Zehnder Group AG (ZEHN) Earnings Call Transcript

Welcome, everybody, and I thank everybody that you're dialing in, take the time to listen to our presentation. I will do that together with René Grieder, our CFO. And in the next 30, 40 minutes, we'll give you some more insights about the first half in terms of what happened with the business in the regions, but also in the segments about the financials that we achieved, but also a short outlook for the remainder of the year, and we should have plenty of time afterwards to address any open questions from all the participants. So if we look at the first half 2026 at a glance, we saw further sales increase and quite a good improvement of the operational result. And it's clear that this was very much driven by our ventilation sales, that had -- they had a continuous growth, solid growth of roughly 8% organic, and that is -- was in the case both in Europe and North America and also across all subsegments of ventilation. At the same time, the radiator activity stayed under pressure. At least we see a certain stabilization in the European business. On the other hand, if you look at the total, they had a decline of roughly 3% organically. Now with that development, the ventilation portion of the total sales are reaching now 69% of our total sales compared to prior year when it was 66%. And this growth was very much supported by the launch and also the rollout of new products in new markets. So for example, the product portfolio, which we already had launched in some markets, we extend into other markets. but also with the continuous growth of our ventilation-based climate solution. And that definitely is also in relation to what we see with the changes of the climate. Now very nice growth we were able to achieve in North America, and that is thanks to our strategy, our initiatives we executed consequentially, and we believe that we now see also the benefits from that. Service is another very important topic for us. So we rolled out existing services into other markets, but we also launched some new services. One example I will present later on. And finally, definitely a highlight for us was the opening of several Zehnder Academies -- ones of you that have been at the Investors Day last year, they have seen the Academy here in Switzerland. So similar setups, not always the same size. And these are very important pillars for us to really transfer the knowledge to all our partners and also customers and help to proliferate our expertise in technology for modern buildings, both in terms of what good indoor climate means as well as energy-efficient solutions. And finally, and that was announced about 4 weeks ago, we started the process of the divisionalization of our main activities, radiator and ventilation in Europe. And I will also give you a little bit of an update on that one later on. But let us look first at the market. So yes, we do see overall in Europe, a recovery of building permits. However, this is not yet reflected in construction completions. On one hand, there's a time lag. On the other hand, it's also fair to say that not all the permits ultimately executed. A very good example for that is Germany. based on uncertainties, higher costs, interest rates that have risen, and that obviously has also an impact. Now some markets are doing better, Netherlands, Spain, Eastern Europe, but there are also certain disappointments. In the first half, we were somewhat disappointed about the U.K. development. That was a market that did very well last year based on a particular regulation, which helped us in one part of the business. On the other hand, we believe that the Building Safety Act, which was implemented in 2024 has an impact also there on the building construction because it's a very rigorous process, 3-stage process that every permit has to go through before approval, and there seems to be a bottleneck now also with governmental positions. And until we finally get the permission, obviously, many things have happened, -- costs are more expensive, and that seems to be the case that some permits or some permits ultimately are not being executed. On the positive side, once you are specified, that means that you can also not be unspecified anymore. And I think what is also fair to say that, for example, U.K., we do have quite a solid order pipeline with projects that are specified. They're just not happening at the speed that we expected them. If we look at North America, it's not so much the market itself. It's definitely the trend towards a better indoor climate that supports us. Our portion in the market is still relatively small with these kind of solutions, but also stricter codes that are developing state by state, sometimes even a community level. On the China front, there's nothing new to report. Actually, China reported again a double-digit decline in new construction starts and that obviously has an impact on our business there as well. Radiator markets remained challenging. Even though it's not so much the volume, it's more also the structural change. We see a trend from, let's say, higher-end products towards lower-end products or lower price models, and that's something that we also see in our product range. And at the same time, there's an existing overcapacity, which puts the whole situation, the whole business on the price pressure. Now obviously, something that we want to focus on, and we also see an ever-increasing interest and demand is the cooling solutions, which we call the ventilation-based cooling solutions. On one hand, I have to maybe refresh your memory, even a regular Zehnder ventilation already has a passive cooling effect in that, for example, we utilized the possibility to bring in colder air during the night through a bypass and then maintain the cool air in the house through the energy recovery capabilities with the heat exchange. That means then the hot air staying outside. And by that, we already have quite an impact on the indoor climate. But what we have launched a couple of 3 years ago is the ComfoClime, which is a module that you can put on top of the existing ventilation unit, which has then an active cooling. And that can be done as a remodel, but it can obviously also bought in the combined set for new build. There, we see that the interest is increasing strongly, not least because of the current situation and the many hot days during the summer that we face also this year. On top of that, we have a new product, which is launched in a few markets only, particularly Spain. That's also a product of the acquisition of Siber. That is not the same like the ComfoClime. There, it is an external heat pump. So like with a split climate system or air conditioning. The difference to an air conditioning unit is that we replace the majority of the air and exchange it with fresh air and on top of that cool. So the cooling performance is higher than with the ComfoClime. And at. The same time, it doesn't have the same draft like you would have with the regular air conditioning unit. So that's something that we feel has also some potential, but still very much at the beginning. Another very good story that we're happy about is the rollout of the Siber product portfolio into all European markets. And you see we have introduced these products now in Italy, Belgium and so on. And with the introduction now to the last remaining markets in the Nordics, we will have that portfolio available across all of Europe. And it seems to really fill a gap in a more price-sensitive multifamily