NIBE Industrier AB (publ) (OTCPK:NDRBF) Q3 2022 Earnings Conference Call November 16, 2022 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
Pam Liu – Morgan Stanley
Viktor Trollsten – Danske Bank
Karl Bokvist – ABG Sundal Collier
Anders Roslund – Pareto Securities
Eric Lindquist
Anyway, thank you very much for calling in. And we are going to go through a number of slides as we typically do regarding the business environment and what we see in the market and of course, how we behave ourselves. And the headline is of course that it’s a continued strong demand, within most market segments. And perhaps the most positive thing is that we see signs of improvement in the supply chain. We have been waiting for that for a long time. It doesn’t mean that everything is peachy keen, but there is certainly some positive signs. And we also dare to pronounce that quite clearly. And of course, as we afford, the Florida demand is driven predominantly by course the sustainability ID and to get rid of gas and oil as before that’s even more pronounced now with the Russian invasion of Ukraine. And we are, of course, increasing our capacity as well, but that should not be viewed as we are running short of capacity.
In the short-term, we have good capacity right now for the coming 24 months. But of course, when you start the investment, then you need a perspective of at least some 24, 30 months. So that’s how that should be viewed. And then, of course, as you know, we have some one-time effects when we close Russia, we had a negative one-off of some 114 and then we sold the majority of shares, which meant that we got a positive gain of some 230 or 232 and then the one-off net is 180. And the growth we say is good. I mean, it’s still hindered by, of course, the shortage of components, but we see some very substantial signs of improvement there. And we have acquired a few companies. During the year, predominantly the three ones with only some small add-ons as well, but I will claim in Italy on the Climate Solution side, where we feel we now have a good platform for heat pump expansion and Pacific Energy and other one up in the Pacific Northwest of Canada. And then we have ELMESS-Klöpper in Germany, which we think is important platform for elements and the industrial side in Germany, where we haven’t been, as a matter of fact, positioned before and then of course, other negotiations ongoing. And now we are almost back to normal again. We can’t blame the COVID for not traveling anymore. So that’s a release in itself.
So, we just take a quick look at the figures, some SEK28 billion out there and rolling one is approaching SEK37 billion. This is substantial growth. Of course, it’s a mixture of the acquired and here we have some figures hidden as well, of course that we divested shorter. So, Hans is going to come back to the figures and how much dilution we have there. And the operating margin is 14% compared to 14.7%, but if we would exclude the one-off effect, it would rather be that 13.6%. So there we see that we are still lagging on the operating margin side. Of course, we like to come up to at least last year, but it’s also important to remember that our history prior to the COVID was rather below 13%. So we have taken a step upwards since 2020 weakness. And the quarter itself, it’s a smelling close to the SEK10 billion, just missed with SEK1 million, which is almost ironically. And the quarter as such continues to grow of course with close to 27%, 28% and the operating margin is now at 14.7% still lagging compared to last year. And that’s where we are eagerly trying to improve the coming months and quarters naturally.
If we look at the graphs that will illustrate with is that it’s a steady growth and there is no decline, but rather an uptick when it comes to sales. And of course, we have the currency and we have the price increases there, but just healthy growth. And that’s the gap in operating margin we would like to close as soon as possible. Looking quickly at Stoves, it’s a tremendous demand and that’s of course a reflection of not only our assortment, but also the energy prices and the shortages of other fuels at reasonable price levels. So here, it’s more comes in as more than a secondary source of heating, in some instances, even the first source of heating and here as well. I mean, we had also issues being able to deliver the shortages of components and material has been less pronounced both in stoves and the two elements. And that’s why they are a little bit of ahead although we haven’t met the margin fully yet, but we are a little bit further ahead when it comes to closing that gap. There is also an ambitious investment program here to cater for the demand to come in the longer perspective.
And here we see what I just mentioned that the operating margin is like 12.1% versus the 12.6% previous period last year, which is an indication that they have had relatively seen lesser issues lately delivering, but of course, the delivery shortages are not over, but we see a steady improvement from that side. And elements there we continue to see strong demand of course that some sectors have softened demand now like white goods for instance. But on the other hand, other sectors that are growing phenomenon like HVAC and like the semiconductor part. So here as well, we are investing quite heavily and the operating margin which is pleasing to see that the good sales development. And here we also of course noticed the improvement in supply and good price discipline and good cost control has taken us up to a operating margin that’s better than last year.
