Ariston Holding N.V. (ARIS) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Ariston Group 9 months 2024 Results Conference Call. [Operator Instructions] At this time I would like to turn the conference over to Claudia Introvigne, Head of Investor Relations. Please go ahead, ma'am.

Good afternoon, everyone, and welcome to Ariston Group's Third Quarter Results Conference Call. My name is Claudia Introvigne, and I'm the Head of the Investor Relations. Here with me today, there are Maurizio Brusadelli, our Chief Executive Officer; and Riccardo Gini, our Chief Financial Officer. The presentation will last nearly 20 minutes, then we'll open up the session for questions. As a reminder, for those on the phone, the right, the deck is available on our Investor Relations website. I will now turn the call over to Maurizio.

Thank you, Claudia, and good afternoon or good morning, everyone. So let me start with Slide 3. Quarter 3 was in line with our expectation in terms of market dynamics, obviously impacting negatively our top line. On the positive, we begin to see the results of our efficiency initiatives on margins and continue to see the result of our work on inventories and CapEx optimization on free cash flow. Quarter 3 revenues were down organically 13.7% on a year-on-year comparison, which is a slight improvement versus the decline of EUR 15.3 million that we had seen in the first half of the year, but still declining. After the exceptional market peak that we experienced in '23, heating markets in '24 and quarter 3 have continued to be strongly negative across Europe, especially in Germany, France and Italy, which are our main geographies. In some of these countries, the heating heat pump market continued to drop more than 40%, 50% in volume. The drivers are well known, normalization of the German market after 2023 peak, destocking that's still ongoing, Germany and France incentive scheme confusion and delay. In this context, we continue to see the service and parts business performing well. The market is buying more maintenance than going toward replacement. Our diversified portfolio give us some edge in navigating through the current context. Traditional gas heating technologies are performing better than hitting pump. Water eating is proving even in this challenging context to be more resilient. Going to margins. We improved our EBIT adjusted margin by 200 business points versus last quarter. from 4.3% up to 6.3%, thanks to our efforts on efficiency initiatives, and Riccardo will comment more on this later. We are also satisfied with our quarter 3 cash generation. We have been able to generate a positive cash contribution despite the EBITDA decline, thanks to the work on inventories reduction and CapEx optimization. Also, benefiting from tax payment phasing. This is the first time over the last 3 years that we have a positive free cash flow in the 9 months. We confirm our efficiency program to be EUR 70 million, EUR 80 million in OpEx and CapEx embedded in our 2024 guidance which, as a reminder, was revised down during the summer and that we don't change today. We continue to believe that the midterm fundamentals of our group remain intact. As we will see during the presentation. Moving to Slide 5. A quick reminder as usual about who we are before going into numbers and guidance. We are a player active in thermal comfort with a balanced exposure to water heating and heating. We are present in 40 countries, and euro represents more than 70% of our consolidated revenues. Importantly, if we think about heating on the left, this includes gas boiler, heat pumps, hybrids and other heating systems. So we are able to follow the market, whatever kind of system the different market we'll have. This is the market the heating one that is in a negative momentum, as I said, after the positive peak of 2023 and the years before. It is negative in Europe, and Europe is where our presence in heating and water eating is more balanced. Water heating on the right is a more resilient business and our main business outside Europe. It benefits from the presence in markets with growing population and still low but rising penetration of water rating solutions. Service and parts is a growing business, as I said, especially this year. And in Europe, maintenance today is preferred to replacement. Now I move to the next slide. In order to understand better the magnitude of the move in the market demand, last quarter, we presented an example of the German heating market. And here, we provide a quick update of it adding the monthly data of heating pumps incentive approvals. Germany is our largest market. Total revenues in Germany accounted for nearly 1/4 of our group revenues in 2023. As a reminder, the heating market in Germany had a 4% growth in volume in the 10 years from 2013 to 2022 being mainly a replacement market. The market growth was higher in value, thanks to the enriching mix of high efficiency and renewable solutions. In 2023, we suddenly saw a plus 34% increase in volume. The German government introducing incentives for heat pumps in 2022. And at the same time, there was a fear that gas boiler would have been banned from 2024, which obviously didn't happen. So 2024 is a transition year. We have seen a normalization of the demand with destocking and still some regulatory uncertainty caused by the delays in setting up the new IT system from the government, which processes the incentives request. As you can see, the first approvals for incentives only came in February. During quarter 3, we have seen an acceleration in the approvals for incentives from the German government, up 48% quarter-on-quarter, also on numbers that are still small. Year-to-date, the approval for incentives are around 81,000. I will now turn over the call to Riccardo, who will provide more details on our third quarter and 9 months results. Thank you.

