Carel Industries S.p.A. (CRL) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the CAREL Industries' 2024 First Half Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Francesco Nalini, CEO of CAREL Industries. Please go ahead, sir.

Thanks. Good afternoon and thank you for joining our call for the presentation of the first half 2024 results. I'm starting from Page 4 with the main highlights of the period. As expected, the second quarter was essentially in line with the first, since we had the continuation of the same trends we experienced in Q1. From now on, we expect a gradual improvement during the second half of the year. So in this first half, revenues were EUR 291.5 million with a decline of 11.7%, compared to the same period of 2023, or 15.8% on a like-for-like constant exchange rate basis. This is mainly due to a poor performance of the EMEA area, basically related to the sharp decline in heat pumps, and a soft demand in refrigeration, which is continuing to show signs of sequential improvement, but more gradual than what we had hoped for. This is compounded with very tough comparables in the first half of 2023, due to the backlog recovery after the end of the shortage, a recovery which was basically peaking in Q2, last year that represented a record quarter. Again, this is in turn compounded with the stocking progress along the supply chain, particularly strong in heat pumps, but in fact present in several verticals. Here, fortunately, if we exclude heat pumps, we believe we're now very near to the normalization of stock levels. EBITDA margin in this first half was 18.3% of sales, again in continuity with the first quarter when it was 18.2%. We evidently have a drop compared to the first half of '23, when EBITDA margin was 22%, due to the negative operating leverage effect on SG&A, while gross profit improved and a number of initiatives to contain discretionary OpEx have been implemented. We maintained non-personnel OpEx close to the same level of last year, in spite of the perimeter change and the fact that we increased our R&D spend, which we now got back to our target of more than 5% of sales. And honestly, I have to say that we never had so many exciting innovation directions open at the same time. Net financial position at the end of the period was EUR 102 million, including EUR 44 million for the acquisition of the residual 49% stake in CFM, EUR 13 million CapEx, EUR 33 million of net working capital change and EUR 21 million dividends. NFP is in any case below 1x on last 12 months' EBITDA. And if we exclude EUR 32.7 million related to the IFRS 16 accounting principle, the ratio would be around 0.6x. Moving now to Page 5, we can see some more figures. At EUR 291.5 million, revenues in the first half were down 11.7% on the EUR 330.3 million of the same period last year, and as expected, this last quarter was in line with the previous one. As we can see on the top right chart, organic revenues declined by EUR 52 million while we had EUR 13.4 million of positive contribution from the perimeter change, mainly thanks to Kiona that saw in the period approximately 15% recurring revenues growth. EBITDA was EUR 53.2 million down 26.7% from the EUR 72.6 million of last year, to 18.3% of sales. Of course, the double-digit decline of revenues had an impact in terms of negative operating leverage while gross profitability improved, thanks to declining raw material costs, and also to the geographic and customer mix. In fact, we had a relative increase in North America where our margins are slightly better, and the sharp decline in heat pumps where we have some large customers, was also beneficial to gross profitability. The incidence of direct labor was in line with last year thanks to the flexibility of the temporary workforce. R&D expense increased and finally went back to the target level of about 5% of sales, and we had a very good accretive contribution from Kiona that had a profitability in excess of 25%. Net profit was EUR 27.8 million down 30.9% from the EUR 40.3 million of last year affected by the operating results. Tax rate in the period was approximately 23%, not far from the 22.5% of the same period last year. CapEx were EUR 13 million in the period up 64.6% from the EUR 7.9 million of the same period last year, mainly for higher investment in R&D, and then expansion of the Klingenburg plant in Poland in order to optimize the efficiency of the production process for our mechanical platforms. We confirm our target of CapEx on sales around 5%. Now moving to Page 6, we find the breakdowns by region and sector. To the left there's the regional breakdown. As anticipated, the worst performing region by far is EMEA, with sales declining by 18.1% at fixed exchange rates. Here we have the concentration of the sharp slowdown in heat pumps, and the stagnant refrigeration market combined with very misleading comparables and high stock levels down the supply chain, especially in heat pumps, but also in other verticals, even if for the other verticals they are close to normalization. In APAC sales declined by 7.1%, net of foreign exchange. Here also we have very tough comparable since Q2 last year, was record for APAC at more than EUR 24 million plus the sharp decline of heat pumps exported to Europe, combined, of course, with the soft Chinese economy. Outside China, the performance is much better especially in industrial applications, even if in Q2 we discount some industrial project timing, which is a short-term fluctuation that will be recovered in the coming month. In North America, we report a growth of 12.4% net of the foreign exchange, with very good results from data centers electrification plus the growing momentum towards variable speed compressor technology, and natural refrigerants. Senva continues to have a very good performance again, especially in the industrial vertical. Latin America also continues with a very good performance growing by 26.4% at fixed exchange rates, with an outstanding result in Brazil compensating a mixed scenario in the other countries. To the right there's the sector breakdown. HVAC has a decline of 13.5% net of the foreign exchange. Here in Q2, we saw the substantial stabilization of a sequentially declining performance that started in Q3 last year, again due to heat pumps, high comparables and stock levels. Refrigeration had a decline of 5.9%, net of the foreign exchange, reporting another slight sequential improvement. Unfortunately the investment cycle recovery in EMEA is lower than expected, even if we increasingly see tangible signs of a gradual recovery. On the other hand we have an outstanding growth in North America, thanks also to market share increases and the accelerating momentum of natural refrigerants. I now leave it to Nicola, to comment the items below the EBITDA on Page 7.