So I guess that’s an illustration of, as I just said, discipline, but also the potential we have once we can deliver without any major hindrances as far as supply chain is concerned. And just a few pie charts before we hand over to homes. Nothing dramatic has happened here, really climate is representing some 63% in sales and element 27% and stoves respectively 10% and then we will come to the operating profit due to the higher marginal cost climate solution is up there around the 70%, where we have been for several years now.
And the distribution of sales, it’s pretty much what we have seen before Europe and the Nordics, of course, relativity has taken a slightly bigger chunk compared to some years back. Other than that, the Nordic are stable and the Europe is growing quite considerably now as we all know, but North America is also picking up. That’s a pretty healthy distribution. We believe of course others could be larger than 6%, meaning predominantly Asia. And there is only elements that’s active we can say to any greatest degree. So I guess that’s pretty much what I like to mention at the start. I am sure there are going to be several questions and we like to answer those. I just like to mention that we have an interview here with a magazine and with a TV channel around 12. So we like to finish this interview around 11:55 or 11:57 of late. Okay, please Hans go ahead.
Hans Backman
Alright, thank you, Eric. I got the message. I will be quick. Some repetition, but also little bit more granularity here on the individual business areas and then a few comments on the balance sheet. I mean, looking now into Climate Solutions again then obviously, demand has been very strong and increasingly also in North America, which is quite pleasing to see. And our challenge has really been on the supply chain. really keen on capping wood burning stoves on board, you can see a gross margin, not quite at last year’s level for the reason I just mentioned, but just below 36% and then an operating margin that we improved by some 34% landing in at 13.2%. In terms of the geographical distribution of sales for stoves, it’s exactly the same as last year actually.
Moving on to elements, elements, has continued to develop quite favorably, especially on the HVAC side, semiconductor side. As you know, we are very well represented throughout the world here through a number of segments. It’s mainly the white goods side that has slowed down. The automotive is still a little bit of crossroads, but we are able all in all to grow sales with some 28.7% or close to SEK1.8 billion actually. Of course, there is a currency impact here as well slightly more than in the other areas due to the exposure to North America, but it’s still the underlying organic growth that has driven the business here, also with some price increases on top. But also here, we have seen some supply chain issues, having led to a slightly lower margin, although the negative effect has not been as high as in climate solutions. So we will add that in at 22.7% as opposed to 23.2% and the operating profit came in at some SEK220 million above last year, and an operating margin of 10.9%, meaning that we’ve also been able to hold our admin costs very well under control.
The quarter was quite good as well, thanks to a good organic growth. We increased it by some 33.7% or up to SEK700 million compared to last year. And here we have been able to close in the gap a little bit on the gross margin it’s only 0.3 as a difference. And then again, with good cost control, the operating profit increased by 52%. Planning and operating margin at 11.4%. In terms of geographical sales, as most of you know, this is our most global business area. There have been some movements here in North America also here picking up making up with slightly larger portion of the case, Europe being the same and Nordic being slightly smaller than before.
Quick look at the balance sheets, the total assets and total turnovers is now at SEK52 billion. There are not so many movements here really what might be sticking out, which we will come back to slightly is that the financial current assets are down by SEK1 million, that’s very much a result of us having built inventory, especially raw material inventory or component inventory to meet the demand that is out there. We have been forced in a way to source whatever we can get hold of and that of course reduces and the cash position. But due to the performance of the group, I mean, equity has increased up by some SEK6.5 billion. And of course, the liabilities have also increased, which means that we have been able to get some compensation to our suppliers, if you like, on that side.
But if we take a look at the cash flow analysis, that’s where you see the effect of us building inventory. I mean, we have generated more cash flow from the operating activities, but with a change in working capital of some minus SEK2.3 billion. Of course, money is being tied up in there. And we are also in the midst of our investment programs to meet the future demands, which also then has an effect. So the net operating cash flow from the operations after changing working capital and after the investments landed in at SEK220 million compared to SEK1.7 billion of last year, but we know where the money is, so to speak.