Thank you, Maurizio. Let's begin with Slide #7, where we'll first highlight the change in net revenues on a like-for-like basis with Russia, they consolidated from the end of April in both 2023 and 2024 figures as noted in our August conference call. As always, the figures are broken down by primary drivers, organic and ForEx effects. There is no M&A contribution as always captured within the organic category. This quarter, the ForEx impact is minimal, primarily affecting our Mexican business. In Q3, top line performance declined by 14.4% year-on-year reaching EUR 632 million, showing an improvement compared to first half year-on-year decline of 15.5%. Organic performance, down 13.7% year-on-year, was impacted by ongoing softness in the heating markets, particularly in European renewables as anticipated in our August update. Water heating, however, remain more resilient amidst these conditions. The decline was driven mainly by volume effects and an unfavorable market mix while pricing played a limited role affecting only a few discontinued products due to regulatory changes. On a positive note, our Service & Parts division continued to deliver strong growth even in this quarter, underscoring the underlying stability of our business. Moving on into Slide #8. We share the sales breakdown by geography. The most notable adjustment remains in our largest region, Europe, which now accounts for 71% of total revenue, down from 74% in the first 9 months of 2023. Net revenues in Europe reached EUR 441 million, reflecting a year-on-year decline of 17.1%, an improvement from minus 20.3% in Q2 2024 largely influenced by softer performance in our key markets, Germany, France and Italy, mainly within the heating segment, particularly heat pumps. On a positive side, Eastern Europe and Spain delivered revenue growth. In Asia Pacific and Middle East Africa net revenues decreased by year-on-year to EUR 128 million, a slight improvement from Q2's minus 11.8% year-on-year decline. Positive growth was seen in markets like India, UAE, Vietnam and South Africa, while some others like China continued to experience macroeconomics headwinds. Finally in the Americas, Q3 revenues shifted from positive to slightly negative, down 7.6% year-on-year to EUR 62 million compared to a 5% year-on-year increase in Q2 2024. This trend was mainly impacted by currency headwinds in Mexico while the heating and water heating segments continue to perform steadily. Moving down along the P&L, Slide #9 focuses on adjusted EBIT performance. This quarter, the adjusted EBIT margin improved by 200 basis points over the previous quarter, rising to 6.3% from 4.3%, driven by the successful implementation of efficiency initiatives. While the margin remains 330 basis points below last year's level, this is primarily due to operating leverage alongside the stocking and country mix effects. For context, key adjustments to reported EBIT included EUR 8 million in PPA amortization from past acquisitions. Additionally, it's worth noting that market normalization is facilitating a return to our business typical seasonality. Historical data shows that on average, the adjusted EBIT has been distributed approximately 30% in the first half and 70% in the second half of the year, from 2017 to 2021, as illustrated in the accompanying figure. Moving on to Page #10. Q3 results brought 9-month free cash flow into positive territory, EUR 14 million, a remarkable achievement given that the prior 2 years saw negative free cash flow during the same period. This was largely thanks to a substantial reduction in working capital outflow, down to EUR 49 million from EUR 197 million a year ago, which nearly offset the EUR 177 million decrease in EBITDA compared to 9 months of 2023. To offer further insight into key performance drivers, a detailed 9-month cash flow statement is available in the appendix. Highlights include CapEx reduced by EUR 22 million to EUR 60.6 million from EUR 82.6 million in 2023, aligning with our efficiency goals; a positive EUR 48.5 million from provisions and other operating changes significantly boost by the noncash EUR 41 million; tax payments decreased by EUR 25 million, due to lower taxable income with a tax milestone now scheduled for Q4. Additionally, the chart on the right shows our Q3 2024 net working capital increased compared to Q3 2023. Notably, our focused working capital management kept the net working capital to revenue ratio stable, rising only by 0.5 percentage points compared to last year's increase of approximately 2 percentage points from 16.9% to 18.7% in Q3. On Slide #11, you'll find an overview of our adjusted net debt movements throughout the year. Starting from EUR 575 million adjusted net debt position at year-end 2023, we saw a positive EUR 14 million contribution from free cash flow in the first 9 months. As noted earlier, we also had a cash outflow from acquisitions and perimeter adjustments primarily from the EUR 21 million acquisition of our Egypt plant announced back in February, alongside a modest negative impact of under EUR 3 million from the net financial position adjustment related to the deconsolidation of our Russian subsidiary. Additional movements include a EUR 63 million dividend payment in May, EUR 12 million invested in our buyback program to support LTI plants executed between August and September, a EUR 26 million cash outflow for financial and effects charges, and approximately EUR 3 million in noncash adjustments. These noncash items mainly include the mark-to-market impact on derivatives, IFRS 16 lease liability adjustments and currency change rate fluctuations on net financial indebtedness. In summary, despite challenging market conditions and the combined EUR 75 million outflow for dividends and buyback, we effectively managed to contain the overall impact on our net financial position. Finally, closing the slide, our adjusted net cash position stands at EUR 692 million, with leverage increasing to 2.3x our adjusted EBITDA from 1.4x at year-end 2023. As a reminder, due to seasonal cash flow trends heavily concentrated in the last quarter, we anticipate a slight improvement in our net financial position by year-end. As we move into Slide #12. It provides a comprehensive overview of the composition of our net financial indebtedness. Compared to year-end 2023, we observed a decrease in our liquidity to EUR 226 million, primarily driven by strategic investments, such as the acquisition of the Egypt plant alongside a EUR 63 million dividend payment and EUR 12 million allocated to our buyback program. Additionally, we have made early repayments of less efficient debt to optimize our financial position. When we examine other key indicators, we find that there have been no significant changes compared to our half year results. Key parameters such as duration, maturity distribution in the percentage of fixed rate debt have remained stable, reflecting our prudent financial management. Despite the challenging market conditions, our capital structure continues to be robust providing us with the flexibility to pursue both organic and inorganic growth opportunities. This resilience is further bolstered by our additional EUR 900 million pool of committed unused credit lines, which positions us well for future investments. Now I will hand over the call to Maurizio, who will drive the discussion deeper into our cost initiatives, market trends and future outlook.

