Strong demand has invigorated profitability levels on the fireplace market

Translation: Original comment published in Finnish on 9/22/2023 at 8:02 am EEST.

2022 was a challenging year for many consumer product companies due to consumers’ weakened purchasing power and extremely low consumer confidence. However, weak demand was not noticeable among fireplace manufacturers as the energy crisis aroused consumer interest in alternative heating forms for homes. Next, we will examine how different fireplace manufacturers operating in Finland have performed in recent years.

The group consists of six Finnish players (Tulikivi, NunnaUuni, Tiileri, Valmistuli, Uunisepät and Linnatuli) and the global market leader NIBE operating in Finland. Tulikivi is the largest Finnish player with a revenue of EUR 44 million in 2022, while the revenue of other domestic players was EUR 3-8 million. NIBE’s Stoves segment is in a size class of its own and in 2022 its revenue was some EUR 382 million.

*2021 luvut

Before COVID the profitability levels of the industry were subdued

Pre-COVID years were difficult for Finnish fireplace manufacturers, and we believe overcapacity in the industry made the competitive situation intolerably tight, the clearest indication of which is the players’ return on capital being lower than the required return on capital. Tulikivi described its strategy as “last man standing”, i.e. being the last man standing reflecting its tight cost control. The growth track record of Finnish fireplace manufacturers was subdued at that time, but the Stoves segment of the market leader NIBE that focuses on fireplaces, achieved steady growth. However, we believe NIBE’s growth focused on other market areas. The home nesting boom caused by COVID raised consumer interest in home, cottage and holiday home renovation, which we believe supported the entire industry. In 2020, the median revenue growth of fireplace manufacturers operating in Finland was 2% and in 2021 it rose to 15%, which boosted the companies’ earnings growth. The median EBIT margin of the group increased from 2% to 7%, clearly exceeding the 2017-2019 average (-2%).

The energy crisis in Europe threw gas on the demand flame

In 2022, the increased uncertainty about the price and availability of heating energy caused by Russia’s war of aggression in Ukraine pushed the entire industry to strong growth. Tulikivi and NIBE’s Stoves segment both increased their revenue by 32%, which was in line with the median of the examined group. We estimate that the growth of the industry in recent years would have been higher than the actual figure without the constraints caused by manufacturing capacity.

One key driver behind this growth was increased exports to Central Europe, where dependence on Russian natural gas led to particular concerns about the sufficiency and price of consumer energy. Tulikivi’s export revenue grew by a very strong 45%. NunnaUuni’s revenue also grew by 45%. NunnaUuni has indicated that up to 80% of its revenue comes from exports, with the main export destinations in Central Europe and the Baltic countries. The export-driven sales mix is reflected in the company’s strong profitability (2022 EBIT: 13%), as we estimate that Finnish players have better pricing power in the export markets, where competition is less intense.

However, not all players succeeded admits the strong demand cycle, and in 2022, Valmistuli filed for corporate restructuring and Uunisepät for bankruptcy. In recent years, both had performed poorly and we believe that they were more exposed to house manufacturer sales with a lower margin profile and more cyclical demand than other players. In our view, one factor behind the bankruptcy of Uunisepät may be the Europe-wide Ecodesign regulation for fireplaces that entered into force in Finland in 2022. The regulation defines emission requirements and minimum energy efficiency limits for factory-made fireplaces sold as new. This forces fireplace manufacturers to invest in product development, which increases operating costs. We believe the implementation of the regulation in Finland will mainly affect domestic-driven companies, as some of the typical export markets (e.g. Germany) have already implemented the legislation. As a result, the collections of export-driven companies largely already met the new requirements. We suspect the Ecodesign regulation strengthens the position of larger players as product development costs scale with production volumes and this will accelerate the consolidation needed by the industry.

But where are we headed?

Amidst very strong demand, it is good to consider where the sector is heading next and whether a longer-term structural change has already taken place. Tulikivi's guidance for 2023 is that both revenue and EBIT will grow from the strong comparison period. The year started out strongly for Tulikivi, and revenue grew by 28% in the seasonally weaker H1 and the order backlog stood at a robust level of EUR 13.9 million at the end of the review period (Q2’22: 11.3 MEUR). NIBE’s stoves segment also clocked a 35% increase in revenue in H1, despite production bottlenecks caused by purchased components. Despite the convincing growth among players, Tulikivi’s order intake has showed signs of slowing down for some time now, which, together with the cooling of the construction sector, may indicate a significant slowdown in demand.

In the next few years, regulation may act as a driver for stimulating demand in Germany. According to the local Bim SchV regulation, fireplaces manufactured before 2010 may no longer be used after 2024 unless they meet the Ecodesign requirements. At the same time, energy prices have fallen considerably from the 2022 peaks, which should cool down the demand for fireplaces.

Factors slowing demand may also include higher interest rates, a challenging outlook in the construction sector and weakened consumers’ purchasing power. Considering the competitive dynamics of the Finnish market, demand development and the volume of manufacturing capacity directed to the domestic market play a key role in our opinion. The fireplace market has historically been prone to price competition, but if export-driven companies like Tulikivi and NunnaUuni direct more of their manufacturing capacity to export markets, it may restrict competition on the domestic market. At the same time, Uunisepät that we believe acted as the price disruptor exiting the market can reduce domestic capacity which would be healthy for the industry that has suffered from overcapacity.

In our forecasts, we expect strong sales in the fireplace market to decline in the second half of this year as the heavy order backlog dissolves, but uncertainty regarding market development is significant in the current exceptional environment. We believe players whose product development costs scale with high production volumes, for whom the export market provides extra support in the business, and who have limited exposure to sales in new builds will fare best in the coming years.