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 the Ariston Third Quarter and 9 Months 2025 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to the Ariston management. The floor is yours.

Good afternoon, everyone. Thank you for joining Ariston Group Third Quarter and 9 Months 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. Today's presentation will last about 25 minutes, after which we will open the floor for questions. As a reminder for who's joining by phone, the slide deck is available on our Investor Relations website. I hand over the call to Maurizio.

Thank you, Albert, and hi, everyone. So let me start with Page 3, where we see an overview of our quarter 3 results. This year, as said many times, our focus is on growth, and I'm glad to comment a very strong performance in quarter 3 with a plus 4.2% organic growth. This is the third sequential quarter of positive organic growth. In Heating, the growth has been supported by a strong development of heat pumps, especially in Germany, and our ability to gain market share in our core countries despite weak external markets, which are in some geographies at the bottom of the last 10, 15 years. Water Heating business continued to deliver a solid performance, leveraging on our leadership position in many countries around the globe and on a stable external market trend. Adjusted EBIT margin improved by 110 basis points like-for-like in quarter 3, again, the third sequential quarter of year-on-year improvement, thanks to the execution of the Fit-2-Win program and to the operating leverage, which more than offset our increased investments in go-to-market, digital and R&D initiatives. Free cash flow was positive in quarter 3, thanks to organic growth and continued focus on net working capital despite higher investments. Regarding the activities of recent months, I share with you 3 highlights. The first one is that in September, we announced an investment plan for Italy, including a new factory in Albacina, Italy, dedicated to the production of next-generation electric water heaters. The ambition is to build the best European plant for technological and industrial excellence. The plant will embed artificial intelligence and digital twin capabilities and fully embrace the world-class manufacturing methodology. This is not an additional plan, but the relocation of the Genga historical plan that will be closed. On sustainability, we are proud to share great improvements of our ESG ratings, a testament of our continuous commitment and quality of actions to achieve our 2030 ESG strategy. I will talk more about it shortly. Lastly, in October, we announced the acquisition of a brand-new production plant in India dedicated to water heating. The plant will increase proximity to the Indian market and in line with our group strategy to add local manufacturing capability in strategic markets, enhance cost competitiveness and supply chain flexibility. To conclude this introduction, we are very satisfied with the quarter 3 and year-to-date performance, which in the upper -- which is in the upper range of what we previously communicated to the market. Based on our 9 months results and the progress observed in October, we are improving our revenues organic growth guidance to around plus 3% versus prior year. If we now go to Slide 4, I'll talk a bit more about sustainability. As you know, this is part of Ariston Group DNA since its foundation. We have published in 2023 a well-elaborated 2030 ESG strategy named Road to 100 that is available to everyone on our corporate website. We work every day to improve toward our 2030 targets with tangible actions. At the beginning of the year, we published Ariston Group sustainability statement prepared for the first time in accordance to the European Sustainability Reporting Standards, which has been a further step in increasing our external communication on ESG activities. And it is very rewarding to see such a positive trend of our ESG ratings. As you can see, all ESG rating agencies that published an update in '25, EcoVadis, S&P and Bloomberg, position Ariston Group now in the top quartile of our peer industry. Now we move to Page 5. And as every quarter call, I would like to give you a quick reminder on who we are. I know most of you know, but there are always some people joining for the first time in the call, so I always would like to explain who we are. We offer thermal comfort solution with a balanced exposure to water heating and climate comfort. Water heating, on the right, is a resilient business, and we are among the leaders in Europe and outside Europe. We are present in emerging markets with growing population and still low but rising penetration of water heating solutions. Climate Comfort, on the left, includes heating, services, parts, ventilation and air handling. In the Heating business, we offer one of the most complete range of technologies in the sector from gas boilers to the most advanced pumps and hybrid system. We offer a comprehensive range of high-efficiency and renewable solutions to enable the energy transition. Finally, the Components and Burners division complete our business lines, each accounting for 3% of total group turnover. Moving to Slide 6. We provide our regular update on the German heating market, our largest country accounting for circa 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 efficiencies and renewable solutions. '23 was an exceptional year, driven by incentives and concerns over a potential gas boiler ban in 2024, which ultimately did not materialize. In 2025, the market, it is at the lowest point of the last 15 years in volume, well below historical replacement rate. Heat pumps have returned to strongly growing after 2024 destocking, supported by a good incentive scheme with average monthly incentive application above 20,000. Boiler market is very weak. Now I will pass to you, Riccardo, and comment more deeper our quarter 3 financial performance.