Okay. Yes, yes. Sorry. Yes. Thank you, Riccardo. And I am on Slide 14. So before speaking about guidance, let me give you an update on a series of initiatives that we have launched to defend our margins in the current market weakness. In the short term, with the impact in 2024, we are working, as already announced on the labor cost with organization optimization, temporary unemployment and on the indirect cost, like travel, rental or services and on technology with a reprioritization of new developments. Actions on both OpEx and CapEx with optimization of the timing without cannibalizing our future growth will have a combined impact of EUR 70 million to EUR 80 million in 2024, as coming from costs and 2/3 temporary. We are on track to execute our actions. But as you know, we have also launched a program called Fit to Win, whose main target is to create a leaner and simpler organization with reduction of redundancies, which will help us to control and reduce fixed costs and to increase profitability from 2025 onwards. To give you some more details, we are working on G&A in order to have an optimal size and structure, sales and services to obtain an effective cost allocation and optimal back-end costs are indeed to have a better leverage on platforms and modularity and finally, IT with the scope to reach business accountability, better use of common platforms and investments review. In summary, in a period of weak markets, we are looking inside ourselves in order to become more efficient and leaner in the future. If I move to the next slide, Slide 15. In parallel to our efficiency programs, we continue to work for our future growth. Our focus on sustainability resulted in June in the certification of our decarbonization targets, part of our ESG plan called Road to 100, by the science-based target initiatives. In addition, we have obtained a number of upgrades on sustainability from bronze to silver medal from EcoVadis, where we are part of the top 16 companies that best address sustainability criteria; from 27 to 39 points from S&P as Global Corporate Sustainability Assessment score, better than the average of industry that is 30 from BBB from MSCI as ESG rating assigned to Ariston Group. Our focus on innovation makes it possible to release new products every quarter. And during quarter 3, we have launched 2 new products. First, a new high-powered pump with propane natural refrigerant. This is a wall product introduced in the German market. Then a new electric storage water heater released for India and Vietnam with a new technology under the brand Ariston. As said, we want to keep and reinforce our solid innovation attitude, even in the current difficult external context. We consider sustainability and innovation key levers of our growth strategy. Now let's move to Slide 17 and speak about guidance. We confirm that 2024 is a transition year. After a 9-month decrease in organic revenue of 14.7%, we see the European heating demand in October improving and some signals of seasonality. Some positive signals are also coming from the approvals of incentives for heat pumps in Germany, which in quarter 3 were 48% plus quarter-on-quarter. But as I said before, the numbers are still small as the market demand is still weak. We continue to see positive signals from our service and parts business, which shows that the renewal market is still accelerating in several maintenance. Summing up all the above. We expect weaknesses also in Q4, despite an easier comparison versus last year. For 2024, we confirm the guidance reset that we communicated last July. We expect 2024 revenues to decrease by minus 12% to minus 15% year-on-year on an organic and like-for-like basis. The guidance, as already mentioned, includes Russia until end of April, both in '23 and in 24 numbers. On the profitability side, we expect an EBIT adjusted margin of circa 6%, already including the efficiency initiatives planned for 2024. New management actions, as previously described, have started, and we will see their impact in the following years. Finally, I repeat what I said during the last call. I want to reassure you 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 are adjusting the timing of the investment to follow the top line evolution and to stay close to our 4% outlook, without cannibalizing our future growth. We confirm that we consider 2024 a bottom year, and we expect some recovery from 2025. In the midterm, I want to reiterate 1 more time, we strongly believe in the fundamentals of our sector and of our business model. The heating business is mainly a replacement business. And on the short-term volatility, once the short-term volatility will be over, we will be back to growth. Buildings are accounting for more than 1/3 of emissions in euro. More sophisticated high efficiency and renewable solution will be needed in the long term to achieve decarbonization targets. 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 solution position us well to serve at best our installers and end users for any solution they need. Moreover, we are active in M&A assessing many opportunities. We are focusing on opportunities that have a strong strategic rationale with our technological portfolio and our geographical footprint. Thank you for your attention. And now I will pass to you, Claudia.