Looking at some key figures before we open up for Q&A as well, we are still solid, if you like, I mean where we have a good portion of cash, the SEK4.4 billion that you see there on the page down by SEK1 billion, which is the results of the inventory buildup. But interest-bearing liabilities in relation to equities has improved net debt is stable around 1 and of course, very solid equity assets ratio now above 50. But it is the working capital that I have mentioned several times that sticks out where we are now at a level of 23%, excluding cash, up from the 16% is really our historical level you can say where we usually are. But being this solid in a way and not yet have been – having been able to put that money into work, it brings down our return on capital employed slightly. And you have a similar effect on the return on equity given the equity assets ratio we have. But all in all, I would say, the solid balance sheet for further growth and further expansions.
I don’t know if you want to add anything Eric before we open up? After that, it wouldn’t be possible to add anything, so I have to leave some room here now for questions so that we can finish on time.
Eric Lindquist
Please go ahead with questions now.
Question-and-Answer Session
Operator
Thank you.[Operator Instructions] And our first question comes from the line of Gustav Österberg from Carnegie. Please go ahead. Your line is now open.
Unidentified Analyst
Thank you, operator and good morning, Eric and Hans, the iconic dual here. So a couple of questions from my side. You have a continued positive message on the supply chain and looking from Q2, it seems to be improving. Could you elaborate whether we’re seeing specific components using specific components or is there also a general improvement in the capacity to deliver on all components?
Eric Lindquist
Well, I mean, the capacity to deliver that’s, 100% and one of the reasons for the lower gross margin is of course, we have an overcapacity staff wise. And so, if you get the products in, then you have to be able to assemble and produce as quickly as possible. That’s one – of course obstacles in the past. And we don’t like to name any specific sub supplies and we’ve had difficulties where we can just say that the one overall difficulty has been of course, a semiconductor availability, because not only ourselves, in our control boards, but in many of our suppliers components, they are assembled crucial semiconductor components. So, and we see that is improving. And of course, the reason for that, the reasons for that, we can only assume that there are some sectors that are not as prosperous as before, let’s say the right goods sector for instance. And that is of course, a possibility for other sectors to grow. And also, the production capacity on from several of our sub supplies, they have increased, they did not expect the quick growth that we forecasted, or they thought that they would be able to meet it quicker. And now of course, we can say that the last five or six quarters we’ve been suggesting that they should invest in, they should increase the capacities and we see that. I think that’s as specific as we can be.
Unidentified Analyst
Okay, perfect. Thank you very much for the color there. And then following up on the improving supply chain situation. You were mentioning lead times of up to two and three quarters previously with improvement in the supply chain that you’re seeing now. Is it too early to speak of improved delivery time so or will that happen soon as well as supply chain constraints is?
Eric Lindquist
I don’t think we’re going to see like as of December 1, as of January 22, everything won’t be very happy or totally improved, I think there’ll be a continuous improvement. And we saw that during the latter part of the quarter three. And we continue to see, that doesn’t mean that we are totally satisfied by the [indiscernible], it’s appropriate to send the signals to you then listen to the market. That is not as bleak as we were before. But we suggest also the report that they’re going to take some time to restore everything back to the ordinary course. I don’t think that we’re going to stick our let’s say anywhere that’s at that particular date, everything will be back in good order. I think that we foresee a strong demand for several years here. And that means that I was surprised and just have to continue to grow production wise and capacity wise, as we grow. And when we now see improvements in, they also have to prove that that is for the longevity. Okay?
Unidentified Analyst
Perfect. And then a final question on demand. I mean, are you seeing still strong deliveries from elements and stoves, and you see positive comments on the market we didn’t say yes. You mentioned that a record high water intake levels still? Are we seeing sequential improvements here in the overall business?