Thank you, Maurizio. Let's now move to Slide #8, which illustrates the year-on-year evolution of net revenues. As a reminder, Russia was excluded from the 2024 consolidation perimeter and was reconsolidated at the end of March of 2025. For reporting purposes, this impact is treated as an M&A contribution. In the third quarter, our revenues increased by 5.8% year-on-year, reaching EUR 668 million. This performance was primarily driven by strong organic growth of 4.2% supported by the recovery of heat pumps, especially in Germany. In the Americas, performance is normalizing after the strong second quarter, which had benefited from preloading activities following the tariff announcement. The water heating segment continued to perform well across all regions, though results were partially offset by unfavorable foreign exchange movements. Our Service and Parts division also maintained a solid growth trajectory, consistent with the pace recorded in the first part of the year. As in the previous quarter, currency volatility continued to have a significant impact on our reported figures, minus 1.7% in Q3 compared to minus 1.6% in Q2, with major headwinds from the Mexican peso, the U.S. dollar and several Asia Pacific currencies. Finally, regarding the scope change, perimeter changes contributed 3.3 percentage points to our growth in the quarter, mainly reflecting the reconsolidation of the Russian business, along with the 2 bolt-on acquisitions in our Components division, DDR Heating in the U.S. and Z.R.E. in Italy. To summarize, we delivered organic growth of 3.4% in the first 9 months of the year, consistent with our full year guidance. Foreign exchange had a negative impact of 1.2%, while the Russia business reconsolidation and the 2 bolt-on acquisitions added 2.2 percentage points, resulting in total growth of 4.4%. Moving on to Slide #9. Here, you can see the evolution of our net revenues by geography, which continues to the trend observed in the first half of the year. Let me remind you that for comparison purposes, Russia business was excluded from the 2024 consolidation perimeter starting from the end of April and reincluded as of the end of March 2025. We are pleased to report mid-single-digit organic growth across our main core regions, Europe, in the Asia Pacific and Middle East, Africa. In addition, our business divisions continued to perform well in the third quarter. As shown in the appendix, the Burners and Components divisions combined together achieved a plus 5% organic year-on-year increase, confirming their solid momentum. In Europe, net revenues reached EUR 481 million, up 4.8% year-on-year when excluding Russia. And this reflects the recovery of heating market, particularly heat pumps in Germany, and our capability to perform overall better than market trends. In Asia Pacific and Middle East, Africa, we reported a 5% organic increase, although performance was significantly impacted by foreign exchange movements. And finally, in the Americas, the market is normalizing after the peak recorded in Q2, while foreign exchange also had a notable negative effect on reported results. Moving further down into the P&L, let's turn to Slide #10, which highlights our adjusted EBIT performance. In the third quarter, adjusted EBIT increased by 21.3% year-on-year, reaching EUR 48 million. This was accompanied by a 90 basis point improvement in margin, bringing it to 7.2%. At constant perimeter, the improvement was even stronger, up 110 basis points with a 7.4% margin. This solid performance reflects the continued execution of our efficiency initiatives and the benefit of operating leverage, which together more than offset the acceleration of our growth investment initiatives, particularly in go-to-market, digital transformation and R&D. For reference, reported EBIT in Q3 stood at EUR 36 million. The main adjustments included EUR 7 million related to rightsizing actions and EUR 5 million from purchase price allocation amortization related to past acquisitions. 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 on the bottom right. Turning to Slide #11, let's take a look at our free cash flow performance. In the third quarter, free cash flow was positive at EUR 15 million. While this is lower than the EUR 37 million recorded in the same quarter of last year, it is worth noting that Q3 2024 benefited from exceptional working capital reduction and a favorable tax cash out timing. As a reminder, and as shown in the appendix on Slide #31, the fourth quarter is typically our strongest in terms of cash generation, mainly due to seasonal effects. The positive performance achieved this quarter reflects our organic growth and improved level of profitability despite the higher investments made. We have maintained discipline in working capital management, and compared to last year, our working capital to sales ratio improved by 3.1 percentage points on a like-for-like basis. The impact from the Russian subsidiary and the 2 bolt-on acquisitions can be seen in the gray area on the right-hand side of the slide. And for further details on the main drivers, please refer to the 9 months cash flow statement provided in the appendix. Further items affecting the third quarter include CapEx, which increased by EUR 4.7 million, reaching EUR 35.5 million, in line with our 2025 guidance, and paid taxes, which were flat year-over-year. On Slide #12, you'll find an overview of the movements in our adjusted net debt since year-end 2024. As shown in the previous slide, the free cash flow contributed by EUR 1 million in the first 9 months. We also recorded a EUR 17 million cash outflow from acquisitions, primarily related to the 2 bolt-on acquisitions for Components divisions, DDR in the U.S. announced in March and the 80% of Z.R.E. in Italy announced in June as well as some additional minority stake investments. Other movements included a EUR 29 million cash outflow for financial and FX charges, EUR 29 million for the distribution payment to shareholders and around EUR 4 million in noncash positive adjustments. These noncash items mainly consist of plus EUR 2.4 million mark-to-market derivatives impact, plus EUR 8 million in interest accruals, plus EUR 1 million from IFRS 16 lease liability adjustments and minus EUR 7.3 million impact from exchange rate variations on net financial indebtedness. The increase in net debt over the first 9 months of the year was lower than in the same period last year, and the leverage ratio improved slightly to 2.2x compared to 2.3x at the end of September last year. Vis-a-vis last year, net debt increased by EUR 71 million compared to EUR 170 million increase at the end of September 2024 due to lower cash outflow for acquisitions, dividend payments and the execution of buyback in 2024. In conclusion, excluding EUR 46 million of cash outflows related to capital allocation, namely distribution to shareholders and acquisitions, the cash absorption from business operations and financial management was limited. Turning on to Slide #13. This slide provides a detailed view of our capital structure. In the third quarter, we extended the duration of our noncurrent bank debt up to 3.7 years, up from 3.2 years at the end of June as a result of a successful negotiation with our partner banks. Approximately 90% of maturities are now concentrated between 2027 and 2032, and our exposure to variable interest rates remain limited to less than 40% of our long-term debt. At the same time, we continue to maintain around EUR 900 million of available credit lines, giving us ample financial flexibility to support both organic and inorganic growth going forward. With that, I'll now hand the call over to Maurizio, who will conclude the presentation by sharing our guidance and outlook. Thank you.

