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Geberit AG
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Good morning. I am the Arkadin operator for this conference. Welcome to the Geberit's Conference Call on the First Quarter Results 2019. [Operator Instructions] And the conference is being recorded. [Operator Instructions] This call must not be recorded for publication or broadcast. At this time, I would like to turn the conference over to Mr. Christian Buhl, CEO; accompanied by Mr. Roland Iff, CFO; and Mr. Roman Sidler, Head of Corporate Communications and Investor Relations. Please go ahead, sir.
Thank you for the introduction. Good morning, ladies and gentlemen, and welcome to our conference call. Geberit had a successful start into the year 2019, with a good sales growth and a strong improvement of the profitability in the first quarter 2019. We generated a sales growth of 0.9% to CHF 830 million. Sales in local currencies grew by 3.6%. The operating cash flow grew by 6.8% to CHF 262 million, corresponding to an EBITDA margin of 31.6% and an increase of 180 basis points. Net income increased adjusted by 4.9% to CHF 192 million, corresponding to net income margin of 23.1%, which is 90 basis points higher than in the previous year. Earnings per share increased adjusted by 6.6% and reached CHF 5.33. Let me now first comment on the sales development and remind you that it is not our policy to communicate the Q1 results our sales figures by individual markets. I will comment on the sales growth rates in local currency. Growth sales increased by 3.6% in the first quarter of 2019, despite a strong previous year quarter. Sales in Europe increased by 3.5%, with growth in all countries and subregions, except for Italy and France. In Far East/Pacific, sales were up by 8.6%, with a strong double-digit growth rate in China. Similarly, in Africa region, sales grew by 4.8%, with a mixed picture in the region. And in North America, sales grew by 2.8%. I will now comment on the sales development per product area, again in local currency. The growth area of Installations and Flushing Systems grew by 5%, with strong growth in Installation Systems and Flushing Systems. Piping Systems grew by 7.5%, with strong growth in both product lines, supply piping and drainage piping systems. Bathroom Systems sales declined by 1.6%, driven by a weak market environment in Nordic, a strong comparison from strong sales for shower toilets in the previous year's quarter and weak sales from Keramag due to the brand phase out in the second quarter this year. Let me now update you on the operating and financial results. Geberit's EBITDA increased by 6.8% and reached CHF 262 million. The EBITDA margin reached 31.6%, an increase of 180 basis points versus the first quarter of the previous year, 50 basis points of this improvement were driven by the new accounting standard, IFRS 16. The remaining operational margin improvement of 130 basis points were driven by 3 factors: firstly, lower raw material prices and increased sales price; secondly, operational leverage from volume growth and a positive product mix, driven by upselling of our product portfolio; and thirdly, efficiency improvements and strong cost control and cost discipline. Tariff-related increases in personnel expenses had a negative impact, while currency fluctuations did not have any impact on the operating margins due to our nearly perfect natural currency hedge. The operating profit amounted to CHF 227 million, which is an increase of 5.8% compared to the adjusted previous year level. The EBITDA -- the EBIT margin reached 27.4%, 130 basis points above adjusted Q1 2018. Net income increased by 4.9% to CHF 192 million, and earnings per share grew slightly disproportionally by 6.6% to CHF 5.33 versus the adjusted previous year's numbers. Free cash flow increased significantly by 130% due to strong operating performance and a positive net working capital development. We further continued our share buyback program starting in 2017 and repurchased around 50,000 shares in the first quarter. In total, we have repurchased, as part of the running share buyback program, around 697,000 shares for end of Q1 2019. In order to refinance the CHF 150 million bond, which became due in April this year and due to the partially Eurobond tender executed in Q4 last year, we recently issued 2 Swiss franc bonds of CHF 125 million each, with maturities in 2024 and 2028. Let me now comment on the market outlook. The various market outlook for the construction sector in 2019 have been presented and commented on with the release of our full year results 2018 in March. Since then our view has not changed. In Europe, we expect overall a favorable but mixed construction market environment, meanwhile individual markets will continue to develop differently. We remain confident about the construction demand in Germany, although the limited qualified installation capacity might remain a problem. In Switzerland, we expect a slightly declining market driven by a softer residential segment. In the Nordic region, we expect, at best, a stagnating market, driven by a positive outlook for Denmark, a stagnating environment in Norway and Finland and a decline in Sweden. In Italy, we are more cautious due to the political and economic uncertainties. We foresee a stagnating market in France as the indicators for the construction sector have weakened. We expect, overall, a decline in market environment in the U.K., driven by the nonresidential sector due to the Brexit uncertainties. In Austria, we expect a positive construction market with a slight growth. We are positive for Benelux, although the strong construction growth in the Netherlands since 2015 led to shortages of qualified installer capacity. The outlook for the Eastern European market remains mixed, with a positive outlook for markets like Poland. And finally in Spain, we expect an ongoing recovery of the building construction sector. In North America, we foresee a moderate improvement of the institutional construction market, while both most relevant segments where different, the health care and the education sector should contribute to growth. In Asia-Pacific, we see a mixed picture across the region. We expect a moderate increase of the residential construction market in China. We are positive for India and expect a declining building construction market in Australia. Let me finalize our market outlook 2019 with the Middle East and Africa region. We are cautious for the goals due to the credit issues and expect the stagnating building construction environment in South Africa, and we remain cautious and see a mixed picture for Northern Africa and the Middle East region. And now a few words about the raw materials price environment. We expect average raw material prices in Q2 of 2019 to be above Q1 2019, due to increased prices for commodity plastics and spot prices for several industrial metals since the beginning of the year. And finally, let me briefly update you on the Geberit outlook. We expect for full year total CapEx of CHF 180 million. An important topic this year is to phase out of the Keramag brand and the replacement by the Geberit brand in the second quarter. As already announced, this will lead to additional marketing costs of CHF 10 million, which will be entirely spent during the remaining 3 quarters of the year. Furthermore, the negative impact from wage inflation will increase as of the second quarter since several tariff increases will be affected only as of Q2 this year. As usual, we will provide a quantitative sales and EBITDA margin guidance for 2019 with our half year results in August. This is the end of our introduction. We're ready to answer your questions.