Eric Lindquist
I actually don’t want to that, I think that’s on the stove side, just to mention, one thing that is occurs, the typical stove demand would have a very cyclical profile. But due to the energy situation in Europe, and due to the price levels, I think that the demand has been reinforced quite considerably and, of course, the aged that growth that is driving not only kind of solution, but there’s also driving elements. So I guess those two very specific ones are very obvious. And then of course, if we go back many years, we didn’t have semiconductor delivery to the other to any magnitude. Now, that’s important part of the Elements business itself stuff. And that’s, of course, also something that is growing gradually over time here. So, I don’t know, nobody answers to question, but there was an attempt anyway.
Unidentified Analyst
Okay. Thank you very much. Those are all the questions from my side.
Eric Lindquist
Alright, sure.
Operator
Thank you. Our next question comes from the line of Carl Ragnerstam from Nordea. Please go ahead, your line is open.
Carl Ragnerstam
Hi, it’s Carl from Nordea. So firstly, is it possible to sort of try to at least quantify the organic growth split between sort of Europe and the U.S. for climate solutions?
Eric Lindquist
No, I mean, relatively seen. It’s growing quicker. And then in Europe, if you just compare them. And I think that it’s quite recent, that those new arrangements in North America have kicked in. I was quartered or 4 months ago, whereas in Europe, we’ve been talking about this, and we have a war going on, making everything very realistic. And in the sad way. Of the America is, so North America is certainly picking up. So I guess that’s relative to seeing the picture we can get in.
Carl Ragnerstam
Okay. Very good. And also when you say that margins will gradually come back, I mean, looking at climate solutions. Is it possible to come back to the sort of full year 2021 margin level? Or is it tough given? I guess you have the capacity coming in maybe somewhat higher costs than you had them in 2021? Or is it a good baseline to reach again?
Eric Lindquist
Well, I mean, that’s our best forecast. In some ways you might play hide and seek but not answering precisely our market share and stuff like that. But when it comes to this, of course, we’ve had – we think, we were late, increasing our own prices. And they’re not that we didn’t want to, but we were hit very hard. As it said, so many times previously when the price increases came to us, and we’ve been trying to increase our own. And of course, we see that the gas going to be closed as the months go by. But also on the productivity side, we are having an older stove production, definitely that once it’s components come in you have to produce both for the immediate demand, but also for the demand that you haven’t fulfilled previously. If the – as we suggested, as we hope, delivery performances from our subsidized can be better, our older stocking relatively soon going to be less, and productivity going to improve. So those are the two major factors that we tried to conveyed to you as investors. And we don’t specifically say we’re going to come back to in that level. But then, as you know, the climate solution margin, if we just look at it, historically, I’m sure you have that picture somewhere. And that matter that we are now on a different level than we were just some years ago. And I think that should also be a reflection of, we have larger volumes. And we also have a greater or should I say, better platform in say. So it’s more stable as the quarters are rolling on. The whole Europe is waking up and really accounts to replacing oil and gas. And previously they had perhaps, and more limited markets. But there’s nothing stopping us really from having decent margins as we go along here. We feel that we are well equipped to have high productivity and decent margins as we roll along. We don’t foresee that we’re going to all of a sudden be hit by – sudden expenses we’ve demonstrated that we can increase prices. We know that our productivity given proper supply chain is among the best ones that we’ve seen. So we are purely positive in our coming future.
Carl Ragnerstam
Okay, very good. Final one from my side, it’s a bit don’t come back to the component shortages, coming in, of course, [indiscernible] improving, but of course you have many critical components and heat pump were coming and taking [indiscernible] for instance to just named of one supplier, do you think it’s possible for you to reach a normalized situation in 2023? When you have so many competitors competing for serving the same components in the industry or what’s your thinking there? Is it – will you get as much components as you want in 2023 is that possible?
Eric Lindquist
Well, if I had a complete answer to that, I think, I you’d have another job, because then that would be [indiscernible] collection with higher mountains and skies. But I think that the promises in the contract we had signed, they indicate that we will get our deliveries. But that also means that we need to grow then, of course, our number of suppliers. That’s no secret. But we would be very surprised if we wouldn’t get our chunk out of our sample size as agreed. We believe that they’re going to be tougher for the smaller ones coming out. We’ve seen that in the past not only this particular outcome, but of course we’ve seen heat pump up sectional in Sweden where we’ve had some 50 produces in the past and it seems like the larger ones, so well established ones, they have a stronger arm – stronger negotiating arm when you negotiate with them. So, we are fairly confident but how can I underline I would be 100% certain that’s – that would be too far to go. But we feel that we will not be abused by any means. And of course, the answer is that larger volumes from existing ones and sub suppliers and also complementary, subsidized.
