Ariston Holding N.V. (E0E.F) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining Ariston's Second Quarter and First Half 2025 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to the company management. Please go ahead.

Good afternoon, and welcome to Ariston Group's Second Quarter and First Half 2025 Results Call. I'm Albert Pozzi, Chief Marketing, Sustainability and Investor Relations Officer. Joining me today are Maurizio Brusadelli, our Chief Executive Officer; and Riccardo Gini, our Chief Financial Officer. This presentation will last about 25 minutes, after which we will open the floor for questions. As a reminder, for those joining by phone, the slide deck is available on our Investor Relations website. I will now hand the call over to Maurizio.

Thank you, Albert, and good afternoon, everyone. So let's begin with a brief overview of our second quarter results on Page 3. In Q2, we continued to deliver a positive trend year-on-year in line with our plans. Our top line grew 3.6% organically. Heating showed signs of improvement, particularly thanks to the continued momentum in heat pumps, while water heating remained stable. We improved margin year-on-year by 50 basis points in quarter 2, thanks to the operating leverage and the Fit to Win program, which we had previously communicated to the market. The Fit to Win program is enhancing the effectiveness of our organization. At the same time, we accelerated investment in go-to-market, digital, R&D initiatives to continuously improve our offering and level of service to support organic growth. Once again, we maintained a strong focus on working capital management, resulting in a stable net working capital incidence on revenues at constant perimeter. This is reversing the typical quarter 2 upward trend of a normal year. Thanks to this disciplined approach, we improved half one free cash flow generation year-on-year despite higher level of CapEx investments. I look forward to commenting on the next slide about the signing of the JV with Lennox. This is a unique opportunity to accelerate our penetration in North America water heating markets in the next years. We continue to pursue our inorganic agenda from transformational to bolt-on deals. And I will also comment about the two bolt-on acquisitions completed in half one to support the development of the Components division. To conclude the introduction, we are happy with the development of the business in half one, even though some core markets are still stabilizing and the global geographical landscape remains complex. For these reasons, we confirm our net revenue guidelines with a narrowed range, and we continue to confirm our midterm outlook. If I now move to Slide 4. As you know, in May, we signed a strategic partnership with Lennox. So let me share a little bit the rationale behind the JV. U.S. is the largest water heating market globally with a very rich product mix. Based on the current regulation framework starting in 2029, there will be a progressive transition of electric water heaters above [ 35 ] gallons towards water heating heat pumps technology. Ariston Group and Lennox have very complementary assets on both companies stand to benefit from this partnership. For us, we are a global leader in water heating, offering a distinctive range of high-quality electric gas and water heating heat pump technologies. Lennox is a leading HVAC player with high reputation for innovation, quality and its extensive network of distributors and dealers will complement its portfolio and accelerate Ariston's ability to reach new standards across North America. The products will be manufactured in our plant in Mexico, improving the facilities utilization. We are currently preparing the product lineup for a launch in 2026. And obviously, it will take one more year to start seeing meaningful developments. Now on Page 5, as you know, we had some new news. Inorganic growth continues to be a top priority for us. We work on a wide range of opportunities from transformational deals such as the acquisition of Wolf-Brink completed in 2023 to smaller bolt-on acquisition provided they offer a strong strategic rationale. Here, you can see the example of two bolt-on acquisitions completed in half one with a strong strategic rationale to support the growth of our Components division. In the first quarter of 2025, we signed the acquisition of DDR Heating, which provides access to the U.S. component market. DDR specialized in tubular electric heater for both professional and industrial applications. In the second quarter, we completed the acquisition of Z.R.E. in Italy. Z.R.E. gives access to new industrial component market verticals, plastics, packaging and medical sectors. Now on Slide 6, a quick reminder on who we are. Ariston Group offers thermal comfort solution with a balanced exposure to water heating and climate comfort. Water heating on the right is a resilient business and our main business outside Europe. It benefits from our presence in markets with growing population and still low but rising penetration of water heating solutions. On the left, you see climate comfort, which includes heating, service and parts, ventilation and air handling. In the Heating business, our portfolio covers a wide range of technologies from gas boiler to heat pumps, hybrids and other heating systems. We offer a comprehensive range of high-efficiency and renewable solutions to enable the energy transition. Finally, our Components and Burners division complete our business lines, each accounting for 3% of total group turnover. On Slide 7, we provide our regular update of the German heating market, our largest market accounting for around 20% of Group revenues in 2024. Historically, the German heating market grew by 4% in volume over the 10-year period from 2013 to 2022, with an enriching product mix toward high-efficiency and renewable solutions. 2023 was an exceptional year, driven by incentives and concerns over a potential gas boiler ban in 2024, which ultimately did not materialize. 2024 market was affected by demand normalization, coupled with channel destocking and some regulatory uncertainty. In 2025, the market is stabilizing but remains in a negative territory year-to-date. Heat pumps have returned to strong growth, supported by a good incentive scheme with quarterly average application of approximately [ 20,000 ] per month. Poland market is still weak. Now let's pass to Riccardo that will walk you through our Q2 financial performance.