Thank you, Francesco. The Slide #7 details the group result from the EBITDA to the net profit. The increase in D&A cost is related to the purchase price allocation of Kiona for EUR 2.2 million and the residual part of the relevant CapEx activities of the last few years. The increase of financial charges is mainly related to figurative interest on accounting effects such as put and call option, earn out liabilities and IFRS 16 liabilities, which impacted the quarter for more than EUR 2.2 million. The ForEx gain is mainly linked to the effect of the Kiona put and call option expressed in NOK. The capital gain refers to the difference between the estimated fair value of the actual amount of the put and call option of CFM. The result of companies consolidated with the equity method include the valuation of Free Polska, a company owned by Alfaco for 48%, focused on sourcing activities. The tax rate of the period was 22.9% in line with the same period of last year. The group net profit at the end of June 2024, was equal to EUR 27.8 million, compared to EUR 40.3 million of the same period of last year. Slide #8 shows the net financial position evolution of the first half of 2024. The period was impacted by M&A activities for EUR 44.2 million. The group paid dividends for EUR 21.3 million, the CapEx of the period were equal to EUR 13 million. In the first half of 2024, net working capital increased mainly due to typical seasonal effect. Taking out the effect of IFRS 16, the net financial position is equal to EUR 68.9 million. I leave Francesco to go on with the presentation.