Carl Ragnerstam
Okay. Very good. Thank you.
Eric Lindquist
You are welcome.
Operator
Thank you. Our next question comes from the line of Douglas Lindahl from DNB Markets. Please go ahead, your line is open.
Douglas Lindahl
Hello, Eric and Hans, thanks for taking my questions. My first question is on the negative factors that you commented already. You mentioned a bit about this topic, you talking about over staffing and so on. But more specifically on the price cost lag. Do you have any sort of view on when you should be able to sort of catch up on that? That will be my first question.
Eric Lindquist
Well, again, of course, we are trying to guide [indiscernible] but as it possibly can. We believe that no manufacturer will in the long run, or even the shorter run, absorb all the cost without doing anything about it. And we believe that we are able to pay for that. But we’ve been a little bit taken by surprise, and it’s taken us some time. And we will be able to take control the price increases that we have been kept by. And to give you a very precise answer, that will be November 30. I mean, that’s impossible. But I think we have, how much stronger can will be in our single to you analysts, when we say we’re going to be going to be able to close the gap, it would be asinine to suggest the [indiscernible], that going to be like in 2025. And we understand that [indiscernible]. And you recently within the coming quarter or the coming quarters with me, though, of course, we don’t talk about unrealistic time. I guess, that’s not all if you wanted to have. But I think, that’s…
Douglas Lindahl
No. I understand it’s a difficult question to give a firm timing, well, I understand that. But on sort of profitability improvements on [indiscernible], do you see any opportunities to lift profitability for that business specifically?
Eric Lindquist
Yes, that’s what we certainly hope. Because that’s as we say, a new company coming on board, we give them typically 24 to 30 months, and then there should be up and running above the 10% EBITDA line again. So that sticks with this company, as well as they’ve been on board now for quarter. So they’re going to take a little bit to lift it up. But that’s a matter of making their business more aligned, but also of course, being able to send products already available from the other companies in the group. That’s the first time we really had a stronghold in Italy on the residential side.
Douglas Lindahl
Yes. Okay. And Eric, you already touched on this with regards to elements, you mentioned that it used to be highly cyclical business. And these days, it’s more correlated to HVAC and semis, is that correct interpretation and the white goods exposure is not so relevant anymore, when we look at growth for elements or should leave it that business?
Eric Lindquist
No. [indiscernible] that is – that continue to be cyclical, or continues to be. And we’ve seen that already. But whereas in the past, that we took a hit, when we saw that when we experienced that we are so broadly exposed now. And there are other sectors that are more important for us and that of course, very healthy. And we also spread in a different way they were during the past. So that’s why we are quite positive about the future that other sectors will compensate. And we won’t see that cyclical or we won’t see that much cyclical as we were in the past and the elements side due to these new segments that are growing so well, okay?
Douglas Lindahl
Okay. No, that’s – yes, that’s clear. And my final question is, we touched a bit on competition. Are you able to comment a bit? I mean, we see now a lot of projects coming on stream with regards to heat pump investments in Europe over the next few years. Do you agree with the picture that competition is heating up? And how do you sort of plan to address this? I guess it’s a broad question.
Eric Lindquist
Well, we see that and we just understand and we know that’s how the market works. If someone is predicting that the market is going to grow from a level that we were have heat pumps, and they’re going to quadruple, or going to be 4x or 5x as big and 8, 10 years out. And the Managing Director of any company being in the sector with the crisis attend the board, I got to stay out of it. I think it’s too difficult. But on the contrary, if you’ve been established there for all these for 14 years, I don’t understand why it should be more difficult for us to sustain the growth, why should need all of a sudden be the suffering part, when the market going to be 5x as big as it was in the past? I don’t understand the question. We are very, very, very positive, three times underline that. And we are known for being very sincere and serious in the market, we are well established. Of course, the competition is there, but that’s also natural. It would be unreal, if NIBE would be the only company out there sailing across the sea their own, NIBE is going on, going to take the whole market. I don’t understand that. Why every – in all the newspapers, as soon as someone starts a comment that now we are going to be threatening that. Oh, come on. I mean what kind of the reasoning is that, I apologize, dwelling a little bit, but.