home market and that this is the case. You can also see in the increase in sales in the first half this year, we were actually able to increase the sales for full year 2025 by more than 150%. So the volumes really starting to become meaningful. If you look at the North American markets, we are very happy that we have now also a first academy in North America, which we opened in April. Which gives us the opportunity to do trainings, to also explain like we do here in Switzerland on how things work, how things do not work and really gives us the possibility to convey this thought leadership to all these stakeholders that we want to address it to. At the same time, we have earmarked a phased approach into the states or various states in the U.S. You see at the top right. And we were able to increase our partnerships with new distributors, sometimes changed distributors across the North American targeted markets. And finally, it's very much about also making these solutions more familiar in the market. So we had several campaigns, for example, the Wellness by Design campaign, which was very much targeted towards luxury homes and spas, but also in Canada, a campaign, which we call Proudly Canadian there, it helped us that one of our main competitor actually ceased the production in Canada. And as you know, there are also certain not animosities but at least challenges between the 2 countries based on the tariff situation. Now the topic that we announced in June is that we have started the divisionalization of our main activities in Europe, to really reflect the shift of the markets in totally different directions. And hence, the need to focus on these different priorities across the whole value chain. So on one side, we have the ventilation business. It's in a growing market. It's really about innovating, being the best-in-class, also making sure that we expand in the market, expand our market reach. And then on the other hand, we have radiators, which is obviously a shrinking market where it's all about highest cost efficiency, but also adapting the organization, but also the offering to the market reality. And while we are not changing our fundamental strategic directions, this should really give both activities the freedom to operate. and set the priorities while at the same time, have the full end-to-end P&L responsibility. So we believe that will give an undiluted focus, a lower complexity, higher agility and really a more entrepreneurial way forward. This has an impact. I mentioned that also the way we are set up at the Group Executive Committee, we reduced from 6 to 5 members, and we will have new President for Residential Ventilation Europe and a President for Radiators Europe. In the meantime, since the announcement, Silvia Witschi, she joined the Group Executive Committee. And her and Jörg Metzger, they will take over the responsibility for the division, Residential Ventilation Europe with Sylvia and President Radiators Europe with Jörg as of 1st of October, while our former colleagues, they are now phasing out and are still available for the transition from the latest end of the year. Now the process to go into that divisionalization, I don't want to go into details, but I can say we are on track. Idea is that by 1st of October or plan is by 1st of October that we really have operationally all the business functions split. That's the first stage. And then in the second stage, on January 1, 2027, we really want to also establish all the surrounding functions to some extent, also supporting functions so that we're fully autonomous within the divisions. And then as of then, it's about optimization. It's about really living in the new setup going forward. Now this chart is something that I always show because we're proud. You see 2026 is not yet in, but you have seen the increase. So we believe that we can continue that chart. But what I would like to do is also give you a couple of examples because I believe they're interesting. So the first one on the left is actually such a solution where we have a combined ventilation and cooling system that we put in all these new apartments. I think interesting is that these are apartments for social living, and that is very much related in that particular situation with overheating, which is becoming more and more a challenge in many of the cities all across Europe. The one on the right is also a nice one. We got a prize for that. And it's a light commercial unit. The specific topic here is that it is specified and certified as a Passive House unit. So also there, we try to differentiate with our offering, and we seem to have some initial successes. Now the one here on the left is a typical example from our Canadian colleagues. So that is a big development in the Toronto area. And you see because it is mandatory to equip every apartment, every new building in Canada, we see that all the 700 apartments were actually equipped with units that we were able to produce and deliver. And finally, on the right side, that is now the custom-built home situation, which is very familiar to us. where you see a design house that has also a ventilation from Zehnder to guarantee the necessary indoor quality of the climate. The Zehnder Academies, I mentioned that. That's something that we really want to put into all relevant markets. For us, it's absolutely crucial that we can increase the penetration rate and therefore, also the understanding and the knowledge about our solutions. And this is our possibility to do that. And hence, that we were able to open 4 other academies is really a big highlight for our organization. And the Air Quality Monitoring is the service I wanted to go in specifically. This is actually a service in our Clean Air Solutions business, where we have air purification as a service as our business model. Now instead of just cleaning the air, we also are able to monitor the air online. So you have constant visibility on where -- which trends you have in your pollution, but also can set alarms and ultimately can also be an entry point because very often customers or potential customers are not even aware of the problems. They might see some dust. But if you really then make it visible, might also be an entry point to then add actually bolt on the air purification service. So it's really an add-on service. It's all inclusive. So we organize installation, we organize positioning, we organize maintenance, we organize replacement if necessary. The only thing that we are asking for is actually a flat fee per month like we do also for the air purification in Clean Air Solutions, that particular segment. But also a couple of projects that we were able to do on the radiator side. Interesting here, it's a new build. It's a big project. We see 377 apartments in Poznan. And you see up to 1,300 units were sold and built into this project. And interesting is also the last bullet point. That's only a first stage of this project, and it's anticipated that there will be several more. And hopefully, that means having had the first order that we can also then follow up with the orders for the next project phases. And then on the other side, another example, and that's really now for more the premium side with the Charleston that goes into this 5-star hotel as a refurbishment that will be probably the more typical projects like we know with 829 units for the electric Charleston in every bedroom. So much for the first half and a couple of impressions about our projects. René, I will take -- I will ask you to take over.

