(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 (+0%) for a hefty 12 billion euros. 💰
But is this news really that big or is it not actually exactly the scenario that I have repeatedly alluded to and discussed in my previous articles on NIBE? ☝️
The heat pump market has been a topic with enormous potential, opportunities and risks, and not just since the decision by the German government and other countries.
Reason enough for me to look at the topic of heat pumps and once again at my investment, NIBE Industriers $NIBE B (+0,14%) 🧐
The heat pump - definition and function:
In short, a heat pump is a heat engine that uses technical-mechanical work to absorb thermal energy from a source with a lower temperature than the target temperature and transfers it to a heating system as useful heat. [see diagram 1; source 1]
Heat pumps are primarily used to heat buildings, but are also used in the process industry, in domestic tumble dryers and also in refrigerators (at least systematically with the process principle of the heat pump...).
Heat pumps are classified according to their process, heat source, heat utilization and mode of operation. It would go beyond the scope of this article to go into all the different methods. You can find more details in [Source 2]. What is important for most people, however, is the type of heat source.
There are three main sources and the associated operating modes of heat pumps:
- Air-to-water heat pump (energy from the ambient air is drawn in and when it comes into contact with the refrigerant, it evaporates and sets the heat pump circuit in motion)
- Brine-water heat pump (geothermal heat is transported via a geothermal probe and brine-filled pipe to generate energy, known as a geothermal heat pump)
- Water-to-water heat pump (groundwater is pumped via a probe and well into another "well", where it is heated by the geothermal energy 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 evaluation. It is therefore purely a list to provide an overview. Also, certain points in the advantages and disadvantages are only relevant if certain conditions are met!
No claim to completeness, these are my loose considerations.
Advantages:
- Energy efficiencythrough the use of environmental heat
- Cost savings, lower energy requirement of the pump leads to lower operating costs
- Environmentally friendly, no fossil fuels therefore reduction in CO2 emissions
- Versatility, various applications are possible - heating, hot water preparation and cooling
- Comfort, with a constant room temperature throughout the year
- Durability, long service life and low maintenance requirements
Disadvantages:
- High purchase costs, conventional heating systems are cheaper to purchase, therefore higher investment costs are required
- Dependence on ambient temperature, reduces energy efficiency, especially in winter
- Space requirementDue to the size and installation space required, more space is needed in the house and on the property
- Noise developmentsome heat pumps generate a lot of noise, especially when starting up or under load
- Complexityheat pumps are not maintenance-free and require regular servicing to ensure the pump's longevity
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 used on ships, for example. 💡
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 Kelvin temperature unit is named) who predicted that a "reverse heat engine" could and would also be used for heating purposes. It was also he who recognized that a heat pump would require less primary energy to be of effective use due to its principle of extracting heat from the environment.
Nevertheless, another 85 years passed before the first heat pump for space heating went into operation. It was thanks to pioneers such as the German Carl von Linde (inventor of the modern refrigerator) and other inventors with a thirst for action, that heat pump technology could be further developed and built upon thanks to refrigeration machines.
Finally, the Swiss Heinrich Zoelley was the first daring inventor to propose and devise an electrically driven heat pump using geothermal energy as a heat source. He was granted patent number 59350 in 1919, but again... the time was not yet ripe and it took another 20 years for the first technical realization. From 1930, the first air conditioning systems for room cooling with the option of additional room heating were built. However, the efficiency was sufficiently modest. 😔
In the wake of the Second World War and the resulting coal shortage, Swiss companies such as Sulzer, Escher Wyss and Boverei developed and commissioned around thirty-five heat pumps between 1937 and 1945. The main sources of heat were lake water, river water, groundwater and waste heat. The first pumps mentioned were therefore water-water heat pumps. Special mention should be made of the heat pump from Escher Wyss, as this heat pump built in 1937/38 was used to replace wood-burning stoves in Zurich City Hall. This heat pump heated the town 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, sometimes more effective and, above all, cheaper.
In Germany, the first heat pump was installed in a detached house in 1968. Here, a geothermal heat pump was used in combination with low-temperature underfloor heating.
It was only with the oil embargo and the resulting rise 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 fall in oil prices at the end of the 1980s had not heralded another abrupt end to heat pump technology.
In the end, it was the Swedes who, together with the Swiss company Sulzer-Escher-Wyss, developed and commissioned 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.
