Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Ariston first quarter 2024 results. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Albert Pozzi. Please go ahead, sir.
Good afternoon, everyone, and welcome to Ariston Group first quarter results call. I'm Albert Pozzi, Strategy and Investor Relations Senior Director. With me here today are Maurizio Brusadelli, Chief Executive Officer, and Riccardo Gini, Chief Financial Officer. The presentation will last about 20 minutes, then we'll open up the session for questions. As a reminder for those on the phone, the slide deck is available from our investor relations website. I will now turn the call over to Maurizio.
Thank you, Albert, and hi, everyone. I am now on slide three, and let me say that Q1 2024 confirmed to be a tough quarter as we anticipated during the full year 2023 call. So no surprises for us. After the exceptional market peak experienced in 2023, the market is now normalizing. Heating markets in Q1 has been strongly negative across Europe, like in Germany, Switzerland, the Netherlands, Italy, and France. In some of these countries, HHP market dropped up to 40%-50% in volumes, leading to market dropping more than 30% in value. The causes are well known. The normalization of the German market after the exceptional 2023 peak, the discontinuity of exceptionally high incentive in Italy in Quarter 1 2023.
Gas price declined, and in Germany and France, the incentive schemes were a little bit confused, and they came with a little bit of delay in terms of system at the beginning of this year. Our diversified portfolio give us an edge in navigating through the current concepts. Traditional gas and oil heating technologies are performing better than heating heat pump. Service and parts business is growing, and our water heating business is proving, even in this challenging context, to be more resilient. This translates in a - 14% in Q1 on a year-on-year comparison, or - 13% in organic. Obviously, lower sales volume draw lower margin. And this year we are going back to the standard half one, half two seasonality in profit generation before the 2022 and 2023 outliers.
Riccardo will comment more on this later. The strong slowdown of our Central Europe markets has also contributed negatively in terms of mix. On the positive side, we have benefit from resilient pricing dynamic. We are playing in the mainstream to high-end market segments, and with state-of-the-art technologies, like the heating heat pump with natural refrigerant. We are also satisfied with our Q1 cash generation. The work that we are doing on inventories reduction has helped us to minimize the cash absorption, despite the EBITDA decline. We registered two significant updates on the market context. First, the European Energy Performance of Buildings Directive, finally approved in April, gives clear target that needs to be adopted from all new member states, -16% energy consumption by 2030, -20% to -22% by 2035 of the entire residential building stock.
The majority of the reduction needs to come from the low-performing building. The renovation of the low-performing building require advanced capabilities. We are committed to support our strong network of loyal installers with our technicians, to design the best solution, support them during the installation and the startup and maintenance. We will leverage our wide range of technologies to provide them with the best suited solution for the specific characteristic of the dwelling. From the most advanced heat pump with natural refrigerant, to high efficiency boilers, to hybrid solutions, to residential mechanical ventilation systems with heat recovery. Second, the process to request incentives in two of our core markets has been changed, Germany and France. Now, new processes are in place with interesting incentive values. We will monitor how they will perform over the next months.
Then, after Q1 closing, as we shared on the press release issued on the 27th of April, our subsidiary, Ariston Thermo Rus LLC, has been placed under the temporary management of JSC Gazprom Household Systems, a subsidiary of the Gazprom Group. There is high uncertainty on how the situation will evolve. Ariston Group is doing what is appropriate under the current circumstances for its local employees, customers and partners, that trusted Ariston Group in the last 20+ years, respecting all, as always, all the regulations. Ariston Thermo Rus generated about EUR 100 million revenues in 2023. Let me move now to slide four. We are continuing to innovate to support our installers with the most advanced and easy-to-install solutions, because we strongly believe in the future opportunities in our sector. As you see from the examples, we are developing a wide range of solutions.
Whatever technology is needed by our installers and users, we can supply it. We continue to invest in digital solutions. Last time, I shared a solution targeting end users. Today, I share the advancements done on our digital platform for professionals, Net Pro. We have extended artificial intelligence functionalities, now embedding advanced remote assistance functionalities in order to make our partners' daily job more effective. We expanded our heat pump range dedicated to the U.K. market. We are relatively small in the U.K., but it is a market with high potential. This product launched is an example of how we leverage our integrated technology competence centers and operations, to launch country-specific products with marginal additional investment. I'm happy to share, for the first time, also, an innovation related to our burner business. We introduced a new smaller unit in the market.