Thank you, Maurizio. We have now completed our presentation, and we are available for your questions. [Operator Instructions] Operator, you can now open the line. Thank you.

[Operator Instructions] The first question is from Vivek Midha of Citi.

So the first of my questions is whether we could -- whether you could please expand on the comments you made around some of those market signals. In particular, one of your peers made a comment that they saw a pickup in order intake in September and October. Did you see this? And following on from that, do you have any indication as to whether that 2025 recovery will be in line with your midterm guidance?

Thank you, Vivek, for the question. And obviously, I don't comment on what competitors are saying and every month, history on the previous year. But as I said, we see -- we have seen both in the number of requests that we received from the government. And as we are just closing October, some signs of recovery and seasonality as well, given the temperature that we are experiencing in Europe. As far as the guidance, as you know, we will give the guidance of 2025 in the next call.

Understood. My second question is just on pricing. So you made some comments at the last earnings call that you see some intensification of price pressure. How is this picture stable? Is it unchanged? Have you seen any broadening of some of the price pressure away from just the older models?

Thank you, Vivek. I mean if we talk about pricing, we obviously monitor what is happening in the market. We see some promotional activities in the different channels. And we are managing the pricing impact already forecasted in our guidance. So no news on this. There is a greater activity on pricing related to product lines that are discontinued due to regulation as of January 2025. For example, split heat pumps with 410a refrigerant. And in addition, we see some players taking temporary tactical actions in some markets mainly on the entry products. And this is happening is -- something that was happening before. Please remember that we play in the upper part of product categories and not in the entry level of products where we see the majority of discounts. So I would say nothing new, nothing that we didn't expect or we didn't plan.

The next question is from Christian Hinderaker of Goldman Sachs.