Thank you, Matt, and good afternoon also from my side. I'm happy to give you an overview about the financial performance in the first 6 months. We achieved a sales growth of 3%. Organically, it was 4%. We had 1% negative foreign exchange impact, mainly from the Canadian and from the U.S. dollar, which is weaker than 1 year ago. After a slow start in 2026, sales picked up with especially strong months in March and June. We had already 2 price increases. One was in April and was then in July, an extraordinary one in July to offset the higher raw material costs in connection with the war. Customer typically place orders ahead of a price increase to benefit from the lower price level. June alone generated EUR 8 million more sales than 1 year ago. On the profitability side, we achieved an adjusted EBIT margin of 9.5%, which is within the communicated midterm target range of 9% to 11%. So it's a clear improvement. So the sales increased 3% and the adjusted EBIT 15% to EUR 37.7 million. On the other side, the operating cash flow generation was weaker than expected. There are 3 main drivers for this development. First, the strategic inventory buildup to safeguard customer deliveries during ongoing supply chain volatility. And second, trade accounts receivables increased, reflecting continued growth of our ventilation business. And third, we had higher customer and employee bonus payments as well as tax payments in the first 6 months compared to 1 year ago. In the second half of the year, we are expected to have higher operating cash flow again. From the one-off effects, we had one one-off effect that is from the introduction of the setup in Europe that was EUR 5.5 million in the first 6 months. The net profitability slightly increased by 2% to EUR 23.9 million. Also, the equity ratio increased by 5 percentage from 51% to 56% compared to 1 year ago. From the sales development in the first 6 months 2025, we generated EUR 383 million. The radiator business slightly decreased by 1% for the total group. So the impact was EUR 4 million. But on the other side, we're able to grow the ventilation business by EUR 20 million. That means 5% for the total group. And again, the negative foreign exchange impact of 1%, that was half-half, half was ventilation and half was radiator. So overall, we achieved a 3% increase to EUR 395 million sales. Also, our EBITDA improved by 11% adjusted EBITDA, that is 12.6% of our sales or EUR 49.8 million, which is a positive development as well compared to the year before. Let's have a deep dive to the different region. So the main region Europe generated 82% of the total sales. There, the ventilation growth was 7% and radiator decline was 1% despite of higher volumes. So we sold more radiators, but with less value at the end. North America, there was a 2% increase in euro, but 8% in local currency. So the negative impact from foreign exchange effect was 6%. Ventilation is a very strong growth in North America of 18%, but a decline by 10%. Asia Pacific with clear decline. So it remains EUR 10.6 million sales in the first 6 months. And on the left side, we see the main countries for ventilation on top. That's Netherlands, Germany, U.K., Canada and Spain. So Spain is now the fifth important country and Switzerland is then #6 now. That is due to the positive development in Zehnder Spain, but also due to the acquisition of Siber in 2024. The 5 most important countries on the ventilation side contributed to 55% of the total ventilation sales. On the radiator side, we have the 5 top countries, France, Germany, United States, Switzerland and Italy. And these 5 countries contributed to 76% of the total sales. Unfortunately, 3 of the 5 countries with a decline, so France, United States and also Italy were not able to achieve the level of the sales from last year. If we go to the segment development, so we have a clear positive development for the ventilation segment. There's further increase of 7% to EUR 272 million. Organically, it was 8% due to the negative foreign exchange effect in North America. As already mentioned by Matt, we have countries with very positive development in Netherlands, Spain, Czech Republic and Germany. And -- on the other side, Ukraine was quite weak. North America in turn positive, U.S. and Canada with a positive sales development. Due to the sales increase, we're also able to increase our margin despite the further investments in research and development, but also market development, as mentioned by Matt, for example, in North America, but also for also for Clean Air Solutions. So we achieved an EBIT adjusted margin of 13.9%. And in euro, it's an increase of 13% to EUR 37.8 million. And on the Radiator side, there's a decline by 5% Organically, the decline was 3%. So in Europe, there was a decline of 1%. And in North America, there was a decline of 10%. So we see a trend to lower-priced radiators and also the renovation activity in general are still quite low compared to the past. On the profitability side, we are not able to make a big improvement. We're still slightly loss-making with EUR 0.1 million despite of different optimization measures. We closed the plant in Gränichen last year, and we also introduced the shift model in our German plant this year as well. So this will have a positive impact further this year as well, but then also