In developing the product, we put a lot of effort to ensure easiness of installation and multiple possible layout, floor standing, wall, or ceiling mounted. On water heating, we have launched the third generation of our flat electric storage water heaters, one of our flagship product. We have been the first to introduce flat products in Europe more than 10 years ago. The third generation has enhanced connectivity and energy saving functionalities, aesthetics, demand response, and home and energy management functionalities. We also work on the harmonization of the product range to improve internal efficiency. Last, we launched the first large electric storage water heater with square aesthetics dedicated to the French market. Now let me pass to Riccardo, who will provide more details on our first quarter.
Thank you, Maurizio. Let's start with slide number six, where the first thing we want to show you the quarterly change in net revenues, disaggregated by the main drivers, organic and foreign exchange effects. We don't have any contribution from M&A this time, as everything is embedded under the organic bucket. As you can see, top line was down by 14% year-over-year, reaching EUR 653 million, with organic at - 13.6%, with foreign exchange at - 0.4%. The organic performance was affected by a strong weakness of the heating market vis-à-vis an exceptional 2023, especially for renewables. While water heating proved to be more resilient even in these adverse market conditions.
Let me flag some positives included in the set of numbers, like the service and parts component, which posted a solid growth, and the Americas region, which grew organically. At group level, foreign exchange was negative, mainly in Asia Pacific and Middle East geographies. Finally, to put the numbers in a broader context, we decided to show and remind you our 2021 and 2022 first quarter net revenues. We are coming from the 2022-2023 market euphoria, and today, the ongoing normalization provides more rationality, visibility, and stability. We think this is healthy, not only for us, but also for the entire industry and supply chain. Moving on into slide number seven, we share the sales breakdown by geography.
The strongest correction is taking place in our largest area, which is Europe, decreasing its way to 71% versus 75% in Q1 2023. Net revenues in the area are at EUR 466 million, -18.2% year-over-year, driven by our top three markets, Germany, Italy, and France, which were strongly down due to very weak heat pumps demand. Asia Pacific and Middle East Africa net revenues were down by 4.5% to EUR 160 million, with some geography delivering positive growth, such as Indonesia and Vietnam, while China showing soft demand. Foreign exchange headwinds mainly came from Australia, China, and some other countries in Middle East. Organically, the growth was slightly negative.
Finally, Americas quarterly net revenues were at EUR 71 million, which is a 4.1% positive year-over-year, with both hot water and heating businesses increasing in the positive contribution from foreign exchange. Moving down along the P&L, slide eight focuses on EBIT adjusted performance. In the quarter, the EBIT adjusted margin has halved to 4.6%, reducing by five percentage points as a consequence of operating leverage as a key driver, combined with destocking , country mix, and labor inflation effects. Despite this perfect storm, which is mainly volume driven, we continue to see resilient pricing conditions across different markets. For the sake of completeness, the figure also includes the final tranche of the insurance reimbursement for the 2022 flash floods, while the main adjustments component on EBIT was the EUR 6 million purchase price allocation amortization from past acquisitions.
To help you with the comparison, let me say that market normalization is favoring the comeback to our business typical seasonality. In the figure on the right-hand side, you can see the average 2017-2021 EBIT Adjusted distribution was roughly split 30%-70% between first half and second half. Moreover, in light of this transitional and challenging context, we were already conscious in budget 2024, and we are now enhancing our focus on cost containment with initiatives as indirect cost reduction. Some of those are tactical and other are more structural. Besides, we worked out solutions with temporary unemployment to adjust the production and stock to the revised demand, with the end purpose to minimize the under absorption we have to deal with.
As regards cash flow, on slide number nine, free cash flow was negative EUR 51 million versus negative EUR 36 million prior year. Please consider that the 2023 figure was restated according to our new definition of free cash flow, which excludes the mark-to-market derivatives effect. Despite the EUR 40 million reduction in EBITDA, free cash flow worsened by only EUR 14 million compared to prior year. This was due to the lower working capital absorption, about EUR 70 million versus EUR 100 million of prior year, mainly driven by the continued effort and success in managing our DPO, so the day of payments to our suppliers, as well as the inventory reduction, which we look at as a significant success considering the sudden top line reduction.