Thanks, Nicola. So, and now on Page 9, for a focus on the high efficiency variable speed compressor technology with particular reference to North America. Let me please remind you that when a brushless variable speed compressor is used in a unit, among other benefits, there's also a substantial improvement in energy efficiency, because the compressor can continuously adjust its speed, according to the requirements of the circuit. In particular, variable speed technology is fundamental, to achieve high levels in the so-called seasonal efficiency which is the weighted average of the efficiency in the operation of a unit during 1 entire year. Obviously, in different seasons, the thermal requirement is different, therefore, a system that can dynamically adjust to this is way more efficient than a simple one. Now, there is an increased attention to seasonal efficiency in North America, in addition to energy efficiency in general. Therefore, we notice a fast-growing momentum for projects introducing variable speed compressors in units. With variable speed compressor -- when variable speed compressor technology is used, more components are needed. There is at least inverters, electronic expansion valves, and additional sensors. This technology has been a game changer in Europe and China in the last 10 years, as we can see from the chart on the top that shows the safe trend of inverters globally. In the period going from 2018 to 2023, inverters globally for CAREL had a CAGR of 35% and a similar trend applies to valves. So now even if the market is still very small in America for this technology, we are seeing a strong acceleration with the growth in the first half of 2024 by approximately 50% for inverters, and more than 30% for electronic expansion valves. We also have a very good pipeline in terms of prospective projects, and the unparalleled know-how we have in helping customers in introducing as seamlessly as possible technology puts us in an extremely strong position. Also considering that in America, we're mainly talking about industrial and commercial applications that have a bigger average size compared to the rest of the world, and so the potential value per unit is also higher. This is a great opportunity for the medium term in North America, and on top of this, as mentioned, we're seeing a fast-growing interest in pipeline, also for natural refrigerant solutions in refrigeration. But coming back to the short-term scenario, I now move to Page 10 for the closing remarks. As expected, the slowdown in the EMEA area continued also in this last quarter, mainly due to the sharp decline in heat pumps, and to de-stocking down the supply chain. On top of this, we have very tough and misleading comparables, particularly in this second quarter, since the same quarter of last year was the peak in terms of backlog recovery. In APAC, results were mixed with some visible timing effect related to specific industrial projects in the quarter that will be recovered in the coming month. On the other hand, we continue to have very good growth in North and South America. EBITDA margin in the first half of the year was in line with the first quarter at 18.3%, down from the same period of last year, because of the negative operating leverage. We're containing discretionary OpEx, and in fact, they are in line with last year in spite of the change in perimeter and in spite of higher R&D. In terms of short-term scenario, in EMEA, we don't see from our standpoint a significant recovery in heat pumps before the end of the year or beginning of next year, also considering the still high stock levels. In the other verticals on the other end, stock levels are probably very close to normalization. Refrigeration is showing tangible signs of improvement, but in a much more gradual way than expected. In the medium term after this transition year, we maintain a very positive view on all the verticals, considering all the secular drivers still in place in our markets. We have particularly strong expectations for America, where in addition to market and market share growth, we see an accelerating momentum for variable speed compressor technology that has been a great contributor for growth in Europe in the last 10 years, as well as for natural refrigerants in refrigeration. To conclude, expectations are for a gradual improvement in the scenario in the second half of the year, with a progressive recovery in the refrigeration investment cycle in EMEA, and the normalization of inventory levels in the supply chain. Therefore, we expect to report Q3 consolidated revenues close to those of the second quarter, and full year consolidated revenues close to EUR 600 million, thanks to an improvement in the second half. Thank you very much for your attention. We're now more than happy to answer to your questions.

[Operator Instructions] The first question is from Niccolo Storer with Kepler.

2 please. The first one is on your revenues guidance. Basically now it's implying mid-single digit growth -- around mid-single digit growth for Q4 of this year after another weak quarter in Q3. So I was wondering if this view of a very weak Q3 and a decent sequential recovery in Q4 at this stage is backed by something you have already on hand, or if it's just a sort of a wishful thinking, and more a hope than a reality? The second one is on margin expectation for the full year. At the moment, I think that consensus is above 18%. You have posted 18% -- plus 18% year-to-date, but considering that usually for you, Q4 is a little bit heavier. Do you think you can keep this 18% threshold, or should we imagine to go below this on a full year basis?

