Zehnder Group AG (ZEHN) Earnings Call Transcript & Summary

Thank you very much. Welcome, everybody. I do appreciate that you take the time to listen in. I'm fully aware you had a busy week. It's mid of the vacation season, and it's a Friday afternoon. So we will try to be brief and to the point. And by we, I mean, Mr. Grieder and me. I will start with a quick business review for the first half. Rene then will dive deeper into the figures. And finally, we'll have a short outlook, and we should have plenty of time for questions. So let me start with a business review at the glance. What we already saw in the second half of '24 that several of our key markets are showing increase of new build construction activities that continue, namely in the U.K., Netherlands, Spain, but also Canada, for example. And particularly our Ventilation segment, which is driven by, to quite some extent, by the new build development has therefore also benefited. We were able to grow 15% organically. And as you know, we acquired the company, Siber, last summer. So that also helps to drive the growth externally, which was an additional 9%. So altogether, the ventilation segment grew 24%. It was not just the market that supported. I think we're very happy to also say that we were able to gain some market share. Again, the candidates are Holland, but also the U.K., but also Canada. Now if you look at the bottom right, we have invested in mostly with a focus on ventilation innovations and also in market coverage. And I guess if you look at the figures that we were able to report in the first half, that strategy proved us right, and that's what we're doing and continue to do also first half, but also for the remainder of the year and going forward. Just to set the base for a sustainable growth and really maintain our position as a thought leader in our particular industry. Now another question that I'm sure you also have is to what impact or to what extent we were impacted by the U.S. tariffs. Here, I think it's fair to say that, however, it was very modest, and that is because you are mostly exempted from any tariffs due to our footprint. As you know, we produce mostly local for local markets. And if we had -- we had also some impact, we were able either to mitigate it to adapt the supply chain or in some cases, also to increase the prices. So if we look at the market as such, I already referred to the new build market. Probably what you also saw as a positive contributor in the ventilation business is that several distributors, but also wholesalers had a depleted inventory level towards the end of the year. And so I'm sure there is a restocking effect in our figures. To what extent? It's always a little bit difficult to say. And what we also have to state, whereas in new build and ventilation, we had some very positive development, renovation in our key markets, and that is the main driver for our radiator business remained anemic. And here, especially mentioned Germany. And at the same time, China, which used to be almost 5% of our total sales, in fact, almost 8% of our total sales a couple of years ago, is further in a difficult situation. And hence, we haven't seen any recovery there, maximum stabilization. So radiator is the one that is in a negative trend, ongoing negative trend, probably magnified also to a shift from our high-priced design radiators towards lower-priced radiators, [ brass/steel fans ], which we don't produce. That obviously is something that we will need to work on in the month going forward. Positive is, on the other hand, at least in North America, we saw a recovering of the demand for our design radiators, particularly in the U.S., and that helps the results to some extent. Now maybe just to highlight a couple of our key projects. The first one is the acquisition of the leading residential ventilation player in Spain, a company called Siber, which we did exactly a year ago. Positive is that the integration is going according to plan. And one of the main benefits that we want to get out of this acquisition is really cross synergies in sales into other markets. And here, I'm very happy that success is happening. In fact, we're ahead of plan. Italy was launched in the first half of this year. We're currently launching in other markets. Baltics, there's a staged approach. We're also going to do the rest of Europe throughout '25. And actually, in terms of volumes and sales, these were ahead of time. Now also positive is that it is a range that complements our traditional range. Zehnder has always traditionally focused on single-family homes. And if you look at the Siber range, that actually is very much geared towards multifamily homes. And as you might know, this is the part of the new build industry that is growing faster. And hence, this is a very good complementation of our product range. The second key initiative I would like to briefly touch upon is the consolidation of our flat steel tube radiator manufacturing footprint. Here, we announced last fall that we will close down the radiator plant in Switzerland and consolidate the activities in our French production plant. This is also well on track. We have closed the activities in Gränichen in April, and we have taken over all activities for all markets in the French manufacturing plant. However, and I think that's something that I will then also show again in the outlook, the effects of this consolidation because it happened in the second quarter will mostly then fall into the second half of this year. Now if you look at this chart, and I'd like to show it at all our conferences, you see that we're progressing, in our transformation from originally a component manufacturer in the building industry to an HVAC system solution provider. And you also see that meanwhile, the ventilation activity, which consists of a couple of different elements, also not to forget the Clean Air solution filtration for commercial, but mainly also residential ventilation is now amounting to 66% of our total sales. And we also see that since 2002, it has shown a steady growth, both in terms of sales in total, but also in terms of proportion of percentage on total sales. Just a couple of reference projects. This one is a project in London. It shows a development for affordable homes and extra care or nursing home. Why do I want to show that? This is really a project where Zehnder was able to do all the ventilation needs. What you see on the bottom right there is a commercial unit. You might remember that we acquired Caladair, a French producer and provider for light commercial units. That's a Caladair unit. But that's just for the commercial areas. And on top of that, we also provided all the single units up to 100 units in the various apartments and rooms. And obviously, all the air distribution is a typical project like we have it and like we like it, where we really do full one-stop all the ventilation needs for the customer. Another project that I also would like to point out, I think it's another typical project here. You see another building development in the U.K. for 134 new apartments. It's according to a passive standard. So focus is very much on reduced energy consumption. And this is interesting because we not only provide ventilation air distribution, but what you see on the picture is actually one of our ComfoClime Q units. So that is a unit that embodies a module that is also able to temper, meaning cooling and heating the air. And that's a product that we launched a couple of years ago, and it's nice to see that we see ongoing market success and growing demand also for this newer technology that we have in our product range. So much for a quick review. Rene, why don't you give us some more details about the figures.