Douglas Lindahl
No, I mean it’s – I understand it’s a difficult question to answer in a short answer.
Eric Lindquist
I think it’s an easier question to answer. On the contrary, I don’t think it’s a difficult question at all. I think typically, company is well established. They benefit from their market growth. They don’t have a disadvantage. That’s what I am saying.
Douglas Lindahl
But I mean, there is a risk if there is over capacity, obviously, but that’s not positive, but.
Eric Lindquist
But for now [indiscernible]. Well, you can turn it around. That’s on the other side, of course, we will shift over there with the factories, of course, will be tremendous.
Douglas Lindahl
We are quite far from that scenario right now at least.
Eric Lindquist
I don’t think that’s going to be the issue there next coming quarters.
Douglas Lindahl
Okay. Thank you so much.
Eric Lindquist
Thank you.
Operator
Thank you. Our next question comes from the line of [indiscernible] from Bank of America. Please go ahead. Your line is now open.
Unidentified Analyst
Hi. Good morning Eric and Hans. Thank you so much for taking my question. So, first question is, I was wondering if you could give us an update on your capacity expansion plan. I know that in the report, you have the doubling of capacity in the short-term, and another doubling of capacity in the longer term? Could you please give us a bit of more details such as the timeframe of both the short-term or long-term? And what are the expected ramp up here post the completion of the factories? That would be really helpful. Thank you.
Eric Lindquist
Yes. Also expect us to give you the name on a low price when Nobel Prize winner in 2029, or did I miss out? Seriously, I can guarantee you one thing that we also see the figures in the forecast that EU and all others are forecasting. And we will have the capacity for that expansion without any doubt. We are going to have a short-term, mid-term, and long-term. It won’t be any issue for us when it comes to capacity. The only one issue and that is that our sub-supplier is going to be there. On the engineering side, on the production side, or the capital supply side it’s 100% solid. So, you don’t have to worry about that. And we won’t release any figures precisely, of course, on our capacity. But that’s I think that’s the answer that caters to your question.
Unidentified Analyst
Alright. Thank you very much. So, I guess my next question is on the pricing. So, I guess the market anticipated raw material prices will potentially normalize into next year, and how should we think about how that would affect you? I mean do you expect to give back some of the price increases you have achieved this year if we are to see lower raw material prices? I mean I appreciate that, you have said that you have not certainly increased the prices much enough to compensate the costs we have seen, but if that reverses, how should we think about pricing?
Eric Lindquist
Well, I think when it comes to prices, we do not negotiate prices over video frames like this, as you will understand. And I think that prices, just like capacity is just like water down the mountain, it always found its way, the same thing here. Now, raw material prices might go down, but then other costs might go up as you all know labor costs are going up. And energy prices are now very difficult to predict. So, even if steel is going down, now, you cannot select one item in the product calculation. It’s the whole picture. And we follow the market, just like we have done now and the cost 24 months or 30 months. And we will not of course would never indicate over conference like this, what we are going to do with the prices versus seeing prices would fall. I hope you appreciate that.
Unidentified Analyst
Alright. Thank you very much. That’s very helpful. That’s all for me.
Operator
Thank you. Our next question comes from the line of Pam Liu from Morgan Stanley. Please go ahead. Your line is open.