Niccolo, thanks for the question. So as far as the guidance is concerned, let's say that -- yes, we do expect an improvement in the second half sequentially, let's say, between Q3 and Q4. Now on an individual quarter, especially considering this very volatile environment is pretty difficult, to make a precise expectation. That's why let's say considering that we do not expect a step change, we are projecting a Q3, let's say, more or less close to Q2. But in general, let's say, that we could -- we have an expectation of a gradual sequential improvement during the second half to land at the guidance we provided, which is backed by the fact that we continue -- we are seeing, now leaving aside heat pumps. But heat pumps now are at the stage where anything that comes can only provide an upside, because they cannot go worse than this, I think. Leaving aside heat pumps, so let's say that we are seeing a normalization in the stock levels in all the other verticals, where by the way, the end markets in some cases are pretty positive. For example, in commercial, the end markets are improving. In industrial, the end markets are very, very positive. So we believe that the normalization of stock levels would lead to an improvement. We are seeing tangible signs of improvement in refrigeration in EMEA, gradual. So the improvement is more gradual, as I said, more gradual than I would have hoped for, but is there. So it's improving. And by the way, it's been improving sequentially also in Q1 and Q2. And we are seeing all these elements, I'm saying, again, in a gradual way. So again, it's not a step change, but in a gradual way, we're seeing this reflected also in our order book, even if it's very short-term, as you know. So these are basically the reasons to back the sequential improvement we see for the second half. In terms of profitability, let's say that, yes, you're right that Q4 is typically sees a lower profitability, for seasonal reasons. But on the other hand it's also true that Q4 normally, in a normal year, has a slightly softer sales, while this time we expect Q4 probably to be significantly stronger relative to the other quarters, compared to a normal year. So let's say that if you can project sales, so you can more or less project costs. Because we are proceeding with our cost containment initiatives, so profitability has been basically in line in Q2 with Q1. Q4 normally is weaker, and this will be true also this year. But on the other hand, the top line will be stronger than a normal year. So I mean, we should not be -- we could make some assumptions for profitability. Even if, of course, as you know, it's quite difficult to project, considering that it very much depends on the top line. It will not probably, let's say that, considering this level we are projecting, it will not be higher than this, than the level we have now, that we see pretty -- let's say, pretty likely.

And maybe a follow-up on what you said on normalization of stock levels. Here, are you talking about stock levels at which level, at your end levels, or are you also able to track quite well what is at distributors' level?

No, here I'm talking about OEM level, because I'm not talking about heat pumps, because the stock levels in heat pumps are far from being normalized, unfortunately. I'm talking about stock levels in all the other verticals. So for HVAC, we're talking about OEMs, the OEM level, also because for industrial and commercial, there's not a big weight of the distribution channels. For refrigeration, there's an impact of wholesalers, but I would say that also there the stock level should be close to normal. So in general, the stock which is at OEM level is close to normal in the different verticals, apart for heat pumps where it's still quite high.

The next question is from Alessandro Tortora with Mediobanca.

I have, let's say, some questions. Okay, if I may. So the first one relates to the -- first of all, let's say, some application and the top performer one, like the data center. I understood that this year, this is clearly a positive contributor for you. Moving a little bit, let's say, towards 2025, or let's say the medium term, can you elaborate a little bit on the growth potential of this division? Because clearly we read, and also, let's say, some other competitors in the space are mentioning stronger CAGR expectedly compared to the past from, let's say, the data center application. So can you elaborate a little bit about how CAREL with each product, okay, which kind of growth can achieve this division for you? That's the first question?

Thanks, Alessandro. So as far as data centers are concerned, you're right. This is by far the fastest growing vertical in this moment, especially North America, where the biggest market is. Let's say we do project or continue to project the significant growth here for the foreseeable future. Now, to quantify is not easy, also because, we are not always sure about the sales we make that go, directly in the data center vertical. Because sometimes we sell to other customers in the industrial commercial space, and then in turn sell to the data center vertical, and we don't have visibility for that. But let's say that we do expect to continue having for the, let's say, coming, for the foreseeable future, so for the short to medium term, double-digits growth in data centers, absolutely.

Point on the variable speed compressor technology and the potential and the opportunity in the U.S. And what are you planning to do, looking at, let's say, the production footprint in the U.S. in order to catch this opportunity? Are you starting to bring more products in the U.S.? So just to understand, what are you doing from the operational standpoint in the U.S. to get this opportunity?