To provide you with more color on other moving parts of our performance, we have the detailed cash flow statement slide in appendix, and let me briefly underline the following. Taxes paid is slightly increased by EUR 2.6 million, CapEx-ish, it was EUR 11.5 million versus EUR 16.3 million in 2023, and mainly focused on new products development and operations improvement. Small negative contribution of EUR 1.8 million from provisions and other changes from operating activities. Finally, on the right-hand side, you can also find a snapshot of our net working capital increase in Q1 2024 compared to Q1 2023. As you can notice, that the stocking effect helped us to minimize the first quarter ramp up, which is typically high and loaded in the first part of the year.
For the benefit of clarity, please remind that in Q1 2023, there was the effect of both Brink contribution on the net working capital stock figure. Anyway, we reiterate our commitment to keep this figure at the most efficient level to maximize cash flow generation during the year. On slide number 10, you can notice the movement of our adjusted net cash position during the year. On top of our EUR 575 million adjusted net debt position at year-end 2023, we had a negative contribution from the free cash flow from our business operations, as we discussed before.
Then there was the cash outflow for the Egypt plant acquisition we announced back in February, amounting to EUR 21 million, the EUR 12 million cash outflow for financial and effects charges, and finally, the EUR 13 million of positive non-cash items, which include the mark-to-market derivatives impact, IFRS 16 liabilities variation, and the exchange rate variation effect on the net financial indebtedness. In a nutshell, despite the adverse market conditions, we managed to limit the impact on the net financial position. Closing the slide, all these items made our adjusted net cash position negative by EUR 646 million, increasing our leverage to 1.7 from 1.4 at the end of 2023, a higher but still solid and safe level. Finally, on slide 11 shows a picture of our net financial indebtedness composition.
Compared to year-end 2023, we can see the liquidity figure decreased to EUR 358 million, driven by free cash flow, affected by seasonality and adverse market conditions, and Egypt plant acquisition. A closer look to the other indicators reveals a successful effort to renew and extend the duration of our debt. The average maturity now is at 4.2 years, and EUR 900 million of available pool are committed on new credit lines to fuel organic and inorganic growth. In March 31st, more than 80% of maturities are spread between 2027 and 2031, and about two-thirds of our long-term debt are fixed rate or hedged. As you can see, our capital structure is safe and sound, allowing us to flexibility to pursuing further organic and inorganic growth opportunities.
Thank you, Riccardo. Now let me go on the outlook of 2024, so I am on page 13. We confirm 2024 being a transition year. In the midterm, I want to reiterate one more time, we strongly believe in the fundamentals of our sector and of our business model. As said, the heating business is mainly a replacement business, and once the short-term volatility will be over, we'll be back to growth. Buildings are accounting for more than one-third of emissions in Europe. More sophisticated, high efficiency, and renewable solutions will be needed to achieve the decarbonization targets in every country. Water heating business is steadily growing in the midterm.
Our business model, with a good balance of heating and water heating, coupled with a complete set of high technology and easy-to-install solutions, position us well to serve at best our installers and end users for any solution they need. On 2024 organic growth, the strongly weak markets in the first months of the year are consistent with the scenario we defined for the low end of the -1% to -5% range. Russia discontinuity might count for an additional circa 3% of our loss, depending on how the situation will evolve. We will update you during our H1 2024 call. We expect heating heat pump demand to continue to be weak over the next month and recover in H2. Water heating business will be flat or slightly growing, more resilient than the heating business.
We expect now the profitability to be in the bottom part of the 9.4%-10% range. Contribution generation concentrated in H2 as per historical seasonality. We have taken more action to control our cost base in order to stay within the outlook range. At the same time, I want to reassure that we will not take any irrational decision to cut costs needed to support our future growth. We don't want to sacrifice future growth for the short term. We are following the same approach on CapEx. We continue to invest for the future growth, focusing our resources on digitalization, technology, new products, production, flexibility, and efficiency. We are adjusting the timing of the investment to follow the top line evolution and to stay close to our 4%+ outlook. Cash generation will be concentrated in Q4 as per previous years.
We are active in M&A, assessing many opportunities. We are spending a significant share of our time on it. We are not in the game to make any deal. We are focusing on opportunities that have a strong strategic rationale with our technological portfolio and/or geographical footprint. Thank you for your attention. I think we can now open for Q&A.
Excuse me, this is the Chorus Call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touch tone telephone. To remove your question, please press star and two. Please pick up the receiver when asking questions. Once again, that's star and one for questions. The first question is from Vivek Midha, from Citi. Please go ahead.