The rapid spread of heat pump heating began in 1990. This was due to technical advances, greater reliability, more efficient compressors and, of course, significant price reductions. 📈
Renewed and even greater importance has been attached to heat pump technology since the outbreak of the Ukraine conflict and the associated war. This is because the heat pump promises to decouple 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 Thermotechnology is the subsidiary of the supplier Bosch and stems from the takeovers of Buderus and Junkers. This 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 a turnover of 3.3 billion euros in 2021. Sales of heat pumps at Vaillant 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 a turnover of more than 830 million euros 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 manufacturers of heat pumps. With the acquisition of Viessmann and the recent takeover of Toshiba Klimatechnik, Carrier Global has also made further inroads into the heat pump market.
It can be assumed that other, currently smaller players want to and will jump on the heat pump bandwagon. This also includes companies that we still classically assign to fossil fuels or only remotely associate 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. It is now expected to double to up to 100 billion US dollars worldwide this year. 🤑
While Asia and the USA were still the drivers of global demand for heat pumps in recent years, Europe has seen a real boom in demand since the outbreak of the war in Ukraine. In Germany alone, sales rose from 154,000 heating heat pumps in 2021 to 236,000 appliances in 2022 (+53.25%).
The federal government in Germany also decided to consistently expand and standardize this heating technology by 2030. Half a million heat pumps are to be installed in 2024, and by 2030 the installed base will be 6 million appliances. 📊
No wonder the industry association "Bundesverband Wärmepumpe e.V." summarizes: "This will make the heat pump the new standard heating system." According to its study from January 30, 2023, these targets can be considered realistic. [Source 3]
The market share of heat pumps in the so-called heat generator market increased from 16.5% to approx. 25% in 2022. This means that one in four heating system replacements involves the installation of a heat pump. Around 56,000 heat pumps were installed in new buildings, which corresponds to 54% of newly built properties. 🏠
In 2022, 1.45 million heating heat pumps were in operation in Germany. The majority of these systems were installed in the last 15 years. With the long service life of these appliances described above, most of them are still in their "youth", which is why the replacement rate for old appliances is currently still below 2% of annual sales. An increase of 5% is expected by 2030.
The International Energy Agency (IEA) expects the installed heating capacity of heat pumps to increase from the current 1,000 GW (gigawatts) to up to 2,600 GW (gigawatts) by 2030. In some countries, such as the USA and Scandinavia, heat pumps are already a standard heating system.
By the end of the decade, the heat pump industry association expects the annual number of heat pumps installed in Germany to be slightly less than one million.
My investment - NIBE at risk?
Of course you start to wonder when you read news like the Viessmann takeover. Is my investment and the decision to invest in it the right one? Can the Group survive in this tough market? Is the company equipped 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 (based on a patent held by Christian Backer for tubular heating elements). In 1952, Bernerup also founded NIBE-Verken AB in Markaryd by taking over Ebe-Verken. Since then, Bernerup's initials have formed the company name NIBE.
With Sven Christiensson and then Rune Dahlberg, NIBE developed into a leading manufacturer of tubular heating elements with a focus on quality and efficient production by 1987.
However, the company was already present in 1952 with water heaters in the agricultural sector (here for milking systems), manufactured fireplaces for the Handöl brand as a subcontractor, later took over this brand and introduced the first heat pump (Fighter Twin) from NIBE in 1981. Production of heat pumps begins immediately afterwards in Markaryd.
In 1989 the Bernerup family decides to sell the two companies Backer-Värme AB and NIBE-Verken AB. Employees from these two companies, together with two other investors, set up what is now known as NIBE Industrier AB and took over the business.
Gerteric Lindquist is appointed CEO, who is still the CEO of NIBE today.
NIBE Industrier 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 strategy, which continues to this day.
More than 70 acquisitions and purchases have been made since the IPO. The complete list is available at https://www.nibe.com/nibe-group#Text3 and https://www.nibe.com/de/nibe-group/akquisitionen-der-nibe-group to view the complete list.
A special feature of acquisitions by NIBE is the independence of the acquired companies after the takeover. Newly acquired companies are encouraged to continue to write their own corporate history with commitment. This means that acquired companies should retain their identity and brands. The previous business owners are also left untouched as far as possible. The companies are to be continued with their existing 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] from 14.04.2023.