[indiscernible] My first question is a bit of a follow-up on heat pump pricing. I just want to clarify if you're saying that you have cut prices or offered some discounts yourself. And then just more broadly, whether there's any color you can note in terms of country level differences? And if we're not seeing price discounts at the upper end of the market, do you think there's a trend towards down trading? I know that, for example, reversible mini-split heat pumps have grown in share to more than 25% of the incentive applications in Germany, for instance. So curious on thoughts on down trading.

Thank you, Christian. So I'm not sure I said that we are doing the proportion and say that we are experiencing and we see promotional pricing actions from everyone in the market as we normally see. So obviously, in the different country category configuration, we have to make sure that we manage our pricing in a rational way. And I think you saw as well that our margins in quarter 3 were good. So everything is under control. On reversible mini split. I mean you know that we don't play today in the air-to-air market segment in Germany, if this is the question. Obviously, we are looking into it as we play in other geographies in this kind of sector. And we will continue to look into it. And our main plans and interest in Germany is on the air-to-water market. So it's nothing that is impacting us so far. I'm not sure there is a tendency or a trend of down trend, as you said, in terms of technologies. Remember that the reversible many splits are good only in some kind of geographies where the weather is more indulgent than in Germany than what it's called. You need air-to-water heating system, otherwise will be a little bit problematic. And this is what we continue to see in terms of choice from installers and consumers. Then obviously, we are well positioned. So if the heating pump market is growing less, we have all the other technologies that can serve well what consumers and installers are asking.

Maybe just a quick follow-up. Just broadly and maybe more strategically, we've seen a number of supply agreements between some of the OEMs and utilities, at least, in the U.K. Do you think that these deals pose a risk to the installer relationship mode? And are you interested in going after any such deals?

Yes. I mean we saw and we monitor this type of agreement. But our feeling here is that they are mainly commercial arrangements with the aim to reduce the total cost of ownership for the end users. So these agreements are making heat pumps more affordable. And we don't see the installer relationship affected by that at all.

The next question is from Brijesh Siya of HSBC.

I have two questions. The first one is, Maurizio, on pricing. Sorry to come back again. Just looking at your cost base today and in terms of your raw material and the labor, what you were kind of experiencing at this point in time. So looking into 2025, do you generally make a price announcement at this point in time? Or you wait for first of January to announce? So how does that work? And if you can just give us what's the cost looking like at this point in time, if this current cost persist, whether you need to increase prices to kind of pass that on?

Thank you. I mean the evolution of raw material is interesting in 2024 because as you know, some of our raw materials that we use, so a low this year. And we expect, obviously, this low to stay in 2025. We are doing coverage on those kinds of raw materials. So I think we are well positioned as well for 2025. So if we have to -- I mean, we have a clear picture on 2025. Obviously, there is a mix of material like copper, aluminum and steel, and there are some consumables, raw materials that we buy externally. And I don't think I have to announce today what pricing also for not helping competitors. But we have this well under control. And I wouldn't expect a major cost increase in the next year because as I said, some raw material cost after the adjustment in '23 and post '22 peak saw a decrease and [ on ] -- still, for example, we are well placed and we will continue to be well placed in 2025. So overall, I think the situation is pretty balanced.

Okay. Understood. And the second one is about your midterm guidance of having adjusted EBIT margin of about 10%. What does that require? Does that require your volume going back to 2022 level? Or it requires there probably half of that recovery with your cost efficiency measures you kind of reach there? So what does that require to hit that 10% margin?

Yes. I mean as you saw in the past, we reached that level of margin. Obviously, this year, with the volume impact we have, the margins are hampered. I think there will be sequential improvement in the next years to go back to the level that we experienced before. This will require, obviously, an acceleration of growth versus this year, which is as I said, the bottom of a transition year, together with work that we started and we will continue to do on our costs, both in terms of organization but in terms as well of productivity that we can deliver to continue to make sure that we are competitive in the market. So that's the journey. I mean obviously, we are having a hit in 2024 due to the scale I think even with the results of this quarter, we proved to manage well a profitability in a super tough environment with top line down 13%, 14%. And we will continue to do this in the next years and go back to the profitability level that we had historically before the 2024 bottom.

