+++ Viessmann! NIBE, what now? +++
(The heat pump and investing - nothing but hot air?)
The news broke like a storm in the German news last week: Viessmann is switching to Carrier $CARR (+2,55%) for a strong 12 billion euros. 💰
Only is this news really that big or isn't it actually exactly the scenario I have been hinting at and addressing in my previous posts on NIBE? ☝️
The heat pump market has been a topic with enormous potential and opportunities as well as risks, and not just since the decision by the German government and other countries.
This is reason enough for me to take a closer look at heat pumps and, once again, at my investment, NIBE Industri $NIBE B (-0,2%) 🧐 I'd like to take a closer look at this topic.
The heat pump - definition and function:
In short, the heat pump is a power-heating machine that uses technical-mechanical work to take thermal energy from a source with a temperature lower than the target temperature and transfer it as useful heat to a heating system. [see Chart 1; Source 1.]
Heat pumps are primarily used for heating buildings, but also find application in the process industry, the domestic clothes dryer but also on the refrigerator (at least systematically with the process principle of the heat pump...).
Heat pumps are divided according to their method of operation, heat source, heat utilization and mode of operation. To go into all procedures would go beyond the scope of this article. You can find more details in [Source 2]. However, the most important thing for most people is the type of heat source.
There are three main sources of heat and the way they work:
- Air-to-water heat pump (Energy from ambient air is drawn in and with contact with the refrigerant, it evaporates, setting the heat pump cycle in motion).
- Brine-water heat pump (geothermal heat is transported for energy production via a geothermal probe and brine-filled pipe, so-called ground source heat pump)
- Water-water heat pump (groundwater is pumped via probe and well into another "well", here heated by the geothermal heat and then fed into the heating process)
The heat pump - advantages and disadvantages:
Below I briefly list the advantages and disadvantages of the heat pump. However, the advantages and disadvantages mentioned here are WITHOUT valuation. It is thus purely a list to get an overview. Also, certain points in advantages and disadvantages are only relevant if certain conditions are met!
No claim to completeness, it is in my loose considerations.
Advantages:
- Energy efficiency, through use of environmental heat
- Cost savings, lower energy consumption of the pump leads to lower operating costs
- Environmental friendliness, no fossil fuels therefore reduction of CO2 emission
- Versatility, different applications are possible - heating, hot water production and cooling
- Comfort, with constant room temperature throughout the year
- Durability, long service life and lower maintenance requirements
Disadvantages:
- High acquisition costsConventional heating systems are cheaper to purchase, therefore higher investment costs are necessary.
- Dependence on ambient temperature, ensures that especially in winter the energy efficiency decreases
- Space requirementDue to the size and the required installation space, more space is needed in the house and on the property.
- Noise levelSome heat pumps are noisy during start-up or under load.
- ComplexityHeat pumps are not maintenance-free and require regular maintenance to ensure the longevity of the pump.
The heat pump - a "short" history
In 1834, Jacob Perkins was the first developer to complete the construction of a machine based on the principle of the heat pump. At that time, he designed a cooling device in which ether was pumped into a cooling coil system and was used, for example, on ships. 💡
The machine he designed already contained the four main components of a modern heat pump: the compressor, a condenser, an evaporator and an expansion valve.
It was Lord Kelvin (yes, the very gentleman after whom the temperature unit Kelvin is named) who predicted that an "inverted heat engine" could and would be used for heating purposes. It was also he who realized that a heat pump, by its principle of drawing heat from the environment, would require less primary energy to be of effective use.
Nevertheless, another 85 years passed before the first heat pump for space heating was put into operation. It was pioneers like the German Carl von Linde (inventor of the modern refrigerator) and other inventors with a thirst for action, that it was precisely through refrigeration machines that heat pump technology could be further developed and built upon.