Thank you very much, everyone, and good afternoon. I have two questions, if I may. The first is around the 2024 guidance. So I calculate that you would need a margin of over 10% in Q2 to Q4 cumulatively, versus the 4.6% in Q1, in order to get to a 9.4% margin for the full year. But even fully understanding the historical seasonal trend and the 30%-70% splits, what market assumptions do we need to make to underpin this assumption of the, the step up in profitability? Thank you.
Thank you. I might start, and then maybe, Riccardo, you jump in. I think, I mean, as we said, we would expect the market to turn sluggish to positive in H2, and therefore, our profitability to take advantage of the better leverage. And with all the costs that we are doing, between cost containment, procurement, and other fine-tunings, I think we are well positioned to be at the bottom range of the guidance.
Thank you very much. My second question is a follow-up on your comment about pricing. What are you seeing in the broader market among your competitors? Are you seeing any permanent list price cuts in heat pumps or any greater than normal discounting activity? Thank you.
Thank you, Vivek. So, I mean, as I said, the pricing is holding. So, the market is so down that I don't think any price reaction from anyone would lead to a benefit of the market. So for the moment, there are not irrational behavior, and on top, I have to say that playing in the mainstream to the high end of the market, we are not impacted by eventually someone if they would play on pricing.
In terms of situation, I think, I mean, our ability, our go-to market, and our proximity to the installers, are helping us to continue to hold the pricing that we need, with the kind of technology that we offer as well, that are best in class, and in most cases, advantage the versus other competitors, because we were, for example, the first and the only one entering with propane gas. So, so far, so good.
Thank you very much.
The next question is, of Christian Hinderaker, from Goldman Sachs. Please go ahead.
Yes, good afternoon, everyone. I was hoping if you could perhaps add some color around performance in, in growth terms of the different product areas. For instance, not clear if hot water in the quarter was flat, or up, and then also maybe a distinction between how the fossil boilers compared to, heat pump demand, in the quarter. That'd be the first question. Thank you.
Yes. I mean, thank you, Christian. As you probably know, the heat pump market is negatively affected for the reason that you might know, and I explained before, a big comparison in our biggest market of half one and especially Q1 2023. The fact that in Germany and France, the system came out a little bit later, and is a different system than before. While within heating, the other technologies are holding back the situation. So, the ones that are most impacted in terms of negativity are heat pumps. As I said, our business is half heating and half water heating, so water heating is more resilient, it's less exposed to the short-term volatility, and we expect to be flat to slightly positive in 2024.
On top, we have our parts and services, which is 10% of our revenue, growing well, and it is a profitable stream for us.
Thank you. Maybe turning to the margin, down 500 basis points year-on-year in the quarter. I just wonder if you can help add some scale to the respective bridge items. You had negative operating leverage, obviously negative country mix, unclear how significant that was, as well as the labor cost headwind, I guess, offset by some of the cost containment actions, but maybe you can help us quantify this. Thank you.
Yeah. Thank you, Christian, for the question. As indicated earlier, I think the volume, component, was the largest one, though it is a combination of effects, so we are sensitive to operating leverage. That was enhanced by the destocking we have seen in the first quarter. On the other side, we got, to your point, labor inflation and also, market mix, but to answer your question, the volume leverage was the key one. Just keep in mind that, as Maurizio indicated, we, we also continued, to invest for our future. So, for instance, when we speak about digital programs, R&D investments, go-to-market, reinforcement and investments, that's something we continued, to work on very selectively, under these, challenging market conditions, but that's what we have done, over the last few months.
Understood. Thank you very much.
Thank you.
The next question is from [Vijesh Jain] , from HSBC. Please go ahead.
Hello, gents. Good afternoon. So I have two as well. Just starting with the heat pump and especially Germany. One of your competitor was talking about the order book improving sequentially, quarter and quarter in Q1. Can you give us a little more sense about you talked about the new system and the old system, there's a delay and hence you had a negative impact in Q1. Can you give us how the new system is working? And secondly, are you seeing any sequential improvement or any changes into your order book compared to what it was in Q4? That's the first one. I'll come to the second one after the answer.