Understood. Can you just split that 14% into what was the heat pump volume down? I guess you did that in Q2. Would you have that number for Q3, please?

I don't think we gave the split of the reduction of the heating [indiscernible] pump. And again, let me quote to the market. I mean the market or the [ heatingless ] pump from the public data that you know better than me, for sure, you see that these kind of technologies are suffering more than the fossil technologies and you know as well that in terms of revenue, we are more on fossil technology than renewable technology. So we said that 1/3, circa 30% of our revenue is on fossil technology and 20% are renewables. So if you do the math, I think you understand well, maybe we are better positioned than others being able to provide a portfolio that is complete and is not completely fossil or completely renewables.

The next question is from Alessandro Cecchini of Equita.

The first one actually is on the cost actions that you executed in the third quarter. If you can elaborate a little bit more, I mean if given seasonality, we need to expect a sequential. So fourth quarter versus third quarter, increase in your cost initiatives in order to reach the EUR 35 million to EUR 40 million of total synergies. So just to understand this topic. And of course, still on cost initiatives, more structural. So you're making some calculation that you need then to improve the structure and the cost to have more than EUR 40 million, EUR 50 million of structural cost improvement starting from 2025 in order to have a step up in margins because we needed to account that 2/3 of this EUR 35 million, EUR 40 million are -- I mean temporary, as I said. So if you can elaborate a little bit more on this, if this calculation, this amount is something that you are achieving roughly speaking? This is my first question.

Thank you, Alessandro. So as you said and as I explained before, for this year, we have a target of EUR 70 million, EUR 80 million in terms of efficiencies. Half of this will come from OpEx. And in the 9 months, we have already achieved circa 70% of our 2024 OpEx efficiency targets. So I think we are well positioned to continue to see an improvement in 2024 quarter 4. This is obviously helping this year. Next year, we will embark in actions that are a bit of a carryover of what we did this year and some other additional actions that will be new and starting to impact '25, '26, '27. I think it will be better to give you the split between CapEx and OpEx on those actions when we will talk about the guidance for 2025. But as I said before, it's not something that we did on in '24 and then we stop. It's something that we will continue to do as a disciplined company that will have to continue to improve effectiveness and reduce cost to be efficient.

Okay. My second question is that about market share in the European market. If you can elaborate a little bit more on -- I mean your market share in the heat pump, but also on -- I mean, on average, of course. But also in other key category like gas condensing boilers and out water, just to have a picture in the third quarter.

Yes. Alessandro, we don't disclaim all this, but let me stay high level and give you some messages. Let me start with water heating, where obviously, our position is strong. We are a leader in Europe and in other fields, some key geographies, and we are doing well in increasing our market share. In heating as you know, the situation is different market by market. And I think overall, we are maintaining our share of market in a tough environment, which is another good news. So overall, we are doing better than the market, if I combine the different technologies that we sell, meaning heating, water heating and ventilation.

The next question is from Alessandro Tortora, Mediobanca.

So I will use my 2 questions, okay. The first one, if you can come back a little bit on Germany on the slide you mentioned heating market. So if you take basically what the [ local association ] is forecasting for the year-end. They are talking about, let's say, 740,000, 750,000 units to be basically sold this year. The question is what basically is a reasonable path, okay, we can see next year by technology, I would say, or for sure for gas boiler but also for deep pump considering what you mentioned and for improvement, okay, on the incentive approval for it? So basically, I would say, better exit of speed for the heat pumps? No numbers, okay, but just a qualitative standpoint, if you see, I don't know, basically, it's coming back to growth next year, and maybe, I don't know, still flattish or the other improvement on [indiscernible].

Thank you, Alessandro. I mean, as you know, the association for this year is giving a number, let's say, that is around 700,000. Now as I said before during my presentation, and if you look at the slide that we present, you see that, I mean in 2024 is a big down even versus the historical numbers of the German market, which, as I explained before, was always growing steadily. I think this will be the case starting from next year that the market will go back to the usual replacement rate that we saw in the last 10, 15 years. And obviously, now it's very difficult to forecast how much will heat pump. I mean think about the technologies and the equipment that are there in terms of heating while they will break. And I think there might be some anticipated in '23 and some stocking and destocking in '23 and '24. So as of next year, we believe the heating market will go back to the average growth that we had before in terms of volume. If heating pumps, as we think we'll do a little bit better. This will help the development of the market in the next few years. So this is what we believe will happen in Germany.