Finally, the Swiss Heinrich Zoelley was the first foolhardy inventor to propose and conceive an electrically driven heat pump using geothermal energy as a heat source. In 1919, he was granted the patent number 59350, and yet... again, the time was not yet ripe and a first technical realization took another 20 years. From 1930 the first air conditioners for room cooling with the possibility of additional room heating were built. The efficiency, however, was sufficiently modest. 😔
In the wake of World War II and the accompanying coal shortage, Swiss companies such as Sulzer, Escher Wyss, and Boverei developed and put into operation some thirty-five heat pumps between 1937 and 1945. The main heat sources were lake water, river water, as well as ground water and waste heat. The first mentioned pumps were water-water heat pumps. Special mention should be made of the heat pump of the Escher Wyss company, because this heat pump, built in 1937/38, was used to replace wood stoves in Zurich City Hall. This heat pump heated the city hall for 63 years. Until the year 2001.😳
Falling oil prices in the 1950s and 60s, on the other hand, were a major blow to the development of the heat pump. Burning fossil fuels was more lucrative, at times more effective and, above all, cheaper.
In Germany, the first heat pump was installed in a single-family house in 1968. Here, a ground-source heat pump was used in combination with low-temperature underfloor heating.
It was not until the oil embargo and the resulting increase in the price of oil that the heat pump suddenly became interesting again. But the story would be too simple if the many incompetent suppliers in the heat pump sector and the renewed drop in the price of crude oil at the end of the 1980s had not once again brought an abrupt end to the technology surrounding the heat pump.
It was finally the Swedes who, together with the Swiss company Sulzer-Escher-Wyss, developed and put into operation the largest heat pump system in the world (180 megawatt heat pump system) with 6 pump units of 30 MW each for the Stockholm district heating network. The system works with the heat source of seawater from the Baltic Sea.
From 1990, the rapid spread of heat pump heating began. The reasons were the technical advances, greater reliability, more efficient compressors and, of course, the sharp price reductions. 📈
Renewed and even greater importance was attached to the heat pump technology since the outbreak of the Ukraine conflict and the associated war. Because the heat pump promises the decoupling from the use of fossil fuels such as gas and oil.
The heat pump - manufacturers in Germany and internationally
In Germany, the market for heat pumps is served by manufacturers such as Bosch Thermotechnik, Stiebel, Eltron, Vaillant and, last but not least, Viessmann. Bosch Thermotechnik is the subsidiary of the supplier Bosch and comes from the acquisitions of Buderus and Junkers. This even makes Bosch one of the largest heating manufacturers in Europe. Vaillant was founded in 1874 and today stands primarily for the manufacture of heating, ventilation and air conditioning technology. Vaillant achieved sales of €3.3 billion in 2021. Vaillant's sales of heat pumps increased by 50% compared to the previous year. Striebel Eltron was founded in 1924 and has been developing heat pump technology since the early 1970s. The company generated more than 830 million euros in sales in 2021. There are plans to more than triple production capacity at the Holzminden site.
Among international manufacturers, Daikin Industriers and Panasonic (both Japan) as well as LG or Samsung (both South Korea) and NIBE Industriers (Sweden) are among the largest producers of heat pumps. Carrier Global has also bought further into the heat pump market with the acquisition of Viessmann and the also recent acquisition of Toshiba Klimatechnik.
It can be assumed that other, currently smaller players want to and will jump on the heat pump bandwagon. These include companies that we still classically associate with fossil fuels or only remotely with air conditioning and heating technology.
The heat pump - the market (in Germany), its key figures and future
The market for heat pumps has experienced a massive upswing in recent years. The sales volume in 2017 was 48 billion US dollars. Meanwhile, it is expected to double with up to 100 billion US dollars worldwide this year. 🤑
While Asia and the USA were the drivers of global demand for heat pumps until recent years, Europe has seen a veritable boom in demand since the outbreak of the Ukraine war. In Germany alone, sales rose from 154,000 heating heat pumps in 2021 to 236,000 units in 2022 (+53.25%).
The federal government in Germany also decided to consistently expand and standardize this heating technology by 2030. In 2024, half a million heat pumps are to be installed, and in 2030 the installed base will be 6 million devices. 📊
No wonder that the industry association "Bundesverband Wärmepumpe e.V. sums up: "Thus the heat pump becomes the new standard heating." According to its study of 30.01.2023, these goals can be considered realistic. [Source 3]
The market share of heat pumps in the so-called heat generator market increases in 2022 from 16.5% to approx. 25%. This means that every fourth heating system replacement involves the installation of a heat pump. Around 56,000 heat pumps were installed in new buildings, which corresponds to a share of 54% of newly built properties. 🏠
In 2022, 1.45 million heating heat pumps were in operation in Germany. Most of the systems were installed in only the past 15 years. With the long service life of these units described above, most of the units are still in their "youthful age", which is why the replacement rate of old units is currently still below 2% of annual sales. An increase of 5% is expected by the year 2030.