Yeah. I mean, I think I would agree, and we said as well, that we expect a sequential improvement of the heating heat pump in Germany, quarter after quarter. Not only because the system is back and will be used extensively by our installers, but also because year-on-year, the comparison is very strong, especially on H1 and a little bit on quarter three. So, as I said, in the next quarter, quarter two will be a sequential improvement, but still a negative year-on-year, and we expect the market to be back in a better trajectory on half two , especially in quarter four. So that's what I would see.
In terms of progress, I think we see demand coming in, so the system is working, and we see week after week that the demand on incentives are coming in. We will continue to monitor how is the situation and act accordingly.
Understood. Just to follow up on that, if I recollect last year, the system was kind of having an application of close to 11-12 thousand per month. With the new system, have you seen any backlog being cleared in March, April, and anything you are seeing early into the May, which is different from last year or a year-on-year comparison basis?
Yeah, I mean, as you know, in 2023, we had the backlog of 2022, demand for heating heat pumps, so the system was obviously working well. And we saw the numbers increasing month, month after month, as I said, and they started to go down in summer or a little bit after summer. So now we are waiting to see the official report from the association, and we need to monitor how this will go in the next weeks and months. So from request to approval, obviously there is a little bit of lag.
We are not yet at the number that you mentioned, so we are not yet at the number of last year. Otherwise the market would be different, but we would expect this to improve week after week, month after month, and turning positive, especially in second half, Q4 this year.
Understood. And, if I understood you correctly, Q1, heating heat pump demand was down probably half year-over-year basis, and that number in Q2 sequentially may be improving, but it's down still strongly in double digits, maybe towards, twenty-five percent or, or more than that.
I mean, Germany, if we talk about Germany, obviously, yes, yeah, as I said, half one 2023 was more than the number of 2022, so we expect Q2 to be negative as well in 2024, compared to a very high 2023.
Understood. And just coming to the overall European market, you touched upon France, you had a delay and that obviously has come back. And Italy, you have the base effect kind of fading away, as we move to Q2. What's your overall expectation of the heat pump market? And if you can, in that context, talk about a little more about the destocking effect, how much it was in Q1, and how that is evolving into Q2.
Yeah, I mean, if you talk about France, there was a new system, a little bit of confusion on the incentives. I think the incentives are now clear. It has been publicly said that the new incentive scheme will work well as of second half of May. So we expect France again to be back in the second half in a stronger way. I think in terms of market in France, I'm not sure there is a big stock level there that we have to digest. For sure, the expectation of the market after a good development of last year in half one, until September, probably will go back to Q4 this year.
But I would expect the total heat pump market in France to be negative, or slightly negative. I don't think we'll be positive given the numbers that we have now up to us, and the fact that the incentive will work as of May.
Understood. I think, I have more than two, not four. Probably the last one is from the water heating. I recall it previously you were talking about the water heating business is more like, a low single digit increase year- over- year, and this year you're probably talking about flat base. Any change in the trend you have experienced in the last four months or so?
No, I think water heating, as I said, is more resilient. I mean, it's less exposed to volatility. Fully, we expect—I mean, it, the global context is not helpful. I mean, we know that we are not in a growth economical global level, and despite this, we expect the water heating total business for us to be flat to slightly positive in 2024, so.
Understood. Thank you very much, Maurizio.
Thank you.
The next question is from Alexander Virgo of Bank of America. Please go ahead.
Yeah, thanks very much. Good afternoon, thanks for taking the questions. I wonder if you could talk just a little bit about the dynamics around visibility, particularly in heat pumps, I guess, but more broadly, just trying to get a sense for how close you are to the levels of inventory in the different channels. Obviously very close when you're talking about installers to whom you're selling direct, but there's a big chunk of the market out there, which is indirect. And I'm just trying to get a sense for how much of a view you have on inventory levels, generally. I don't want us to talk about Germany, but just generally in Europe, 'cause it feels like there's a big unknown out there, which...
We're sort of struggling to get a grip on. And then the second question is just to sort of follow up a little bit on pricing. I appreciate that list prices aren't changing, but I'm guessing that there must be a bunch of promotional activity going on, very much in the same vein as we see on more traditional white goods. And I'm just wondering if that is something we need to be factoring in, and thinking about how that ends up playing through into sort of reigniting demand? Thanks.
Thank you. So let me start with inventory first. Obviously, as we said, also in some, in the previous call and in some conversations with some of you, the German market had a little bit of higher inventory than expected, not so much, I mean, it was on other kind of players. And obviously, given the market situation, you might appreciate that the inventory are not yet digested in the system, but are being digested. As you know, in Germany, we go in two ways, we go indirect with Wolf, and we go direct with Elco.