Okay. Okay. And the second question, sorry, if we can also come back a little, let's say, to the target to achieve a slight improvement by end in terms of net debt. First of all, if you can tell us the impact of the tax payment phasing okay, you mentioned. And secondly, on the working capital. So basically, if we take the 9 months level, the 17.5%, which kind of, say, ratio, okay, you see by year end. And sorry, tell me, if you can also confirm which kind of, let's say, a target you have in terms of working capital on sales ratio.

Maybe I'll pass to Riccardo, so he can answer to that.

Thank you for the questions, Alessandro. Well, I'll try to address all of them. When it comes to tax, yes, we made mention on the explanation on the first 9 months cash flow that we have timing favorability, which is true. And in Q4, the tax cash out will be higher than Q4 prior year. All in all, the combined 12 months to bring some favorability to this year. So there are still some moving parts. So let's see how things will evolve but that's a combination of the expected results, taxable income of 2024 compared to prior year, which I think it's quite easy to understand. Yes, net debt then, we'll see other factors come in like the cash flow generation in the last quarter, in the fourth quarter, which we do expect to be positive as anticipated. And to answer your question on net working capital, we are aiming to improve it. Now it's too early to tell you a given number compared to the 17.3% we closed the third quarter. We have all the levers to pull to make sure that we will be successful by the end of the year. If we look back at the history, you know that we have been absolutely extremely focused on keeping this ratio extremely low. I mean that's -- the 2024 has been quite challenging because of volume softness, but I would call it sort of success, the 17.3% of the end of September, given the current circumstances of revenue softness.

Okay. I'm sorry, okay, understood, let's say, for the year-end. And can you remind me, let's say, medium-term expectation, if it is still realistic to think about, let's say, low teens, okay, ratio for the working capital sales ratio?

Yes, I think, I mean, Alessandro, we spoke in the past about this, probably an achievable target for us will be 12%, 13%. This is what we always said and we will go for it than in the past. We were also lower compared to this. But I think, I mean if we move in the next in the following quarters and years '12, it's already a good achievement.

The next question is from Axel Stasse of Morgan Stanley.

I have 2, if I may. The first one is about the excess inventory, can you please give us an update on this? Have you received some feedback from the wholesalers? Is it improving in Germany, for example? Or should we expect further excess inventory in Q1 next year. That's my first question.

Yes. I mean, obviously, the inventory is improving. The destocking is ongoing, and the heating [ heat ] pump demand is improving, and we believe that this could be in a good position by year-end. I always say that obviously, I'm talking about channel stock. I'm not talking about the stock that we have in our customers because our position is better than that so we see other competitors that are having more challenges. So that's an overall situation improving. We are in a good position, while some others will have still to digest some stock. In Italy, the destocking is almost finished and is more advanced versus Germany. So that's where we stand.

1 Okay. Very interesting. Good to know. Now my second question was about the [ refrigerant ] products that you have mentioned during the presentation. Actually, one of your competitors today announced as well the production of these kind of products in Germany. And they're also mentioning that they're sell the high-end premium products in heat pump. So does this mean in your view that we could see high competition in terms of 290, sorry, heat pump product going into Germany next year and as a result, potentially some pricing pressure? Or not at all?

I mean as you know, we -- thanks to work, we were one of the first introducing this, but others came later. So it's not something that you can insulate forever. There were already and there are competitors with this kind of refrigerant in the market. So I think everyone will do whatever they need to do to launch this and will play on the same level as we play on the same level in other technologies So the best for us is to make sure that our quality is better than others. I'm not sure if you remember but I mean, we had last year a very good rating in terms of heating and pumping in Germany. We were the second best and I'm sure that we will continue to be a better quality than other competitors' launches. So we are well positioned. We have the first mover advantage few months back or more than one year back, and now the other will come but I mean we are confident on our strength.

The next question is from Michele Baldelli of BNP Paribas.

