NIBE Q3’24 preview: Another weak quarter, but signs of recovery expected

NIBE will be publishing its Q3 results on Friday at 8.00 am CEST. The results are expected to be weaker than last year's relatively strong figures, due to a decline in revenue. Although NIBE doesn't give specific numerical forecasts, the company usually comments on market conditions and forward-looking expectations. We assume that NIBE will maintain the outlook from its Q2 report. This suggests that destocking is largely complete (except in Germany) and that margins in all three divisions are expected to return to historical levels in 2025. Our main focus will be on updates on consumer demand, the destocking situation in Germany and the pricing landscape.

Revenue expected to remain weak

The past year has been characterized by a slowing economy, high interest rates and overcapacity, resulting in efforts by distribution chains to reduce inventories. This has led to weak order intake at the manufacturing level. However, based on company and peer commentary (e.g. Viessmann Climate Solutions reported an upturn in orders at the end of Q3), we believe that inventory adjustments are largely complete, with the ~50% decline in the European market during H1 representing the bottom. However, we expect only a modest quarter-on-quarter recovery due to the lagged effects of destocking and likely continued weak end-user demand. Consequently, we estimate that NIBE's organic sales will decline by 9% year-on-year to 10,660 MSEK, which is roughly in line with the consensus. We expect revenue to decline in all business areas, with Stoves being affected by weak consumer demand and construction activity, and Elements by weak demand in consumer goods and semiconductors. However, we expect Climate Solutions to experience the largest decline, both in absolute and relative terms.

Profitability impacted by revenue decline, but cost savings to provide some support

We estimate NIBE’s Q3 EBIT at 904 MSEK, which falls roughly within the middle of consensus range, reflecting a 50% drop from the strong comparison figures. This decline is mainly due to reduced sales and underutilized capacity, partially offset by cost-cutting measures. Further down the income statement, we anticipate roughly flat financial expenses and similar relative tax rate. However, with lower operating income, we expect adjusted EPS to decrease to SEK 0.28 (Q3’23: SEK 0.64), in line with consensus. Lower working capital requirements due to declining revenue and reduced inventories should support free cash flow, though the low operating income will restrain overall cash flow.

Signs of a gradual market recovery

Recent data indicate a gradual market recovery may be underway. For example, Swedish sales of air-to-water heat pumps declined only 13% year-on-year in Q3, and applications for heat pump subsidies in Germany rose by 110% in August (compared to last year), with a 5% increase over the previous month. Although we believe the market has bottomed out, we expect recovery to become more noticeable in Q4’24 and throughout 2025, influenced by lingering inventory adjustments in some markets and the expected delayed impact of potential interest rate cuts on consumer purchasing power and confidence. Additionally, in many European countries, electricity costs more than 2.5 times as much per unit as gas, which is prohibitively high and needs to be reduced to encourage consumers to invest in heat pumps.

In NIBE’s upcoming Q3 report, we expect the company to reiterate the outlook from Q2, stating that destocking has largely concluded in Europe (excluding Germany, we estimate it constitutes around 10-15% of total revenue) and that growth should gradually improve, with margins in all divisions expected to return to historical levels by 2025 driven by higher volumes and the cost savings program. We will watch closely for any comments indicating a change in these assumptions, as well as insight into the pricing landscape, where excess inventory at the manufacturing level could lead to downward pressure on prices.