Yes, absolutely. So we are -- first of all, we are investing in technology, completing our lineup of inverters for the sizes, which are more requested in America. For example, some bigger sizes that are not so requested in Europe, but we expect them to be requested in North America, so we are completely in the range. We're also investing in technical support and R&D in order to support customers in the transition towards this technology because the know-how in America is not so common. In terms of operations, we still don't manufacture inverters in America. It's one of the very few product lines that we still don't make in America, because the volumes so far haven't been justifying a local manufacturing, but of course, we're more than ready to deploy local production when the volumes will justify it. That can be done in a relatively faster way, because our assembly lines can be deployed in a relatively faster way. So that will be, let's say, the next step for supporting this growth. Also, let's say, it can also be a countermeasure against possible trade duties in the future in America, because at that point, we'll have basically the entire range manufactured locally in America.

Okay. And then the question is on Kiona. You mentioned before, sales is understood well up in the 15% area. Can you give us an update on this, Francesco? Which kind of, let's say, level of say growth Kiona may achieve this year? But probably, I think, let's say, also looking at, let's say, much more the medium term. What is the view you have today on Kiona in terms of growth potential, but also in terms of profitability?

Yes, so recurring sales of Kiona are, in the first half, grew by approximately 15%, which is slightly shorter of our expectation. Of course, the market in Europe is tough for everybody, tough also for Kiona. So this growth result is not so bad in this context. Also because there are several very important projects in the pipeline, for the coming month. And the timing is, as it typically happens with projects, the timing is uncertain, but we do have positive expectations for materialization in the coming month. In terms of the margin expansion, on the other end, we are ahead of our expectations, because profitability is well in excess of 25% already, so it's already pretty accretive. So on that front, the results are above expectations. In general, we are increasingly investing in the technological and commercial integration of Kiona. So we have, as we mentioned already, we are working on the first step of the integration of Kiona with our supervisory system for supermarkets, which is the first step. We already identified the way to fully integrate the Kiona platform, with our platform with a very innovative software solution for supermarkets. It's something very, very innovative, that we are very excited about, and that will represent basically the merge of the Kiona platform with the RED platform, which is our legacy platform for food retail. That's also extremely interesting. In parallel, we're working on the commercial integration. Now, as we deploy the first step of the integration of the platform with RED, we'll start cross-selling it for supermarkets, and we're also starting the cross-sell Kiona in those countries, where we have the presence in the contracting channel for buildings. So, we're working very intensely on the integration. On the technical integration, I would say that we are probably finding some solutions that are even better than our expectations, definitely. On the financial results, yes, growth is slightly behind the plan. Margin expansion is slightly ahead of the plan. But in terms of the top line, we're not too concerned, because the market conditions in Europe in this moment are really very, very challenging, because of the cycle, as you know.

And then the next question is on the working capital. As I've said, we saw in the first half. Yes, it is a seasonal plan, but clearly it is, let's say, a pretty huge, okay absorption, compared to the past. Which kind of a path, which kind of, let's say, reduction we should think about for the year-end?

Alessandro, this is Nicola. And with reference to the working capital, we can say that in terms of account receivables and accounts payable, we are in the -- in terms of payment conditions, we are at the same level in the past. And so, we do not expect any changing from these 2 elements. With reference to the inventory level, in this moment it is something higher than what was the projection at the beginning of the year. But anyway, we expect that at the end of the year, the level, the ratio of the working capital in terms of the sales will be at the same level of last year.

Okay. And the last question is again, sorry, for Francesco. Can you -- this is 2024 is a year of, let's say, transition, okay? Let's say transition, but moving towards next year, you mentioned that with the exception of heat pumps, we are basically close to a full normalization for stocks. We have some application going well. Considering the past, which kind of -- I know it's difficult and you can also, let's say, not answer this question. But do you believe that we should think about 2025, as sort of gradual recovery for you, or it is fair to say that restock, maybe not let's say at the crazy level, but restock can help, let's say 2025 to be more than positive year for you?