The International Energy Agency (IEA) expects heat pumps to expand from the current 1,000 to up to 2,600 GW (gigawatts) of installed heating capacity by 2030. In some countries, such as the USA and Scandinavia, heat pumps are already the standard heating system.
By the end of the decade, the heat pump industry association expects an annual installation figure of slightly less than one million heat pumps for Germany.
My investment - NIBE at risk?
Of course, reading news such as the takeover of Viessmann makes you wonder. Is my investment and the decision to invest in it the right one? Can the company survive in this tough market? Is the company prepared for the future?
NIBE - The company
In 1949 Nils Bernerup and Christian Backer founded Backer Elektro-Värme AB in Sösdala, Sweden, which manufactured the so-called Backer element (after a patent Chr. Backer for tubular heating element). In 1952 Bernerup also founded NIBE-Verken AB in Markaryd by taking over Ebe-Verken. Bernerup's initials have since given the company name NIBE.
With Sven Christiensson and subsequently Rune Dahlberg, NIBE developed into a leading manufacturer of tubular heating elements with an emphasis on quality and rational production by 1987.
However, the company was already present in 1952 with water heaters in the agricultural sector (in this case milking equipment), manufactured fireplaces for the Handöl brand as a subcontractor, later took over the company and in 1981 introduced the first heat pump (Fighter Twin) from NIBE. Production of heat pumps begins in Markaryd immediately afterwards.
In 1989 the Bernerup family decides to sell both Backer-Värme AB and NIBE-Verken AB. Employees from these two companies, together with two other investors, establish the now well-known NIBE Industrier AB and take over the business.
Gerteric Lindquist is appointed CEO, and he is still NIBE's Group CEO today.
NIBE Industier AB has been listed and traded on the Stockholm Stock Exchange since 1997. The IPO is also the starting signal for the company's strong expansion and acquisition drive, which continues to this day.
Since the IPO, more than 70 acquisitions have been made. The complete list can be found at https://www.nibe.com/nibe-group#Text3 and https://www.nibe.com/de/nibe-group/akquisitionen-der-nibe-group to be viewed.
A special feature of NIBE's acquisitions is the point at which the acquired companies become independent after the takeover. Newly acquired companies are encouraged to continue writing their own corporate history with commitment. This includes ensuring that acquired companies retain their identity and brands. Also, the previous business owners are left untouched as far as possible. The companies are to be continued with their previous management at the original locations and thus stand for continuity and responsible local action.
NIBE in figures = love?
The latest annual report can be found at [Source 5] dated 14.04.2023.
NIBE's core market is North America with 27%, the Scandinavian countries with 22% and Europe with 46%. In 2022, sales amounted to Sales amounted to SEK 40.071 billion (EURO 3.5 billion) to SEK 30.83 billion (EURO 2.7 billion) from the previous year. This corresponds to a growth of 30%. Sales growth has been stable for at least 5 years.
The earnings per share were 2.17 SEK (0.19 EURO). This is also the fifth year in a row that profit has increased.
The operating margin increased slightly in 2022 from 14.4% (2021) to 14,7%. After tax, NIBE will achieve a Group net profit of SEK 4.428 billion (EURO 387 million), an increase of 33.16% compared with the previous year (SEK 3.348 billion). With an equity ratio of more than 50% the company is financially sound and ready for further acquisitions.
NIBE pays a dividend. However, this is quite meager. It makes sense, however, given the capital outlay required for development and acquisitions. The dividend yield related to the share price is approx. 0.57% at 0.65 SEK (0.057€). In the long term, the payout ratio is expected to be 25-30% of net income. Investors should also be aware that Swedish shares are subject to a higher withholding tax.
NIBE = the future?
NIBE has already defined targets for its corporate activities in the past. These include targets for key performance indicators, but also targets in the areas of SRI and ESG.
The main corporate targets are growth (at least 20% per year), return on equity (at least 20%), operating margin (at least 10% of sales) and equity ratio (not to fall below 30%).
