijenberg

Thank you very much. Thank you, Eric and Hans, for taking the question. Just one from me, one follow-up considering the time here and I wanted to ask you with regards to the net financial development here in Q4, up a little bit here to 214 and I think it was 181 in Q3. So just wanted to ask if this here Q4 sort of pure financial costs? Is it a justifiable level going forward, because I think you had maybe a few one-offs in Q3 related to the bond issuance when you did the acquisition of Climate for Life? That’s my question. Thank you.

Eric Lindquist

Yeah, no, I mean, there’s nothing special in this in a way. I mean, it’s a result of the financing that we’ve done following the acquisition of the Climate for Life business, and of course, increasing interest rates that have come step by step over a year. That could be or there is a portion of currency in there as well, but that’s not a major part.

Carl Deijenberg

Okay. Okay. Very well, thank you.

Eric Lindquist

Well, we have now been talking about the 65 minutes and we’ve come to the end here because we have other interviews to be taking care of. So we hope that we have now started an era with a little bit of a more open attitude to the future, but as said it has a little bit of old fox that is trying to change and I’m not including Hans in this because he’s a young guy. We appreciate the questions and we had all the best intentions to answer them. And now we’re going to go out to work again. Thank you for calling.

Operator

Thank you, ladies and gentleman. This now concludes our conference. Thank you all for attending. You may now disconnect your lines.