So, we are aware of a little bit of stock in the channel, but to the best of our knowledge, as I said, it does not refer to our brand, so on this, we are pretty clear. On pricing, I mean, it's true that there are promotion, and promotion are always there. I would ask you to think first, that, as I said, we are not playing in, in the lower part of the market. And secondly, our point of difference and our strength is the ability to have a go-to market that other cheap players might not have, and, and they would be forced to try to leverage price to sell more.
The cost of the heating heat pump is only a fraction of the total investment that someone would have to do in his flat or in his house, to renovate the house. So, even if someone would do a promotion, I'm not sure this will go directly to the end users, and the magnitude could be marginal on a EUR 15,000-40,000 spending that they would have to do on the renovation.
Mm-hmm.
This is where we have to be, and we are managing well the situation, as I said, and let's see how the market and competitors will continue to act.
Right. Okay. If I can follow up just a little bit on the broader market, we've heard from a number of participants in the value chain across the last couple of weeks, about deteriorating renovation and refurbishment markets. I think that the fewer numbers of transactions happening in terms of residential transactions is obviously having a bearing on that. The German data on boilers was materially weaker year-over-year as well. So I'm just wondering if you think about the broader market, is that something that you are expecting to improve through the rest of this year as well, or are we having a you know, a more prolonged trough, if you like, or a flat bottom, before we see some recovery sometime next year?
I mean, the market in which we play is a replacement market, so, replacement will have to continue to be there, because systems are, are breaking, and after a period of time, you need to, to change the system. On top, there are clear and, and positive incentives, to help, the change to more efficient, kind of products, to reduce emission, as, as I said before, also following, the new, European law. I expect, as I said, the market overall to go back, and, and be better in half two. You know that our three biggest markets are France, Italy, and... Sorry, Germany, France, and, and Italy, and, in those markets, we are especially in half one, and even more in Q1, the comparison of 2024 versus 2023 is very, very high.
I don't repeat the reason, but obviously, you know better than me, that Germany exceptional evolution in 2023. The fact that in Italy we had the Superbonus until mid-February 2023, and the fact that in France, the market did well until the summer, a little bit later. So I would expect all the technologies to do better in the second half. For the moment, renewables are more affected than fossil technology. As we speak in Q1, this is not a surprise for us, we've always said that Q1 would have been tough. We always said that half one would have been tough, and then remember that we have water heating, that, as I said, is more resilient. We have parts and services, 10% of our revenue that is growing fine.
So no surprises for us, it is what we expected, and we expect a sequential improvement, to be in a better condition in Q4 and in 2025, with the tailwind that will come from continuous replacement and acceleration to renewables.
Okay, great. Thank you.
Thank you.
The next question is from Alessandro Cecchini of Equita. Please go ahead.
Hello, everybody, and thank you for taking my questions. So the first one is about margins. So you stated we are well positioned to be at the bottom of the range in terms of margins. I was just wondering, so if you have potentially additional extra savings to do, if I don't know, your top line could be even worse than -5% that you are forecasting, of course, excluding Russia. So just if you could add some color on your statement on what position to be at the bottom. So if you can add maybe more information about your construction or your extra potential extra savings. This is my first question.
Thank you, Alessandro. So first, as we said, we have been very prudent in building the budget 2024, because we were already expecting a weak market in 2024. Then, as we said, we enhanced our cost reduction initiatives, and we are really pursuing indirect cost reduction. Some of those are tactical and are meant to deliver immediately in 2024. And then we work out on solution with temporary unemployment to adjust the production and making sure that we have the right stock based on the revised demand. And the purpose is to minimize the under absorption and the cost that we have, because we produce less. Our cost reduction initiatives are more structural, as we are reviewing internal processes to make them leaner and avoid unnecessary redundancy.
So I think we are really looking into all the options. Nothing dramatic, because we want to continue to invest for the future. I mean, this is a temporary year. All the prospects for the mid long term are there, so we don't want to compromise 2025, 2026, and the next years, because we need to cut costs this year. So that's what we are doing, and that's why we say we are where we are in terms of guidance for 2024. Obviously, if the market and when the market will accelerate, this will give us the opposite, a positive leverage, and this will put everything in a more positive scenario.