In terms of sustainable corporate goals, 60% of the product portfolio was originally to represent sustainable and higher climate protection by the end of 2023; this goal has now already been achieved at 63.2% and has therefore been reformulated to 70% by 2026.
Energy consumption is to be continuously reduced, and the accident rate at the workplace is to remain constantly low. To this end, the LTIF value will be looked at.
The CO2 balance is to be improved and by 2050 NIBE wants to be completely climate neutral. To achieve this, emissions are to be reduced to 65% of the 2019 baseline by 2030. This corresponds to 11,500 tons of CO2.
NIBE sees its opportunities in the area of energy efficiency in the end user's own home, everyday safety in the supply of hot water, building energy efficiency and infrastructure and industry.
Opportunities from NIBE:
- great market potential for heat pumps and air-conditioning solutions
- Potential in the renewable energy sector
- International market presence
- broad product range
- intensive and driving product development
- Synergy effects from new acquisitions and cooperations
- Expansion through acquisitions
- Energy prices could force consumers to take action
NIBE's risks:
- Changes in legislation and decisions by authorities, with impact on existing product ranges
- weak economic activity
- increasing competition and competitors from Asia and the USA
- energy prices could decrease for consumers or increase for production
- raw material prices
- Currency fluctuations (SEK to dollar and EURO)
- supplier dependency (see supply chain issues)
- geopolitical situation such as wars and sanctions
The bottom line:
The topic of heat pumps is a highly complex one. Not only are politicians currently looking for solutions and ways to quickly move away from fossil fuels or to reduce dependence on certain countries or resources, no, complex interrelationships such as the energy-efficient use of air-conditioning technology products or heat or cooling pumps used in production and process chains also play an important role for the future.
The sale of Viessmann's air conditioning division to a major player in air conditioning technology shows that the cleaning and consolidation of the market is only just beginning. Large groups will penetrate the individual regional markets, especially from the Asian environment.
In terms of market technology, there is still a lot of cake to be distributed, but the distribution battle is not a children's birthday party and will take one or the other competitor and protagonist out of the race.
Viessmann was only the beginning for us Germans and now of all times the big outcry. In a normal news situation without the explosive nature of today, this takeover would probably have remained a marginal note. Now here meanwhile and at times with brute words like the "sellout of German industry"... but this sale is by no means a sell-out, but it shows the direction in which the market is moving. Eat or be eaten.
NIBE has been expanding for many years now. The company's activities are broadly based and not just limited to heat pumps. Whether it is heating solutions with fireplaces, the heat pumps or as a partner to industry, NIBE has established itself as a professional, solution-oriented and, above all, committed company (in terms of the environment and social responsibility). The solutions it offers are constantly being developed further, cooperation with other companies is being sought and the expansion course that has been embarked upon is being constantly pursued.
I am not currently concerned that the market for heat pumps or other climate-friendly solutions will wane or that it will be sold off to Asian competitors (as has happened in the past with PV and solar solutions). NIBE would do well to maintain its growth trajectory.
I am also positive about the company's future goals and competencies and hope for further sustainable developments in the future.
I am sticking to my guns, even though I expressly warn against exuberant feelings about shares:
NIBE is LOVE. ♥️
At least for my portfolio.
Source 1: Chart 1 - https://um.baden-wuerttemberg.de/fileadmin/redaktion/m-um/intern/Dateien/Dokumente/2_Presse_und_Service/Publikationen/Energie/Energieeffiziente_WP_Heizungsanlagen.pdf or as video under https://youtu.be/KDL1Xf-kuIA
Source 2: Wikipedia on the heat pump https://de.m.wikipedia.org/wiki/Wärmepumpe
Source 3: Industry study heat pump 2023 https://www.waermepumpe.de/fileadmin/user_upload/waermepumpe/05_Presse/01_Pressemitteilungen/BWP_Branchenstudie_2023_DRUCK.pdf
Source 4: Graphic from the study of source 3, sales heat pump (Industry study heat pump 2023)
Source 5: Annual report 2022 from 14.04.2023 https://www.nibe.com/download/18.4ccfd67f186f21bb5967bdd/1681288254456/DE-G-bericht-22-W.pdf
Long live the #tldr club ! 📝