Pam Liu
Thank you very much. I have three questions, please. First, I would like to understand more about your expectation of gradually improving margins from here. So, well appreciate that and improving supply chain and a more sustainable input costs will help. I can also see a number of headwinds from here. For example, first of all, your customers have already seen quite substantial price increase over the last year, surely that they will be more price sensitive now in their discussion with you than before. Second of all, you are investing ambitiously in capacity and workforce growth across all your divisions. So, that is cost. And third in Element, you did say that in most of the industry, end market industry division, you are actually seeing demand decline. So, could you please help me understand more about the specific plans and actions you have in mind in order to drive the margin growth in this backdrop? My second question is in Climate Solutions for Q3, if I take away the acquired impact, the very positive effects if I add back the washing machine impact, I think the Q3 organic local currency growth would be around 15% or so, and most of which I expect to be pricing. Now, Q3 last year was not a particularly strong quarter anyway, because you already started to experience supply challenge. So, could you help me understand why Climate Solutions volume growth has been weak in Q3 relative to the various strong demand you see in the market and an improving supply chain? Do you think you might have lost a market share in air to water in Europe specifically? And my final question is in Element, you mentioned, the declining demand in commercial and auto. So, I think it’s reasonable to assume – I also think it’s reasonable to assume that your customers will also have built up quite a lot of inventory last 12 months. So, how should we think about Element’s growth and margin into 2023 in light of the demand and customer inventory backdrop, please? And if I could I think if I am correct, I think your semiconductor exposure in Element is mostly acquired. So, it’s probably about 10% to 15% of Element’s end market. So, surely, it’s probably not enough to offset to the more cyclical sector. Thank you.
Eric Lindquist
Yes. We would need another hour or two hours on so for our questions. And I understand that you have difficulties believing in our future. And I also read that you are always negative on your report. So, I won’t be able to change that attitude. And that’s fine, you can continue to be negative to us. And I have no intention changing that. And what you read in the report, that’s exactly what we believe in and of course, if we have not been able to deliver, as we have not been able to deliver in all sectors. That is of course possible that some might have taken a few heat pumps or stoves or elements out of our hands. But that’s not because the customers would have liked that. That’s been because of shortages, Arizona compensate for now. And the signals we are getting from us in reports. I mean all the 100 questions you bombarded with us says we have been here now. I don’t think we have time to answer those. You have read reports, and you have heard the answers that we have given to the other analysts. I think that has been catering for all your questions. Okay? Thank you.
Operator
Thank you. Our next question comes from Viktor Trollsten from Danske Bank. Please go ahead. Your line is open.
Viktor Trollsten
Yes. Thank you, operator. Hi, Eric and Hans. Greetings from Finland. So, you have been rather explicit in your previous answers. I am going to try to push you a bit more on your own ability to grow into next year. I mean you have a record order book, so that supplies is sort of insane, you are over stocked. So, I guess in that context, you have annual growth target of 20%. And I guess you would be able to lift volumes by 20% into next year, is that how we should think about your current capacities capture?
Eric Lindquist
Well, that’s an interesting analysis. I mean I don’t think we got to change our targets. We have been living by the same targets now for some 30 years, at least since we got launched on the stock exchange. And that was realistic to believe that when the market is going in the direction that we see right now, of course, the 10% organic growth would be perhaps on the more cautious side. And again, I mean we won’t give you any more precise organic growth figures. But when the market is growing of course, as we said all along, when the market is shocked, then of course, we have to rely more on acquisitions. And as you see now, the acquisition part has been lesser. And then we still grow quite healthy. So, we continue to anticipate the strong organic growth for the coming quarter or at least where we can see now to come in 2022. We cannot see that that year and that another war breaks out or something really crazy, that comes up. We believe that that’s going to be a healthy market for us, but I think that’s clear.
Viktor Trollsten
And maybe just one question on your order book. Just interesting to hear whether you have seen any cancellations, I am in little times are significant. So, how steady is your order book, have you seen any calculations?
Eric Lindquist
It’s difficult to analyze order book. But we have not seen that, that could possibly take place. I mean we wouldn’t exclude that. But had we seen that so far, I think that we wouldn’t have as bold as we are in our forecast for the future. I am sure that any plumber or any stove, potential stove owner would say, well, if I can’t get it there, I might put an order there. It might be that they have placed an order to different places, but we can’t really control that. But we have not seen that so far.
Viktor Trollsten
Okay, now that’s clear. That’s all for now. Thank you very much.
Operator
Thank you. Our next question comes from Karl Bokvist from ABG Sundal Collier. Your line is now open.