Thank you, Riccardo. So I'm now on Page 15. As said before and to summarize, we are very happy with the progress achieved year-to-date, which marked a solid return to positive organic growth over the last 3 quarters despite weak external heating markets. We improved our expectation for 2025 top line. Given the solid performance over the first 9 months and the trend we see in the beginning of Q4, we have decided to improve our full year net revenue guidance to around plus 3% organic growth from the previous plus 1% to plus 3% range. Turning to profitability. We confirm our adjusted EBIT margin target in the 7-plus percent range at like-for-like perimeter, meaning excluding Russia and M&A contributions as normal cash flow generation is expected to be concentrated in the fourth quarter, consistent with our historical seasonality. On CapEx, we confirm our guidance at 5% to 6% of net revenue for 2025, a level exceptionally above historical average. We continue to assess strategic and bolt-on M&A opportunities with strong strategic rationale. Given the current value of our share, far from the fair value, today, the Board authorized a buyback program up to 2 million shares to cover the future LTI plans. Thank you for your attention. Now to you, Albert, to handle the Q&A.

Thank you, Maurizio. We are available for your questions. [Operator Instructions] Operator, please open the line. Hello, operator? We cannot hear you. Can you hear us from Chorus Call team?

The first question is from Alessandro Tortora, Mediobanca.

I have 2 questions. The first one is on the -- let's say, I listened to your comments on the German market, and I understood clearly the progress on the heat pump side in Germany. Can you comment a little bit more on the performance on the gas boiler side? Clearly, we saw the very negative number, okay, on the gas-based side. So can you tell us a little bit what is happening there in the country, considering the basically no replacement happening there? And what's your view, let's say, in the coming years, meaning the next year or next 2 years, considering that district heating now may in theory affect or not also the pace of the replacement? So this is the first question. And then I will go with the second one.