Thank you, Matt, and also welcome from my side. The next few minutes, we would like to present you the financial performance in the first 6 months. So the sales increased to CHF 382.8 million, that is an increase of 11% or organically, it is 8%. Then the EBIT adjusted increased by 45% to an EBIT margin of 8.5%. That is a significant increase, also considering that we have no one-off effects in the first 6 months. And then last year, we had one-off effects of CHF 10 million. Then the operating cash flow increased by CHF 22.9 million despite the trade accounts receivables increase of more than CHF 20 million due to the higher sales. Also there, we made progress, and we see that the measures taken in the last few years have a positive impact on our financial performance. Then the net profit significantly increased, but also due to the one-off cost last year, the increase was more than 200% to CHF 23.5 million. Less is only the equity ratio, that's 51% compared to last year at the end of June, to 68%. That is due to the acquisition of Siber in July 2024, and the offset of the goodwill connected to the acquisition. If we go a little deeper to the sales development. So last year, we had CHF 345 million sales. And now if you make the bridge, we divested the Climate Ceiling Solutions business, that has a negative impact of CHF 8 million last year. And then we have the acquisition of Siber, that's an additional CHF 20 million sales in the first 6 months 2025. Then we have an organic decrease of radiator business of CHF 4 million, and an organic growth of the ventilation business of CHF 30 million. There was nearly no FX effect in the first 6 months. The weak U.S. dollar will have an effect in second half of the year. And for the financial performance, we see that really make progress on one side with a double-digit sales increase, but we also see clearly operating leverage from the additional volumes that we have in the ventilation side and also the measures taken in the last 2 years to really drive the transformation in the direction of the ventilation business and reduce costs where needed. We also kept investments in R&D, stable, so invested CHF 12.7 million in the first 6 months. That's mainly related to the ventilation business, and that is similar to the level that we invested last year. Also that the EBITDA margin is double digit, so with 11.7% there, we also see a clear improvement compared to last year, where we had an adjusted EBITDA margin of CHF 10.2 million -- 10.2%, sorry. And again, last year, we had one-off effects of CHF 10.1 million connected to the climate ceiling investment and also structuring. And in the first 6 months 2025, there was no one-off effects reported. The financial result is negatively impacted by foreign exchange losses. Overall, the financial result was negative of CHF 2.5 million. But again, the net profit significantly increased to CHF 23.5 million in the first 6 months. If I go back to the sales and the development in the different countries. So we still have -- Germany is the #1 country with the highest sales within the Zehnder Group. The ventilation business was growing again, but radiator business was decreasing. Then the second important country is now Netherlands. It's the country with the highest ventilation sales. But in Netherlands, we were able to grow in the ventilation and in the radiator business. Then France, the sales were stable. So for radiator, but also ventilation, it was more or less on the previous year level. Then U.K., the second most important ventilation country is on the fourth place. There we had a clearly differentiated development. Ventilation sales was growing significantly. On the other side, we lost on the radiator side. And if you see the overall picture, 81% of the sales is still in Europe, and then 10% in North America -- and 15% in North America, and we only have now 3% in Asia Pacific, that is mainly China for the Zehnder Group. If we have a closer look to the ventilation segment. So as mentioned by Matt, the sales increased by 24%, and that is 15% organically besides the Siber acquisition. There we see a positive trend from the activities in the market, but also some stock increases on the customer side. That also had a significant impact on the profitability despite of investments in market expansion and also in R&D. So the margin increased to 13.1%. And in absolute terms, EUR 33.3 million EBIT adjusted, which is a very positive development compared to the year before. On the other side, on the radiator business, as mentioned already by Matt, it's further decreasing. So we lost 8% sales. Organically, it's a decrease of 3% and also the lower volumes, but also a shift towards lower priced model, we have a negative financial result of EUR 0.7 million EBIT adjusted. That is mainly related to low factory utilization and also some negative price effects in the first 6 months 2025. Then just the long-term development. On the ventilation side, we're able to keep the double-digit margin over the last few years despite the investment in market expansion and also in innovation. On the radiator side, we have a negative trend. And as already mentioned by Matt, we have initiated different measures and some of them we should have a positive impact and also in the second half. Normally, we have a seasonality that the second half of the radiator business should be better than the first 6 months. With that, I would like to hand back to Matt for the outlook.