This is quite difficult to say, Alessandro, at this stage. Let's say that, let's exclude heat pumps for a second, because again, heat pumps have been an outlier both positively and negatively in the last 2, 3 years. So let's leave heat pumps aside. Considering the other verticals, we can definitely confirm our mid-cycle guidance of high-single digit organic growth rate. For sure, there are some elements, which are very positive in terms of mid-term, not tomorrow morning, but mid-term, some elements are very positive, like the growth in North America, like the high efficiency natural refrigerants in North America, plus Kiona, plus a number of other innovations that we are now investing in. So there are several positives. The timing of this is of course uncertain, and the timing of a possible restocking is of course uncertain. So it's not so easy in this moment to calculate this effect. Let's say that excluding heat pumps, we do have -- we do confirm our mid-cycle guidance of high-single digit organic. Heat pumps, let's say, the expectations of everybody is that medium-term, they should grow by at least 10% in Europe. That's the consensus. And, well, by the way, even if the market is really, really challenging, we are in any case getting new projects for heat pumps with customers. So let's say -- the technical development is going on. We are continuing to develop our new solutions for heat pumps, which is, by the way, also very, very exciting. We do expect, and we are starting to see some concrete signs for heat pumps in North America. So let's say that the scenario for the medium and long-term is definitely quite optimistic. Now, to provide a guidance for 2025 is really difficult at this stage, unfortunately. But let's say that we are for sure optimistic.

The next question is from Alessandro Cecchini with Equita.

The first one actually is on, I mean refrigeration. You stated about some, of course, light improvement -- signs of improvement. The last time you talked about qualitative signs. So just to understand what is changing and wherever. And if you can remember us about your visibility in this segment, if it's still 1, 2 months, or it's a little bit higher given its more project-based than the rest. This is my first question?

Yes, yes, Alessandro. Yes, last time I talked about qualitative signs. Now these qualitative signs are turning into more tangible signs. So they're turning into orders or let's say something, which is close to orders. Again, very gradual, so not a step change. I had hoped, like many others, I had hoped for faster rebounds. It's slower, it's gradual, but now we're talking about tangible signs, not anymore about just qualitative signs. The visibility is not high. It's still quite low. But let's say we are seeing now, especially in some parts of Europe, we are seeing tangible improvements. Again, this is Europe, because in America, on the other hand, refrigeration is very small, but it's growing in an outstanding way, and we're seeing a huge interest for natural refrigerants that are providing very good growth now, but will continue also for the medium term.

Can you remind us about refrigeration, how much is -- so Europe probably used to be 80%, 90% of total, and the rest, say, U.S. refrigeration?

Yes, refrigeration in America is, let's say, is a minor part, because we started developing the refrigeration market at the later stage, so let's say below 20% refrigeration of the American sales.

Okay.

North America, because in Latin America, it weighs more. In North America, it's less than 20%.

Okay. If you could also elaborate a little bit more on variable speed compressor technology. So just to have a reference, a very rough indication of your full year sales, or just to have a size of this business in the U.S. in particular, at the moment. So just to have a very rough indication, we are talking about 5 million, 10 million, so just to have an indication?

Yes. Okay. So the opportunity in total is very relevant, because talking just about inverters, we are talking, last year, for example, in 2023 globally, our sales of inverters were several tens of million euros for just inverters, and valves comparable value. In the U.S., it's still very small, it's still very small, because we're talking about a few millions, so it's basically an order of magnitude less than the global sales. But what we are seeing is that it's basically the pattern we are seeing in the U.S., is exactly the same pattern we are seeing in Europe 10 years ago. So it's starting. And in Europe, especially inverters and valves have been a huge cross-selling and up-selling opportunity in Europe for the last 10 years. And I mean -- all the signals we are having in the U.S. is that the same trend is starting. So it's a few millions now in the U.S., valves and inverters, but if it follows a similar path to what we experienced in Europe, it can grow by, I mean, potentially, in the medium term, by an order of magnitude. That's the difference between sales globally, which are mainly in Europe, and sales in North America now.