Thank you, Maurizio. Let's begin with Slide #9, which shows the year-on-year evolution on net revenues. Please note that Russia was excluded from the 2024 consolidation perimeter and was reconsolidated as of end of March 2025. For reporting purposes, the impact is treated as an M&A contribution. In Q2, revenues increased by 5.2% year-on-year, reaching EUR 644 million. This growth was primarily fueled by the organic expansion of 3.6%, underpinned by the steady recovery of the heating market. Notably, Europe returned to growth, while the Americas sustained the positive momentum that began in Q1. Meanwhile, the Water Heating segment maintained a stable performance across all regions, providing a solid foundation as we continue to capitalize on market opportunities across all our geographies. Our Service and Parts division continued its growth trajectory in line with the pace seen in Q1. As expected, given the current geopolitical context, global currency volatility had a significant impact this quarter with foreign exchange effects playing a meaningful role in our results. Minus 1.6% compared to minus 0.3% in Q1, with major headwinds from the Mexican peso, the U.S. dollar and several Asia-Pacific currencies. Final comment on the perimeter variation, which contributed 3.2 percentage points to our growth in the quarter. The main driver was the reconsolidation of the Russian business, along with the two bolt-on acquisitions in our Components division, which Maurizio covered earlier in the presentation. Summing up Q1 and Q2, in the first half of the year, we achieved organic growth of 3% in line with our guidance. Foreign exchange had a negative impact of 0.9%, while the Russia business and the two bolt-on acquisitions contributed 1.6 percentage points for a total growth of 3.7%. Moving on to Slide #10. Here, you can see the evolution of our net revenues by geography, which continues the trend observed in the first quarter. Let me remind you that in 2024 figures, Russia was excluded starting from end April, while in 2025 was reincluded starting from end March. We are pleased to report organic growth across all three regions with Asia-Pacific and Middle East, Africa and the Americas growing at a mid-single-digit rate in the second quarter. In addition, our business divisions delivered solid performances in Q2 as detailed in the Appendix with the Burners and Components divisions combined together achieving a plus 2% organic year-on-year increase. In Europe, net revenues reached EUR 471 million, marking a 3.2% year-on-year increase when excluding Russia. This performance reflects the ongoing market stabilization in our top 3 countries, coupled with solid growth across several other geographies. Notably, demand for heat pumps continued to rise steadily throughout the quarter, further supporting the region's overall positive trajectory. In both Asia-Pacific, Middle East, Africa and the Americas, revenue trends followed a similar pattern. Reported figures were slightly down year-on-year, primarily due to unfavorable foreign exchange movements. When adjusted for these currency effects, both regions would have delivered a solid mid-single-digit growth, reflecting healthy underlying business performance. Moving further ahead into the P&L, the Slide #11 highlights our adjusted EBIT performance. In the second quarter, adjusted EBIT rose by 13.9% year-on-year to EUR 31 million, accompanied by a 50 basis point improvement in margin, which reached 4.8%. This performance was primarily driven by the continued execution of our efficiency initiatives and supported by moderate operating leverage. These positive effects were partially offset by an acceleration of strategic investments in go-to-market initiatives, digital transformation and R&D. For context, reported EBIT in Q2 was EUR 61 million. The main adjustments totaling a net negative impact towards the adjusted EBIT included EUR 40 million from the reconsolidation of the Russian subsidiary and EUR 5 million related to the purchase price allocation amortization from past acquisitions. As a result, reported EBIT is higher than adjusted EBIT, which excludes these one-off and nonoperational items. As a reminder, our adjusted EBIT historically shows a seasonal pattern with an average distribution of approximately 30% in the first half and 70% in the second half of the year, as shown in the chart at the bottom right. Turning to Slide #12; let's take a look at our free cash flow performance. In the second quarter, free cash flow was positive EUR 3 million, although lower than the EUR 27 million recorded in the same quarter last year, this represents a clear improvement in the first half performance with cash absorption narrowing to EUR 40 million compared to EUR 24 million in the first half of 2024. As a reminder, as shown in the appendix on Slide #33, Q1 and Q2 are typically the weakest quarters for cash generation due to seasonal effects. This performance was mainly driven by our continued discipline in working capital management with a working capital to sales ratio improving by 3 percentage points year-over-year and remaining stable quarter-on-quarter versus the end of Q1, at constant perimeter. The contribution from the Russian subsidiary and the two bolt-on acquisitions is highlighted on the chart on the right-hand side of the slide, marked by the gray bar. For more details on the main drivers, please refer to the half year cash flow statement in the appendix. Further items affecting the second quarter include CapEx, which increased by EUR 4.5 million, reaching EUR 22.8 million, in line with our guidance. A negative contribution of EUR 48 million from provision and other operating changes due to the Russia reconsolidation effect and paid taxes, which were flat year-over-year. On Slide #13, you'll find an overview of the movements in our adjusted net debt during the first half. As shown in the previous slide, free cash flow contributed negatively by EUR 14 million in the first half. We also recorded EUR 14 million cash outflow for acquisitions, primarily related to the DDR, the U.S. acquisition for Components announced in March, the acquisition of an 80% stake in Z.R.E. in Italy as well as some additional minority stake investments. Other movements included EUR 16 million cash outflow for financial and FX charges, EUR 29 million for the distribution of payment to shareholders and around EUR 1 million in noncash positive adjustments. These noncash items mainly consist of negative EUR 2 million mark-to-market derivatives impact, plus EUR 3.7 million in interest accruals, plus EUR 4.2 million from IFRS 16 lease liability adjustments and minus EUR 6.8 million impact from FX variations on net financial indebtedness. The net debt increase in the first half of the year was lower than in the same period last year. So EUR 75 million compared to EUR 113 million -- EUR 113 million in the first half of 2024. It's worth highlighting that excluding EUR 43 million of cash outflows related to capital allocations, namely distribution to shareholders and M&A, the cash absorption from business operations and financial management was limited. Slide #14 offers a detailed breakdown of our net financial indebtedness. I can confirm that Q2 showed no significant developments compared to year-end 2024. The liquidity position decreased slightly to EUR 221 million, primarily due to early repayment of EUR 50 million of medium- to long-term variable rate debt completed in the first quarter, a strategic move to optimize our debt structure and reduce interest rate exposure. Other key financial indicators remained largely stable compared to the first quarter with the exception of a slight reduction in debt duration to 3.2 years from 4 years at the end of March 2025. Meanwhile, our maturity profile and the share of fixed rate debt held steady, reflecting our continued commitment to discipline and prudent financial management. With that, I'll now hand the call over to Maurizio, who will conclude the presentation by sharing our guidance and outlook.