I mean, as you said, gas boilers are at the bottom. So I think we always comment that maybe people are waiting and see what the government will say about the future, which kind of incentives they will give to heating heat pump, and especially for gas boiler, they want to understand if this will be released and relaxed and that they can invest on a gas boiler. So I think while we are very happy to see that the transition to heating heat pump is working, I think for the next year, I would expect the gas boiler market to go back to growth again. So let's see what the government will decide. There are a lot of speculation, which I'm sure, like us, you can read on many newspapers. But since we are not in the government, we cannot really comment on what they would do or not do on relaxation in terms of gas boiler. But we expect, as I said, the replacement rate to go up because this is a level which is dramatically low.

And sorry, on this, do you have, let's say, any deadline -- I know it's a political stuff, but do you have any deadline, I don't know, beginning of next year or end of this year in order to understand which decision the government will take on this?

I mean they normally would have to say something by end of November, beginning of December. I mean we know that they announced that the incentives are covered for next year. It could be that this will move to Q1 '26 in terms of communication. So honestly, it's really difficult to understand. So they said they have the fund for '26, but we don't know when they will say something. I mean there are also elections that are coming up locally in the next March. So I don't know if they will do before or after election. So honestly, I wish I would know more, but I don't.

Okay. Okay. And then the second question is on also your comment on the willingness to do, let's say, bolt-on or to take bolt-on option or a strategic M&A. Can you comment a little bit about, let's say, the M&A environment basically we see in Europe? Reading the press, there are some assets in Italy, France potentially, let's say, under disposal. So how do you see, let's say, your competition in Europe also considering that we may have as potential buyers also some Asian players. And therefore, how this could play for Ariston. As an example, let's assume that there will be a strong interest from Asian players to take, let's say -- to take an asset in Europe. How this will play also for you? So if you can elaborate a little bit more because clearly, we read press articles mentioning, let's say, a lot of assets now coming into the market?

Yes. Obviously, I wouldn't comment on what is written in the press. I think Ariston has a proven track record in being a consolidator with many acquisitions done in the last decade and also some bolt-on that we are doing this year. I think we always said that this market will consolidate. We want to be the consolidator and one of the consolidator. And I think we will continue to work on both bolt-on and strategic acquisition, which obviously has to have a strategic rationale or a strong financial case. So this is what we will continue to do.

And I see that. And sorry, a follow-up on this. Do you see, let's say, a strategic rationale, for instance, to, I don't know, monitor a potential M&A opportunity even in the gas-based space? Or it's just, let's say, renewable interest you may have?

Yes. I'm not sure I got the question because it was a bit strange. Tell me, Albert, if you got...

No, no, the question -- no, no, no, maybe -- I will formulate this. The question is, are you looking, for instance, for assets, let's say, not only in the -- let's say, across technologies, no heating technologies, you may also look at, for instance –- yes, that's the question, okay?

I mean we look at -- and the line is bad, but I think Albert got the question better than me. So go, Albert...

The question is whether we are restricting our screening to players in heat pump or we're looking to multiple technology.

No, we are looking to multiple technologies. We want to consolidate our position as we did recently with some components acquisitions. So if we see the opportunity to be stronger, I mean, obviously, both in components, burners, thermal comfort and water heating, we will act.

The next question is from Alessandro Cecchini of Equita.

The first one actually is on your overperformance in third quarter that was important, looking at some of your peers. And I presume that this kind of overperformance is continuing also on this key fourth quarter. So can you elaborate a little bit more the reason behind this? It's more mix, more your focus on heat pumps in Germany? So just to add more color, that is largely, of course, given your footprint to Europe. So just if you can elaborate this a little bit more on your overperformance and the drivers. This is my first question.

I mean, as Riccardo commented, I mean, our performance was good across the different regions. We performed much better than the market, meaning that our in-market execution, both from a sales, marketing and technology has been done well. It's something that we put focus on and we continue to put focus on an investment. And I think this is giving us now results. I mean we see our business doing well in market share in our core countries and across all heating, water heating, and also we are performing well in the divisions. Also, our service is doing fine. So I think it's important to underline how strong continued to be the service. And I think overall, we are satisfied and happy. Obviously, it is an everyday measurement with our competitors, but I'm very happy to see that in tough market conditions, we are doing well. So we continue to invest for the future because the market will go back and will go back to the historical growth, both in heating and water heating, and our ability to gain share now will have a tailwind when the markets will go back. And I think it is across. It's not only heating heat pump in Germany. It's across gas boiler. It's very strong in water heating and across all the regions. So yes, there are maybe minor position, but overall, very good performance, better than the market.