NIBE's core market is North America with 27%, the Scandinavian countries with 22% and Europe with 46%. In the year 2022, the sales amounted to SEK 40.071 billion (EURO 3.5 billion) compared to SEK 30.83 billion (EUR 2.7 billion) in the previous year. This corresponds to growth of 30%. Sales growth has been stable for at least 5 years.
The earnings per share amounted to SEK 2.17 (0.19 EURO). This is the fifth consecutive year of profit growth.
The operating margin increased slightly in 2022 from 14.4% (2021) to 14,7%. After tax, NIBE will generate consolidated profit of SEK 4.428 billion (EUR 387 million)which corresponds to an increase of 33.16% compared to 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 meagre. However, it makes sense in view of the capital expenditure required for development and acquisitions. The dividend yield in relation to the share price is approx. 0.57% at SEK 0.65 (€0.057). In the long term, the payout ratio is expected to be 25-30% of consolidated profit. Investors should also be aware that Swedish shares are subject to a higher withholding tax.
NIBE = future?
NIBE has already defined targets for its business activities in the past. These include corresponding targets for key operational figures, but also targets in the areas of SRI and ESG.
The corporate targets focus on growth (at least 20% per year), return on equity (at least 20%), operating margin (of at least 10% of sales) and equity ratio (should not fall below 30%).
In terms of the sustainable corporate goals, 60% of the product portfolio was originally intended to represent sustainable and higher climate protection by the end of 2023; this target has now already been achieved at 63.2% and has therefore been reformulated to 70% by 2026.
Energy consumption is to fall continuously and the accident rate in the workplace is to remain constantly low. The LTIF value is used for this purpose.
The CO2 balance is to be improved and NIBE wants to be completely climate-neutral by 2050. 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 areas of energy efficiency in the end consumer's own home, safety in everyday life in the supply of hot water, energy efficiency in buildings, infrastructure and industry.
Opportunities for NIBE:
- Great market potential for heat pumps and climate control solutions
- Potential in the renewable energy sector
- International market presence
- Broad product range
- Intensive and proactive product development
- Synergy effects from new acquisitions and cooperations
- Expansion through acquisitions
- Energy prices may force consumers to take action
Risks for NIBE:
- Legislative changes and decisions by authorities affecting existing product ranges
- Weak economy
- Increasing competition and competitors from Asia and the USA
- Energy prices could fall for consumers or rise for production
- raw material prices
- Currency fluctuations (SEK to dollar and EURO)
- Dependence on suppliers (see supply chain problems)
- 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 reduce dependence on certain countries or resources, but complex interrelationships such as the energy-efficient use of air conditioning technology products or heat and cooling pumps used in production and process chains will also play an important role in the future.
The sale of Viessmann's air conditioning division to a major player in air conditioning technology shows that the cleansing and consolidation of the market is only just beginning. Large groups from Asia in particular will penetrate the individual regional markets.
In market terms, there is still a lot of cake to be divided up, but the battle for distribution is no children's birthday party and will take one or two competitors and protagonists out of the race.
Viessmann was just the beginning for us Germans and now, of all times, the big outcry. In a normal news situation without the explosive nature of the current situation, this takeover would probably have remained a side note. Now, in the meantime, the news is being spread with brute words such as the "sell-out of German industry"... but this sale is by no means a sell-off, but it shows the direction in which the market is moving. Eat or be eaten.
NIBE has been expanding for many years now. The areas of activity are broadly based and not just limited to heat pumps. Whether heating solutions with fireplaces, 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 on offer are constantly being developed, collaborations with other companies are being sought and the company's expansion strategy is being driven forward.
I am not currently concerned that the market for heat pumps or other climate-friendly solutions will slow down or be sold off to Asian competitors (similar to PV and solar solutions in the past). 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 with it, even if I expressly warn against exuberant feelings for 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 a video at https://youtu.be/KDL1Xf-kuIA
Source 2: Wikipedia on the heat pump https://de.m.wikipedia.org/wiki/Wärmepumpe
Source 3: Heat pump industry study 2023 https://www.waermepumpe.de/fileadmin/user_upload/waermepumpe/05_Presse/01_Pressemitteilungen/BWP_Branchenstudie_2023_DRUCK.pdf
Source 4: Graphic from the study by source 3, heat pump sales (Heat pump sector study 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 ! 📝