Okay. My last point was a technical question about tax rate, so you had, if I am not wrong, a 23% tax rate, but of course, on pre-tax, including profit, ForEx, that's of course not being part of this. So if we exclude this, it's more in the region of 26%, so much higher. So just to understand what, is the normal tax rate for the year, or just a new normal in terms of tax rate?

The tax rate that we are expecting for the end of the year, it will be something like 22%. Then part of the financial charges are deductible anyway, but what we are expecting around the 22%.

The next question is from Michele Baldelli with BNP Paribas.

I have a couple of questions. The first one relates to the heat pumps performance in H1. Hearing some of your possibility auto clients, the market was strongly down for the OEM, even close to the 50% range in many markets. Someone was wondering what kind of degree of sales decline did you exhibit in H1? If it's 60%, 70% or if you can give some color. Then the second question relates to the earn-out and put options that are not including the net debt reported if you can give us the update of the level in euro million?

Okay. Thanks Michele. So yes, the decline we saw in heat pumps in this month is, let's say, not far from the 60%, 70% that you just mentioned. That I mean, it's pretty close to that figure, because let's say that in addition to the end market demand we had also de-stocking that compounded this effect. Plus there was the backlog recovery that was happening at the beginning of last year. So the composition of all these effects led to a decline of way more than 50% for us. It's slightly compensated by some niches in heat pumps like industrial heat pumps, or some niche players which are performing way better. But, overall, the market is down a lot. So not far from that figure.

With reference to the earn-out and even the put option that are in the liability that we have in the financial statement is something around the EUR 95 million and mainly refers to Kiona and to Senva.

The next question is from Christian Hinderaker with Goldman Sachs.

I wanted to start maybe on pricing and I guess particularly within the heat pump market. Obviously the declines are pretty sharp and you've got the de-stocking dynamic as well. How do we think about pricing both cyclically today? And then I think you talked about an innovation cycle here. Presumably this is linked to refrigerant upgrades in some of the heat pump production at the OEMs. What impact do you think that might have on pricing, if we see an acceleration in the product cycle?

Yes, thanks Christian. So overall, we -- in terms of the entire top line of the group we are seeing a pretty stable pricing in this moment and also for the short-term, let's say. So we're not seeing, let's say, a significant pricing pressures in total. And neither, we are seeing significant pricing pressures in heat pumps in this very moment, because the market is down so much that, let's say, the pricing effect is not so relevant. For the medium term, we do expect the pricing pressures, of course, because it's absolutely reasonable to assume that in the medium term there will be pricing pressures on heat pumps. That's why we are well into the development of a new product architecture specifically aimed at heat pump, which is much more cost effective on the cost side, but also very, very innovative on the technology side. Of course, for new refrigerants, but also on the software side. We have a number of very innovative software features that we are going to release, with this new product architecture. So basically, we will have a cost reduction to compensate the pricing pressures that, we do expect in the medium term. But we're not seeing now, for 2024 probably, we will not see any significant negative pricing effects. For the medium term, there will be pricing pressures, but we are getting ready with an architecture, which will be much more cost competitive than the current one. On the other hand, let's say that we started to see cost improvements. So costs started their decline, so we're seeing some cost decline, which is one of the reasons why our gross profit, is actually improving in this moment.

Maybe a conceptual one. I'm just eager to understand, you've seen some tangible signs in refrigeration. We know that's been weak, and I think the sort of dynamics somewhat understood, but the strength of commercial HVAC, can you just talk about that market? How much demand might be impacted by the interest rate situation? Obviously, energy efficiency is in focus, but maybe you can contrast that with what you're seeing in refrigeration?