Okay. In terms of the guidance, we understood that in terms of organic top line growth, the implied fourth quarter is plus 1%, plus 2%, of course, given your guidance. But in terms of margins, so just to understand, according to my calculation, probably Russian business could be dilutive of 10, 20 bps for the year. Is something reasonable or not? So just to make, I would say, a reported number, so it could be very, very helpful.

Yes. I mean I think you are right. Russia business is dilutive for us. And as we said, we are working to make sure that things are going back at its possible best considering obviously the guidelines and the restriction that we have to follow. But Russia is dilutive. The rest of the business is doing fine, and that's why we reaffirm our 7-plus percent guidance.

Okay. So just if we can elaborate on Russia. So you expect, I mean, this kind of -- because maybe I am wrong, but at the beginning of the year, probably your expectations for Russia were better, I would say. So the margins, I remember that your comments were -- I mean, margins are not so bad, I would say. Probably now are, of course, a little bit worse than expected. So just to elaborate when you expect to gain more traction. So just a little bit of color on this.

Yes. So I'm not sure I commented on Russian numbers because we said we would give Russian numbers now. So I -- we always commented how profitable was Russia before the fact that happened, obviously, last year. Now the level where we are today is much lower, and we have to restore and work to improve our position there. But it's highly dilutive today; it's minus 10. We will have to improve year after year and respecting, as I said, all the restrictions that we have in terms of the way we do business in Russia. So this is where we stand.

The next question is from Davide Rimini of Intesa Sanpaolo.

I have one question on cost synergies. I just wonder whether you might update us on the level of synergies that you have reached so far versus the EUR 50 million target on a 3 years plan. And then I have a second question.

Yes. So it's cost reduction, it's clear. And obviously, I think we can say that we are well on track on what we said we would have done with Fit-2-Win. So we said that this program will be implemented within 2027 with a permanent effect of around EUR 50 million. And I have to say that with what we did a little bit last year and what we see this year, which is around EUR 20 million, it's going well. Instead, if you want to have an update on cost synergies, which is what we had at the time of Wolf-Brink acquisition, also on that front, we are doing very well. I think we accelerated and we are very satisfied with the level that we are having, and we will have a lot of interesting new news for the future that we will highlight during 2026.

Right. Sorry, just to get it clear. So the EUR 20 million is that you're referring to this year. So it's EUR 20 million out of the EUR 50 million, right?

Yes.

Correct. Okay. Got it.

On the Fit-2-Win, which are not the synergies of Wolf-Brink.

On cost synergies, I just wonder -- sort of a follow-up since you're mentioning probably you're going to sort of step it up next doing more on synergies on Brink acquisition. Is there any way sort of linked also sort of to the operating leverage that we have learned on the way down, but we might learn on the way up reconsidering sort of the different German pricing and the cost structure that you have versus other countries?

I mean, obviously, with this top line, we see the benefit of scale. And obviously, in terms of mix, we always said that the countries that are part of Central Europe are more positive. So Germany, it was and it is our first country, and we see very positive leverage, thanks to the fact that we are picking up in heating heat pump. When the market will go back overall growth in the next years, this will be even better.

Right. The second question would be just a follow-up in terms of topic [Technical Difficulty] and it's been M&A. Now you mentioned already sort of it is across technologies and it is both, bolt-on and strategic ones. I just wonder whether from a regional or from a geographical, if you want, standpoint -- you mentioned earlier sort of the significant investment that the group has been doing in the domestic market, and that has been highlighted in the recent event in September. I just wonder whether strategically would you make any exception to the rule of being already well represented to the domestic market in terms of current presence and the level of investments that you're still sort of planning over the coming years?

Yes, I think we are pretty flexible. I mean, as you said, we announced those investments in Italy. And again, we are closing a plant and opening a new one, which is -- which will be much more effective and efficient. But in the meantime, we announced the joint venture with Lennox, which is in the U.S. We announced the acquisition of a plant in India. We are opening a new plant in Serbia and in Egypt. So we are really working to optimize our footprint and improve our cost effectiveness to make sure that we are close to the markets in a very efficient way.

Right. So can I assume sort of the domestic market shouldn't be sort of requiring additional sort of focus in terms of M&A?