Thank you very much, Rene. So if you look at the market trends, I guess it's fair to say that we anticipate our key markets to further recover, although at a different pace. One of the key questions, obviously, what will Germany do, our largest market. So there will be a certain impact by the economic stimulus package, and it sure will have some positive midterm impact. To what extent we will benefit from that? And you see that on the right, that is still questionable, particularly regarding timing. We are late cyclical. So we do see an increase in building permits. However, until we have an impact, we guesstimate that it's going to be late 2026 only. Now if you look at the North America, Canada seems to continue in a positive trend there. Maybe a certain question mark is what the U.S. housing market will do. Probably I read a report from Martin Husler this morning, he called it lukewarm. So I would share that assessment, possibly a certain slowdown might be related to the U.S. tariffs, and that obviously remains to be a question mark on how they will impact us when and to what extent they will come. Now as I mentioned before, we have several initiatives also to increase efficiencies, but also reduce cost. And we anticipate the large share of the impact of the production consolidation in the second half. But at the same time, if you look at also China, we won't see any support out of this market, at least in 2025. So for the full year, and you have seen that in the announcement, we expect sales between CHF 740 million and CHF 770 million. Reason is that normally the second half in ventilation is a little bit weaker. That has to do with how many working days we have. It is not a seasonal business. On the other hand, I think that's -- then the question to what extent that can balance. We have the radiator business, which traditionally was always a little bit stronger during the heating season or the preheating season. However, and I think this also needs to be stated, that's an effect that we have not seen, at least not in the last couple of years. Therefore, we also anticipate a margin approximately on the level of the first 6 months for the remainder of the year. Now if you look midterm, and I showed this chart before, we maintain our core strategically. So we will focus on growing the ventilation and there, in particular, also the solution business. I tried to show a couple of examples. Clean Air Solutions, which is the smaller service business for filtration and commercial applications, it's definitely an activity that we will seek to accelerate the growth in. And I can say that again, in the first half, like in the last few years, it is growing over proportionately and is also contributing over proportionately to the result. We highlighted the service topic and really want to start actively manage the installed base here in Europe, we have more than 1 million units in ventilation that are installed. And I think that's obviously something that takes time to develop, but we have initiated several projects to really see growth in the midterm. And replacement since we started more than 20 years ago, will also have a certain base effect in that some of the older units will have to be replaced because they come to the end of their lifetime. Like we did in the past, we will also look at opportunities to selectively increase market expansion penetration, possibly also additional markets. So I think you've seen in the chart before, that's something that we did and that we want to continue to do. Now in terms of operational levers, I mean, it's a fact that we got hammered in the radiator segment by the market. We are more than 30% in volume down versus pre-COVID. We have done many adaptations in terms of capacity, but also in reducing the cost structure. So should it finally also recover to extent, we will have quite an operating leverage. But because of the shift towards more ventilation versus radiator, the whole business model is shifting to an asset-lighter business model. And I think in terms of efficiency gains, it's both for ventilation and radiator true that we do have still opportunities. You have seen in the chart before that we have acquired many smaller companies normally with a portfolio. We're in the midst of also going forward, looking at consolidating this portfolio that should give us possibility to reduce components, but also to obviously hopefully leverage volumes towards partially automating some of the assembly. And the same is true for radiators with a shrinking market. Obviously, we are constantly looking at how we can optimize the portfolio, but also the service that we make available. So I guess, the first step from our results 2024, we have been able to make now in the first half, the elements I referred to in my previous chart. So we feel we are on a good path towards our midterm targets. And I guess, in a nutshell, it confirms that the strategy to become or be a global provider of indoor climate solutions, but also a thought leader in that particular segment is the right thing to do. So we are obviously the specialists and the people that have the competence around ventilation system for eco-friendly building with innovative portfolio. We're also the ones that are able to educate the market and the customers, and that's what we want to continue to do and obviously continue our path that we have taken over the last few years going forward. That's what we wanted to share today. So I'm sure there are some questions. And before we get to them, maybe I can ask the moderator to quickly guide us through the instructions.