Yes, so in terms of commercial HVAC, let's say that the end market is, again, gradually improving. The end market is, let's say, already positive, most probably. It's already positive, and we expect a gradual improvement. We have the effect of the comparison of last year, which was pretty heavy in commercial HVAC, and also the effect of stock levels. But they should be, again, close to normalization in commercial HVAC. So let's say that, considering that the end market is already positive, and it's going to gradually improve, plus the normalization of the stock levels and the comparison effect, these are the reasons that lead us to expect an improvement, for the short-term. For the medium-term, the trend of commercial HVAC is very much related to investment in buildings. Mainly in retrofitting existing buildings for improving the energy efficiency. The EPBD, the Energy Performance of Buildings Directive, has been approved a few months ago, and it foresees a continuous improvement of the energy efficiency of buildings in Europe. So now, after the elections, we do expect that in the medium-term, the investments will restart for improving the energy efficiency of buildings in general. Especially for refurbishment, probably, but that's okay for us because it doesn't change, and that will sustain, let's say, demand for commercial HVAC. So let's say that for commercial HVAC, we expect now a gradual improvement in the short-term, and then we expect to more or less go back to the usual growth path, very much related to the energy efficiency improvement of buildings, a lot of it related to refurbishment in the medium-term.

Maybe if I can squeeze a final 1 in. You touched on liquid cooling in the announcement, obviously strong in data center cooling more broadly. Maybe just a few comments on that would be great?

Yes, sure. So yes, liquid cooling is, of course, the fastest growing architecture for cooling data centers in this moment, because it's related to GPUs, so to high-density server boards. The CAGR of liquid cooling is very high, and is expected to remain very, very high. A lot of the market is now happening, a lot of the innovation, as well as of the growth in this moment is happening in North America where we are also experiencing an excellent, outstanding growth. In general, in data center, in most data centers, there is -- the expectation is to have a combination of liquid cooling plus so-called CRAH, which is basically ventilation. So ventilation plus liquid cooling, because not all the servers require liquid cooling, and in general, you need a ventilated environment, which are both technologies that we are present in. So for liquid cooling more specifically, typically you have 2 refrigerant circuits. One is the circuit that extracts the heat from the boards. It's typically a dielectric liquid that takes the heat away from the boards. The heat is then taken to a heat exchanger called the CDU, coolant distribution unit. There, the heat is exchanged with typically water, and then taken to a chiller that extracts the heat from the water. So in a liquid cooling architecture, we make the controller for the CDUs, for these heat exchangers, for the coolant distribution units, and you can have one pair rack in some cases, plus we make the controller for the chiller, which is present to extract the heat from the water, plus we make sensors. And for example, Senva in this moment is growing a lot for sensors used for liquid cooling. So there are more sensors that are required in liquid cooling, because the architecture is very, very mission critical. You need very fast responses, so you need also additional sensors. So this is the current, so what we sell for liquid cooling is chiller controller, CDU controller, sensors typically. When I'm talking about the chiller controller, I'm talking of course typically about the increasingly, also in North America, the variable speed solution, so also inverter and valve. Now, the market, most of the innovation is happening in North America. So of course, our idea is to try to see, to innovate in this vertical like we do in many other verticals. So this is one of the directions that, we are exploring to see what we can do better, or more in the liquid cooling architecture. Then besides liquid cooling, there's of course the traditional ventilation solution, where we're present with all basically our products. Because in an air-wrangling unit, we have the heat exchangers, dampers, the controls, the humidifiers and so on. But then also the very traditional computer room air conditioning, air-to-air solution is also growing, because in many parts of the world, that solution is also very used. So everything is growing. Liquid cooling is the fastest growing. We are, especially now in this moment, North America investing to see how we can, let's say, create more innovation and more technology for liquid cooling.

[Operator Instructions] Mr. Nalini, there are no more questions registered at this time.

Okay. Thanks everybody for joining this call and for your questions. Looking forward to speaking with you for the presentation of the Q3 results. Thanks. Bye.

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