Thank you, Riccardo. So we are on Page 16. To summarize, we are happy with the development of the first two quarters, which marked a return to positive organic growth. We are focused on delivering our 2025 objectives while also building a more effective organization and investing where it matters most to maintain and strengthen our leading role in the future. We confirm our expectation for 2025. And given the progress of half one, we have decided to narrow our 2025 net revenue organic growth guidance from between 0% and 3% organic growth to between 1% and 3% organic growth. We observed that analyst consensus has already anticipated it, and we feel consensus is a good indication of full year expectations. Turning to profitability. We reconfirm our expectation of an adjusted EBIT margin in the 7-plus percent range, supported by the Fit to Win efficiency program and additional direct cost saving initiatives that are already well underway. We want to balance year-on-year profitability improvement with continued investment to sustain mid- to long-term growth. Cash flow generation is typically concentrated in Q4, in line with our historical seasonality. And regarding CapEx, we confirm our guidance of 5%, 6% of net revenue for 2025, which is above the historical levels. As mentioned at the beginning of the call, we actively work on assessing strategic bolt-on M&A opportunity with strong strategic rationale. As far as regards tariffs and evolution of the geopolitical context, we are closely following the developments as I'm sure you all are. Our guideline reflects the current known situation and does not factor in second order effects on GDP and demand that may arise from current or future tariff-related developments across our key markets. Thank you for your attention now to you, Albert, to manage Q&A.

