Zehnder Group AG's Strategic Reallocation to Ventilation and Service-Driven Profitability: A Pathway to Structural Growth

Zehnder Group AG (VTX:ZEHN), a Swiss leader in indoor climate solutions, has embarked on a strategic reallocation of resources toward its ventilation segment and service-driven profitability, positioning itself to navigate a challenging market environment while unlocking long-term value. This shift, underscored by operational restructuring, targeted acquisitions, and a focus on high-margin service offerings, reflects a calculated response to evolving industry dynamics and macroeconomic headwinds.

Strategic Reallocation: Ventilation as the Core Growth Engine

Zehnder's 2024 annual report highlights a deliberate pivot toward ventilation systems, which accounted for 60% of the Group's total sales in 2024, despite an overall 7% decline in sales for the year. This resilience is attributed to the ventilation segment's adjusted EBIT margin of 10.5%, generating EUR 44.4 million in profitability. The company's acquisition of Siber, a Spanish ventilation specialist, bolstered its presence in Southern Europe, contributing 4% to ventilation sales. By contrast, the radiator segment-historically a core business- saw a 12% sales decline, driven by weakened renovation activity and the decision to discontinue Swiss-based radiator production, relocating it to France and outsourcing in China.

This strategic reallocation aligns with broader industry trends. Ventilation systems, particularly in multi-family housing and renovation markets, are gaining traction as energy efficiency and indoor air quality become regulatory priorities in Europe. Zehnder's focus on ventilation not only capitalizes on these trends but also insulates the company from the cyclical volatility of the radiator market.

Service-Driven Profitability: A High-Margin Growth Lever

Beyond hardware, Zehnder is increasingly leveraging its service offerings to drive margin expansion. The company's service business-encompassing maintenance, filter replacements, and digital monitoring of installed systems-is positioned as an "above-average profitable" segment. This approach is critical given the growing installed base of ventilation systems, which creates recurring revenue streams less susceptible to construction cycles.

According to the Group's 2024 management report, service initiatives are part of a broader strategy emphasizing "technological leadership, customer proximity, and operational excellence". For instance, digital monitoring tools enable predictive maintenance, enhancing customer retention while reducing service costs. These innovations are expected to amplify the profitability of the ventilation segment, which already commands a 10.5% EBIT margin-a stark contrast to the radiator segment's 0.8% margin in the first half of 2024.

Financial Resilience and Future Outlook

Despite a challenging 2024, Zehnder's ventilation segment demonstrated structural strength. Organic growth in the second half of the year, coupled with the Siber acquisition, offset a 4% sales decline in the full year. The Group's adjusted EBIT margin for 2024 stood at 7.1%, down from 8.3% in 2023, but this was partly due to one-off costs from restructuring efforts, including the impairment of a Chinese production plant. Excluding these items, the ventilation segment's margin remained robust at 10.5%, underscoring its role as a margin buffer.

Looking ahead, Zehnder anticipates double-digit sales growth in the ventilation segment in 2025, driven by increased construction activity and the integration of Siber. The company also plans to expand its service offerings in the U.S. and Europe, targeting the renovation market-a sector with long-term growth potential. These initiatives, combined with cost-reduction measures and production efficiency gains, are expected to stabilize the Group's operating margin and restore profitability in the radiator segment over time.

Risks and Considerations

While Zehnder's strategy is compelling, risks persist. The European construction market remains fragile, with renovation activity unlikely to rebound sharply in the short term. Additionally, the company's reliance on a single high-margin segment (ventilation) introduces concentration risk. However, Zehnder's proactive cost management, including production relocations and outsourcing, mitigates some of these concerns.

Conclusion

Zehnder Group AG's strategic reallocation to ventilation and service-driven profitability represents a forward-looking response to industry challenges. By prioritizing a resilient, high-margin segment and leveraging recurring service revenue, the company is positioning itself to outperform in a low-growth environment. For investors, the key metrics to monitor in 2025 will be the acceleration of ventilation sales, the scalability of service offerings, and the Group's ability to maintain its 10.5% EBIT margin in this segment. If successful, Zehnder's transformation could unlock significant value, making it an attractive long-term investment in the industrial sector.