for the years to come. But on the other side, we lost on the pricing and also we had a negative impact from the product mix. Balance sheet. So we still have a healthy and strong balance sheet. As already mentioned, we had an increase in stock due to strategic buildup of inventory and also higher accounts receivables. That's on the asset side. Then on -- we also had a further increase of the equity ratio, and we switched from a negative liquidity situation of EUR 12.6 million to a positive net liquidity of EUR 11.9 million now at the end of June 2026. So that's positive as well. If we see the long-term development of the 2 divisions, -- so the positive trend from sales and also profitability continues on the ventilation side. So we see a growth on that side to have a driver for the margin development. On the radiator side, we see a further decline, and that is then also impacted on the profitability development. Overall, as already mentioned by Matt, we generated 69% of our sales in the Ventilation segment and 31% of our sales on the Radiator segment. With that, I would like to hand over back to Matt for the outlook.

Thank you very much, René. So if we look at the market overall, yes, I mean, the geopolitical situation, as we all know, is not really improving a whole lot, and that will have an impact on all European economies. Nevertheless, and I think that's also anticipated by all the forecasts. There seems to be a recovery happening. I think the only challenge is that it takes time. So while we see that some markets are doing quite well, and I mentioned them before, Holland, Switzerland, we just also read it this morning in the newspaper, Eastern Europe, Spain, but also U.K., we believe will catch up to some extent. And we also see other markets that are just dragging on with that recovery, namely also Germany, which has, again, this year, a lower completion rate, substantially lower completion rate than last year, but also Italy, Austria, smaller countries in Belgium. Now if we look into the 2027 forecast, that is supposed to improve steadily. But again, the challenge is it is a very timely process. The renovation market has also stabilized, albeit at a relatively low level, but there the same situation, we believe that it is going in the right direction. However, second half, to what extent that will already have an impact that is questionable. And definitely on the radiator side, competitive pricing is ongoing and also that certain structural shift towards lower-priced models. Now in North America, actually, the market itself is not so different from Europe, if you take Canada, for example, Canada housing starts have actually declined at beginning of the year by 7%. And also in the U.S., there is a decline of 3% -- now it's different by segment. So multifamily and renovation markets, we see a higher resilience. And in the end, it's not so relevant for us because for us, the relevant topic is really how fast can we get our products known our solutions into the market. And that's why we don't believe that this will have such a massive impact on the future for us. Now China, I'm afraid to say there is no change anticipated even though also there are certain niches like the top housing market are slightly recovering. But then in the mass volume market, there is still a decline since there are massive overstock in empty housing, and there is really also a price decline for the available housing. So it's also the purchasing market that is massively under pressure. So what does that mean for us? Well, I guess, not an immediate change in the trends that we are experiencing now. Obviously, we believe that we do have the right strategy that we also see the benefits of these initiatives, and we will try to really focus on those initiatives. So on the ventilation side, it's further investments into product innovation, into product launches. It's the service business, also the market penetration expansion and on top of that, also digitalization, which offers, again, additional opportunities. And at the same time, with the radiator side, we do have to leverage now the existing footprint, which we still have opportunities. René mentioned that we closed the plant last year. So these impacts have not yet shown their full impact. But at the same time, we have to continue to adapt to the market realities and see on how much we will support it by a recovering renovation market. The situation will be very different by market. So that has then also to do to what extent we are exposed in what market. North America, maybe a certain lull temporary more because of some decline of investments into new projects. But I think in general, codes working against that, increasing codes, but also the penetration rate. So we have to continue to be cautious with how we operate. And ultimately, what that means in total anticipation for the year, yes, we believe that we should be able to maintain a margin at the level for the first 6 months. And as René mentioned, that will be within the targeted range. Sales, we have a bandwidth from EUR 770 million to EUR 790 million. So we are short of the 5% also related to the delays of the recovery of the market. So these are the anticipations for the second half of this year. And I'm sure there are questions that you would like to ask and that we can try to address.