Thank you, Maurizio. We are now available for questions. [Operator Instructions] Operator, I give you the line.[Operator Instructions] The first question is from Vivek Midha from Citi.

I have 2 questions, if I may. The first is around the guidance, in particular on margins. You're continuing to guide for 7% plus adjusted EBIT margin. Clearly, the business is very seasonal. But if we just look on the year-on-year trends, this has appeared to slow somewhat. In Q2, we're 50 bps up year-on-year. So, you need some acceleration in the margin momentum year-on-year to get towards that margin guidance. How should we think about how that's likely to progress over the course of this year?

Thank you, Vivek. Yes, I mean, as you rightly said, we need to accelerate our progression in Q3 and Q4. This is something that historically happened for the company. So, we are confident about the ability to increase our profit in Q3 and Q4 to reach the guidance of 7% plus, as said in the guidance.

Understood. Just to follow up on that then. So, what is driving the faster year-on-year increase that you expect? Is it that those -- is it the impact of those investments gets diminished as you have the higher top line, so you can accelerate more? What is it that gives you the confidence that the margins on a year-on-year basis should start to improve by more in Q3, Q4? Of course, there's a seasonal impact in general sequentially leading to that upturn. But in terms of year-on-year development, still interesting.

Yes. I mean there is a seasonality, as you said. And obviously, we have our cost saving programs that are kicking in properly in half 1. We invested also a little bit more in half 1 since we stopped some of our investment in half 2 last year. So, we have a little bit of front-loading investments. Overall, all of this is -- I repeat, we are confident on the 7% plus that we have to reach full year.

That's helpful. And my second question is around the German heating market, particularly on boilers. As we've seen the heat pump market recover, boilers remain very weak, reflecting that shadow effect from the strong growth of 4% you highlighted. So, how do you think about the potential for any kind of upturn on the boiler side? Are there any data points that you're tracking on that?

Yes. I mean, obviously, we saw that the German heating market was very positive for heating heat pump in half 1, and we continue to remain bullish on the development of heat pumps in half 2 as well. As far as gas and oil boilers, obviously, the dynamic are different because also last year, I mean, Q1 was stronger. And obviously, we are ready to capture any opportunity on the German market if we will see a more positive development of gas boiler. We are doing better than the market overall there. So it's difficult to predict what the market will do. I mean, you saw that in our slide, we put a plus/minus on the range of the total market in terms of volume. But I would say that we are well positioned. The team is doing a great job. In Germany, we have a strong reputation. We play in the mid- to high part of the market with very strong equipment. So like you, I wish the market will do better. And if the market will do better, obviously, we will do better as well.