Okay, thank you. My second question is instead about, just to, model a little bit, the, your growth expectation for, for the year. So first quarter, you had a very tough comparison, in main markets, Germany, France, Italy, and then you reported minus 13%-14% organic growth. So just to, to understand, do you have a, a range for the second quarter that probably will face, is facing, not so tough comparison? So, I will expect, I mean, not double digit decline, but, I was just, wondering how do, do you are modeling, I would say, the, the growth for, for, for the year. Thank you.
Yeah, I think, Alessandro, you do your model better than me, but as I said, both Q1 and Q2 have tough comparison. Remember, Germany continued to grow very well until Q3, and Germany is our first market. Second market is Italy, and obviously, also in Q2, we had a little bit of a tail of the Superbonus, and then France, that was good in Q2 as well. So if you would ask me, I cannot give numbers, but in your model, I would assume Q2, another negative market, not with the magnitude of Q1, but I mean, a negative, very negative versus Q2 last year, and then sequential improvement to a positive, flat to positive enough to Q3, Q4.
Okay, thank you. My final question is about, I mean, the competitive environment. So if you have some feeling on your market share in the first quarter in term of heat pumps, there are some, I mean, competitors that are blaming or experiences, they say, market share gains. So just your feeling, qualitative feeling, or your positioning in main markets in heat pumps in first quarter. Thank you.
But obviously, market share, the better we do, the better it is, because we cannot control the market; we can control our execution in every market. I have to say that, overall, we are satisfied with our performance across all the markets globally, both in heating and water heating. Obviously, there are some ups and downs, market by market, but I think overall, I have to say that, we perform better than the market.
Okay, thank you.
The next question is from Axel Stasse, from Morgan Stanley. Please go ahead.
Morning, everyone. Thanks for taking my questions. I have three, if I may. The first one is on the cost optimization you spoke about. Can you please help quantify the effect for 2024? Are we speaking about a EUR 5 million savings, EUR 10 million, EUR 15 million, EUR 20 million? Just try to understand how big of an impact it can help on your 2024 numbers.
Yeah, thanks for the question. Unfortunately, we are not in the position to give you a precise number. I mean, to Maurizio's point, the levers we are pulling, we can tell you are various. We are extremely focused-
... to make them happy and, and successful. We want to protect our margin, we will do, and we are committed to do so, without jeopardizing the following year growth and go-to-market opportunities. So be assured that all the levers we are pulling are the right one to make sure that we keep control of the business, because cost control is part of something, which is under our leadership. And, I mean, all the actions are consistent with the outlook, we confirmed for the full year.
Okay. Thank you for that. The next question I had was about raw materials and costs, energy costs, sorry. According to my basket, it is slightly going up, going to Q2. Is this an opportunity for the firm to, you know, increase prices, to offset some of the volume weakness, or is that not at all on the table? Same for labor and logistics costs. Can you provide an update on this?
Well, I mean, that we are constantly looking at the raw materials, inflation or deflation, and we will continue to do so. Of course, if there are any pricing opportunity, to chase, we will take them into account. So far, we are not planning, any increase, or at least, we go and see market by market, product by product, and we do apply to the best of all of our, I mean, commercial experience and leadership, what is the best decision. So we are closely, closely monitoring the evolution of, raw material inflation or deflation.
Okay, um-
I think-
Yep.
Maybe just to couple and give a clear answer. So we see the raw material in a positive way for our PNL, and our procurement team are doing a great job in terms of buying and coverage. So we don't see, and we will not have a negative effect or a cost increase in 2024. So we don't have... on the contrary, this will help, again, us to deliver what we need to deliver on the bottom line.
Okay, perfectly. So that was for, I would say, cost, short term. If we now move, now look, sorry, on the pricing more on the medium term, every single player out there is expecting a recovery in volumes in H2. If we assume this is actually happening, and with the existing competition, is there not here a risk that, you know, the European players will have to cut their prices to compete for the same volumes, and basically capture share?
I mean, I always say that I cannot comment on what competitors will do. I think, if the market is, and I'm sure it will be, the market condition will be better in half two, we go back to a level where our differentiation in terms of how we play, which is more on the upper part of the market, is helping us to keep the net pricing in a positive way. Because we have the ability to work with our installers, guarantee pre-sales, after sales, and quality. So that's, I mean, we don't play on pricing. We are not like some other players without a route in the market that were maybe very opportunistic to come in, when there was a bit of a bubble on the heat pump.