I have 2 questions. The first one relates to the sales decline. Can you provide us a little bit of feeling of how much of this sales decline is driven by the reduction of the stock to your clients that are using their stocks? Second question...

Michele, Michele, sorry, the line was a bit -- yes, sorry, the line was a bit difficult. So I'm not sure we got your question. Can you repeat the first one, sorry.

So coming back to the stocking argument of your clients. My question was about how much of the sales decline that you had in the first 9 months, is related to the reduction of the level of the stock of your clients? So just to have a little bit of an idea if you have this kind of bids. The second question is relating to your own investor, so your level of inventory today or at the end of this year, let's say, will be at a normalized level. So basically, you will not have to destock anymore? Or do you see still at the end of this year, a little bit of still higher-than-normal inventory level and in case in which product categories?

Yes. Let me start with the second. So as I said before, our inventory level is good. So we don't have an issue in terms of inventory level in the market. So we are fine. And I bridge it to your first question. I mean the inventory level of the market as you know, wholesaler are keeping more than one brand. And if they have a level of stock that was high obviously, they wouldn't buy any heating in pump, unless there is a special request on a special power or kind of technology. So our sellout numbers from wholesaler, it is better than selling numbers because they have to digest to the overall stock. And I think this is the key message that I wanted to give you. [indiscernible] been more acute in H1 and improving in Q3 and continue to improve in October as well. So we are confident that the sellout level is not the level of market decrease. I mean we are talking mainly about heating heat pumps so that's the Q1, especially in Germany and France, which is creating issue because after a strong 22%, the market rebounced in Italy, as I said, both for us and the channel, the inventory level is good.

So relating to this, you prefer not to comment about a possible magnitude like the difference between sell-in and sell-out is something like mid-single digit or -- so you don't give any details about it.

No, I don't talk because it's not so easy to have the -- a clear market view from the wholesalers. Some are sharing number. I mean we don't have like in my former company, [ Nielsen ], or having a clear selling sell-out story. So that is a little bit more difficult in our channel. So I'm trying to give -- I will give you a wrong number, so I wouldn't feel confident to give you a number, which could be or too positive or too negative for us because I could easily trust the answer. What I'm telling you that the sell-out is stronger than the sell-in for the stock level.

Okay. Perfect. And then because probably my second question was [indiscernible] in the sense that you were referring to the market, the level of inventory of your products in the market. What I was interested about is about your own level of inventory on your balance sheet. So basically, if you expect the level of inventory in your balance sheet and therefore on your new net working capital, to get to a normalized level by the end of the year? Or you will have still have some adjustment from production to be made in early 2025.

Maybe Riccardo can help me on this. But when you have free cash flow improving, it means that we are reducing a lot of the stock that we have internally and improving our ability to manage really what we produce versus what we sell. As I said at the beginning of this year, I mean the deceleration was sudden in Italy last year and then in Germany this year. So we have to digest a lot of production and raw material stock that we had because we moved from a period of very high demand and low supply to the opposite, very low demand and from our side, good supply. So I think the work that we did on stock is remarkable. I think we are well positioned for next year. And as we expect the market to recover, this will help us to recover all the indicators, including the net working capital that we spoke about before.

The next question is from Isacco Brambilla, Mediobanca.

Quick question on my side. This is a follow-up on your financial structure. Could you remind us if you have any specific covenant in your financing lines. And also, if you can give us a sense of the average cost of financing of the fixed rate or hedged portion of your debt?

Yes. Thanks for the question, Isacco. To answer your first question, no, we don't have any financial covenant, which I call it as a success of this company that has achieved over the course of the years. Cost of debt, we are currently financing medium long-term debt at around 4%. However, you have to take into consideration the cost of medium, long-term debt is the most relevant component of our financing costs, but not the only one. For instance, we were speaking about the EUR 900 million additional. So we have, I mean fees such as revolving credit facilities commitment that we had to take care of. So those are the 2 answers where I hope I've been clear. Thank you.

Gentlemen, I'll turn the call back to you for any closing remarks.

Thank you. Thank you all for your participation to our call. As a reminder, the Investor Relations team is available, if you have further questions. Good afternoon, and I speak with you in the next call.