The next question is from Cedar Ekblom from Morgan Stanley.

Just a follow-up on your top line outlook. I'm surprised that you're not more positive in terms of the organic growth potential, considering you're really delivering to the top end of the organic range in the first half. And the comps are definitely not getting harder in the second half of the year, particularly in some of the Northern European markets where we would have seen weak volumes and destocking in the second half of 2024. So, could you just talk a little bit about why you are not more optimistic? Is this a case of you're very pessimistic on the outlook for gas boilers? Or is it just being conservative for conservatism sake, right? I don't really understand how we don't have a better H1 and H2? And then can you just talk a little bit about the balance sheet? I see that there were some changes to the sort of definition of net debt. Just talk a little bit about what has happened there and if those changes are cash linked or simply a balance sheet impact?

Thank you for your questions. I mean, as you know, our half 1 was very strong and positive in terms of organic growth. Now the context and the global market situation is not an easy one. I mean, we see a lot of volatility, uncertainty. We see the consumer confidence that is moving in different directions globally. So, we feel that keeping the range between 1% and 3% is correct, and we are confident to be within this range. And then let's see month after month and quarter after quarter where we are, and we are ready to give a further update when we will discuss Q3 actuals.

Can I just ask a follow-up? Would you be willing to comment on what organic growth looks like in July? Has it actually slowed relative to that 3% that you delivered in the first half and the 3.6% in the second quarter? Or has it accelerated? Because I think that would also give us a little bit of help in terms of understanding the longevity of the cycle improvement that you're seeing.

Yes. We don't comment normally monthly development. I mean, what we can say that what we can see in terms of orders and delivery is that July is in line with our expectation and continue to be a positive evolution as half 1. So, we are okay on what we see in July versus what we expected. Maybe on your second question, I don't -- I mean, we didn't change anything on balance sheet. Maybe I will ask Riccardo to give you some details and maybe you can ask us what you think we did, but I don't think we changed anything.

Yes. I mean the -- we only reconsolidated the main difference compared to the end of Q1 from a balance sheet perspective is the reconsolidation of the Russian subsidiary. Other than that, there are no other significant changes. I mean, that's pretty much consistent with the P&L performance on our side. And on the other hand, with our net working capital management, as we indicated earlier, which continue to be, we believe, under control and with a good performance, keeping in mind that the additions that we got during the quarter, namely, again, the Russian subsidiary as well as the 2 bolt-on acquisitions are actually dilutive, as you might have seen during the presentation. So, those 3 will likely represent an opportunity for the future. But other than that, there are no other major differences in the balance sheet compared to the end of the first quarter.

The next question is from Christian Hinderaker of Goldman Sachs.

My first question is on dynamics across new build and refurbishment or replacement markets. I appreciate your majority in the replacement setting. But maybe you can talk a little bit about what you're seeing in the new build environment, particularly in Europe and I guess, the 3 key countries.

Yes. Thank you, Christian. As you said, we are mainly residential and replacement and the majority of the market is in this way. I think from a new building perspective, obviously, the situation is different country by country. We see slightly recover also on that part of the business. This will not change completely the situation. But as I said -- I always said that the new buildings are the cherry on the cake and the majority for us is the replacement business. So, some recovery versus last year in new buildings, particularly in some geographies, but overall, nothing surprisingly positive.

And maybe just on mix. You've talked to being in the mid- to high range in terms of your premium positioning on products. If we think about the different specification levels across that range or within a given product category, should we think of there being a margin mix benefit as you sell higher specification ranges? Or is your strategy to sell or rather price your items such that you have a consistent margin across that range?