Again, the cost is not linked to commodity and to cost only. I mean, there is a lot of work on technologies. There is innovation. There is obviously work we do in terms of digitalization of our machine, which are very much sophisticated. It's not the pure cost, as I think someone was asking before on the white goods. We are more sophisticated.
Okay. Thank you very much.
The next question is from Alessandro Tortora of Mediobanca. Please, go ahead.
Yes, sorry. Good afternoon to everybody. Let's say I have two questions. The first one is just let's say a follow-up on Italy. Let's see, the question is related to how do you see the current market condition in Italy after this negative quarter? But also, if you can comment a little bit about the pace of the stocking, if we're still in sort of the stocking mode in Italy. So just to comment on Italy, that's the first question. I don't know if you want to go one by one, or I can tell you all the-
Yes.
- questions. Okay?
Thank you.
Oh, yeah, yes.
I'm sorry. I thought you wanted to do one by one. Thank you.
Yes. Better, better, thanks.
Okay, let's do one by one. So Italy, obviously, we know Italy, and we play in Italy. We have a very good position in Italy. I have to say that in terms of heating, probably, heat pump was not and is not a surprise on what we see in terms of development. The situation is slightly better on the other technologies, and I have to say that on water heating, Italy is doing well. So this is where we are experiencing a good momentum and better than what we forecasted. So not a surprise on the negative on the heat pump, a little bit better in terms of fossil and a positive surprise on what it is.
Okay. Okay, thanks. Well, the second question is just reasoning on the operating leverage, okay, you mentioned before. If we look at the heating heat pump, and tell you that the steep decline we saw in sales, but also probably the underproduction you're having in this quarter, in these months. Can I know that you don't comment, let's say, on the profitability of a single segment, but considering also the level of automation, which cannot be comparable for the heat pump compared to gas boiler, is it fair to say that this is a segment that did suffer this quarter or maybe even the next one, with the profitability that I don't wanna say is, let's say, close to zero, but it has been suffering a lot, considering again the operating leverage?
Sorry, the line is a little bit bumpy on your side. Let me try to rephrase the question if I understood correctly. You're talking about on volume operating leverage for heating heat pump, correct?
Yes, correct. Correct, correct. Also, considering the level of automation in terms of production, that [IIM] should be, you know, should be much lower compared than, let's say, traditional gas boiler.
I think, I mean, in terms of efficiency, I would say that our ability to leverage automation on heating heat pump or efficient way to produce it is good as well. I think we have enough flexibility to really... I mean, now we are in a bit of a tough situation with our heating heat pump lines, and so we are using all the possible social measures that we can use to protect and to make sure that we can keep the business going with the mix that we need, because even today, we are selling heating heat pumps. It's not that we don't sell anything, but obviously with a different mix.
And then, I think what we prove to be good at is in moving people from different lines, so from heating heat pump to wall-hung boiler, and eventually to other kinds of technologies, which is one of our plus being so diversified.
Okay. Okay, thanks. The last question is on the Wolf and Brink. You mentioned before that the company's strengthening the effort on the cost optimization side. What is the role played here by Wolf and Brink? Is also the German company contributing to, let's say, the cost savings target you mentioned before?
Yeah, I mean, obviously, as I mean, Riccardo said, we don't say the magnitude, but, in terms of... First, we have two things: the work that we are doing on cost, which is not all, I mean, it's meaningful, otherwise we wouldn't mention. And then on the other side, we have the benefit of the integration of Wolf and Brink. So the synergies that are coming, thanks to the acquisition, are helping us to launch a system that we didn't have before on propane, under Elco in both Germany and Switzerland, but also to have a cost synergies benefit that are incremental, for example, in our procurement part.
That's why we are, as I said, we were prudent in budget, and we are accelerating, and we started to accelerate when we saw the first couple of months of this year.
Okay. Okay, thanks. Thanks for the answer.
We apologize, but due to lack of time, we must close the question and answer session. Mr. Pozzi, do you have any closing remarks?
Thank you all for participating to the call. As usual, I'm available for any follow-up question you might have. I realize there are more people lined up for questions, so I'm happy to reach out in one-to-one. Thanks again for participating. Thank you.
Thank you very much. Ladies and gentlemen, thank you for joining. The conference now over. You may disconnect your telephone.