Karl Bokvist
Thank you, and perhaps good day to you both. I have only two questions. The first one is just on, I believe you mentioned Sweden in particular. But it still seems like the Nordics is growing very, very well for you in Climate Solutions, for example. So, just out of interest, do you think that there might be product mix differences that you continue to perform very well in the higher categories or something like that, when we just compare it to the publicly available market comments? That would be my first one. So I will stop there.
Eric Lindquist
Once again, I got a little bit disturbed here by another, how we performed compared to…
Karl Bokvist
Yes. Sorry, It just seems like you performed still very well in the Nordics. And if we look at for example, Sweden, the market is not growing as fast. So, I was just a bit interested in hearing if you believe that you are maybe some of the more higher price premium segments or you have been able to deliver quite significantly better this quarter?
Eric Lindquist
Well, I think that the Nordics as you know, being a small country, we have to rely on the Nordics as our home market. That’s where we have those 25 million people. That is certainly our home market. And that’s why we always have to serve we have to be there very obedient. We have to be obedient in any market. I think all companies have their home turf. And our home turf, that is certainly, the Nordics. So, we try to do our utmost to serve customers there and to I mean, we are not perfect by any means. Of course, there have been people waiting for heat pumps and stove for a long time. But we count on their loyalty. And also the fact that we are coming out with new products very frequently means that we have stirred interest and people are in most instances, willing to wait for our products. We can say that there aren’t any exceptions. Of course, there might be exceptions to that. But we feel that we have a very strong position in those four home markets Finland, Norway, Sweden, and Denmark.
Karl Bokvist
Understood. Yes. Thanks. Maybe difficult to get a quick answer on this one, but I will try anyway. Could you give us an update on the transition towards more friendly refrigerants? And where you feel you are in terms of your own timeline, and considering the kind of recent proposals with more stringent F-gas restrictions and so on?
Eric Lindquist
No, I think that we have been talking about that, that’s not a secret where we are being heading. We have been heading towards the natural refrigerants ever since the first science came out, particularly 2018. But they were giving recommendations that we will go in towards on the GWP issue, down to single digit. And then when we started to work in that direction, then of course, EU for some reasons, we are sort of convinced by manufacturers outside Europe that they were going to use other refrigerants, that’s totally a detriment to the [indiscernible]. And that’s been of course, a debate that with refrigerants having a GWP factor of 600, 700, 800, would be sufficient. We never believe that. That’s why we never altered our direction. That’s why we see the products coming out and we will be in there with our natural refrigerants, it is now 2025 when we have to fulfill that and we are going to be there. And you see our models on the market already. We never gave up the natural refrigerants on our first day exhaust or heat pumps. We have been there since 1997. It’s our 25th anniversary now. We have very good experiences with that. We find it very, very peculiar that manufacturers from outside Europe have convinced Europeans to use other refrigerants. It’s a very sad story. We embrace the legislation that’s coming.
Karl Bokvist
That’s all for me. Thank you.
Eric Lindquist
Thank you.
Operator
Thank you. Our next question comes from the line of Anders Roslund from Pareto Securities. Please go ahead. Your line is open. Anders, your line is now open. If you are on mute, can you please take if of off mute. Okay. And since we are not getting a response…
Anders Roslund
Hello, can you hear? Yes. Okay, excellent. Sorry.
Operator
Please go ahead with your question.
Anders Roslund
Yes. I had a question regarding the order book. I assume that the order book increased in the third quarter – the second quarter. And I wonder if the order gap for the last 12 months should be quite substantial looking into ‘23. And I guess that order gap, ordering take minus sales is part of your sort of bullish view on that you will grow organically maybe above your target level of 10%.
Eric Lindquist
Well, we have a good order book. But that’s not the reason why we have a bullish outlook. That’s why we that’s – the reason for that is that we see the true demand to continue to increase.
Anders Roslund
Okay. Excellent. Thank you.
Eric Lindquist
Thank you. I think that there, we now have to rush to the next session. We apologize for cutting it short. But we have been trying to be as open, as transparent as possible, not at the same time being able to answer all questions.
Hans Backman
Thank you, everyone.
Eric Lindquist
Thank you very much.
Operator
This now concludes our conference call. Thank you for attending. You may now disconnect your lines.
Be the first to comment