Yes. I mean, as I probably said many times in the past, we are pretty balanced between heating and water heating and within heating across the different technologies in terms of percentage margin. Obviously, when you sell heating heat pump, the absolute value is much higher of a water heater of 10 liters. So even if the percentage is the same, the absolute is higher. So, we are well positioned, happy, and we just need the market to continue to see and give us signs of recovery and then the rest will come naturally.

The next question is from Alessandro Cecchini of Equita.

First of all, actually, it's on the German market. Your competitor, I mean, U.S. competitors are with -- that both German player said that the first half in terms of units was minus 20% in Germany. So, a very strong decrease largely due to, of course, gas boilers. So just to understand, in units, it's quite a material downturn. So, do you think that is feasible? Or I mean, the German population are wait-and-see mode and then to restart because actually, if you combining the 2 technologies, minus double digit is quite strong. And conversely, your performance was much better if we see your results. So if you can elaborate a little bit more on this. This is my first question.

Thank you, Alessandro. Yes, obviously, as you rightly said, I mean, the data are public and the market of heating heat pump is growing strongly, 55%, but the gas and oil are decreasing with an overall heating negative a little bit more than 20%. So with the park that we see in Germany, this number is low. So, we would expect the market to continue to develop between the second half and obviously, in 2026. And to go back to the historical total volume level that we saw before the famous kind of acceleration and deceleration of the last, let's say, 3 years. Yes, we are doing better than the market. So, we are happy about our performance in Germany. I said before that the team there is doing a great job. We have a strong sales and after-sales team. So, let's really hope altogether that the market will recover sooner rather than later, and then we will continue to enjoy it. But you are right, it's surprisingly low versus the historical level as well. And again, we know that the government is thinking to new solution in the future and maybe some consumers are waiting before changing the gas boiler -- to place another gas boiler or to place a heating heat pump when they will see something more from the government that will happen hopefully by the end of this year.

Okay. Also because according to your figures, thermal market is expected to be slightly down, I mean, for the year in thermal units. So this is association. So basically, association is expecting a little bit of pickup in second half, okay? And the second question is on the Lennox JV. It seems to me that it's just enough to gain little bit of market share. So, not a huge market share in the market to add sizable business for you, of course, starting 2026, 2027. Is it correct this, my assumption that it's enough, I mean, to keep a very, very low single-digit market share in the market to gain significant business for you given the fact that in some markets, basically, you are present, but basically not present given the size of your turnover, but lack, of course, distribution?

Yes. I mean we -- as I said, we are very happy and positive about this partnership. So as you know, the market is huge. And I think there, we will have 2 impacts. First is obviously what Lennox will say. And if they will gain market share, we are producing and delivering the products to them and this will help us both in terms of revenue, if you want, and profitability. Secondly, I mean, obviously, [indiscernible], opportunity to reinforce our position, reminding that we are obviously hydronic heating player since ever and we know the technology. We own the technology, while in U.S., the market is still to develop in terms of hydronic and this will happen probably with an acceleration in 2029 and 2030. So, we are bullish. We are confident. They have a great distribution system. And when you do a JV, there are also other opportunities to partner and to leverage each other to continue to improve both company positions. So, keep in mind the 2 effects, as I said. One is direct, meaning our reputation in the market and obviously, our share of market in the market. And the other one is indirect because it's Lennox developing. As we said, this will start during 2026. It will be just a start and then we will be maturing and becoming bigger in '27, '28 and moving forward.

Okay. And finally, my last is on margins. Is it right that probably also your -- to be back to the first question by my colleague that your margin improvement acceleration in the second half is potentially also driven by lower raw material or input costs. Is it something that you are expecting to support this improvement? Or is, I mean, neutral, not accounted so far?

I would say that it's neutral. I mean, half 1 and half 2 also versus last year is neutral. But obviously, we -- I mean, I explained before, there is seasonality. There is the fact that we had some front-loaded investment to continue to support growth and CapEx. So, we will see our margin to go up in Q3 and Q4 as we did last year to the level that we need to reach. But no impact from raw materials.