[Operator Instructions] The first question received is from Andre Kukhnin, Credit Suisse.
I'll just go one at a time. On raw materials first, please. The guidance for Q2. In Q1, you had a 90 basis-point improvement in raw materials to sales year-on-year. Should we think about Q2 as kind of reversing that and therefore, that 130 basis points component on the bridge becoming kind of smaller or more towards neutral? I'm just trying to get some kind of a quantification of this. And I wanted to check if what we discussed at the full year results a couple of months ago about H1 being overall small headwind and H2 being overall potentially small tailwind on raw materials for this year still holds? Or is that changed for you?
No. As I said in our introduction, we expect raw materials prices to go up in Q2 versus Q1 2019. Of course, we do not know how much that increase will be, therefore it's difficult to answer your question. But most probably, the raw material price level in Q2 this year will still be below Q2 last year. So overall, most probably, we expect raw material prices in the first half of the year this year below first half of last year. Regarding the second half of the year, I don't want to speculate because the volatility and uncertainty around raw materials prices is high, as you have already seen in the first quarter. Therefore, I don't want to speculate about the second half of the year.
Okay. That's helpful. And can I just check on these extra costs for Keramag branding? You said the whole of CHF 10 million will be spent in the rest of the year. But in Q1, we had a couple of trade fairs and 1 particularly sizable one. So I just wanted to get an idea of this kind of extra cost. Would that be still a step up in Q2 because of the, say, whatever it will be, CHF 3 million, CHF 4 million, maybe up to CHF 5 million spend in Q2 on Keramag rebranding? Or this is kind of the run rate you're already running at, given bond, muni and ISH costs in Q1?
We have slightly higher marketing cost in first quarter, driven by ISH, it's true. But the CHF 10 million, which we plan to spend for the branch, which will only be spent as of the second quarter. So the entire CHF 10 million will be spent during the next 3 quarters. There was no expense so far in the first quarter for the switch of the brand.
Okay. And ISH cost is kind of not comparable to the quarterly run rate of Keramag rebrand. It's much lower. Is that right?
Yes. Lower.
All right. Great. And then just one more interesting stuff. We saw some products at ISH that I think some of your customers are very excited about. So I just wanted to get an update on how that 1 month has gone since you launched them.And whether the customer take-up is in line or ahead of your expectations, and whether we can expect an impact from that already in Q2 and onwards. Or is it still kind of more of a gradual ramp-up?
We had a positive feedback on the new product, which we introduced as of April 1, especially on our main fair at the ISH. So the feedback of customers were very positive. But of course, we do not see yet any impact in the figures. As you know, that takes time. So there is no quantitative impact so far.
And last one. On IFRS 16 impact, could you give us an idea of it for the full year? That's going to run at that sort of 50 bps as in Q1? Or will it change?
Yes. We expect that it will remain at that run rate. We charge CHF 4.5 million -- or CHF 4.5 million were switched from above to below the EBITDA line. And on the balance sheet, it was CHF 71 million each on the investments and on the liabilities, which we added.
The next question received is from Matthew Spurr from Exane Paribas.
It's Matt Spurr from Exane BNP Paribas. Can I ask about the personnel expenses and tariffs? So your comment in the presentation and the bridge points to tariffs is a headwind year-on-year. I don't square that with the key figures release, where it looks like personnel expenses are basically flat, despite higher sales. Can you just run us through that? And then what am I missing, please?
There is a currency effect on personnel costs as well, which you have to take into account. That is the main reason.
Okay. And then on the mix and well, volume and mix, which you put together. The -- so what -- the main mixed effect, was that due to upselling? Or was there an -- can you quantify the mix on the margin from, say, the different segments have had quite a divergence. So you've got Piping with sort of your middle margin business growing the most then Installation and then Bathroom Systems declining. So can you say what the segmental mix did to the margin?
No. The positive effect -- product positive -- the positive effect from product mix is mainly coming from upselling and not the different growth rates of the segments. It's upselling within the segments.
All right. And then last one was on marketing cost. So excluding the Geberit ONE and the ISH, as the marketing cost were down year-on-year. Can you just give us a bit color around why that was?
Sorry. Can you repeat the question?
So you talked about marketing cost and there's a couple of sort of one-off-ish things on there. What -- ISH, which comes every 2 years and then you have the -- well, you didn't have any Geberit ONE launch cost this quarter, even though perhaps you thought you would. So underlying marketing spend, I think you said it was down year-on-year or at least in -- until the percent of sales. Can you just give us some more color around why your marketing spend was perhaps reduced?
The marketing expense was not reduced in Q1. The -- we had some additional cost for these fairs. But even if we exclude that, there was no significant change compared to the previous year. And then in the next 3 quarters, marketing cost will be higher due to this cost we need for the Swiss branch which project and the missing trade show cost from Q1 will not compensate for that.
Next question received is from Daniela Costa, Goldman Sachs.
Just 2 quick things. Can you comment about in terms of pricing actions going forward, I guess if you're going -- if you did your normal April 1 and if there's anything else sort of planned? And then just a little bit color, if you can, regarding the shortages in terms of plumber labor, if you have seen any signs of easing there? And particularly in Germany, but I guess geographically across Europe, how is that situation developing?
Question number one. Our pricing this year, we did normal price increase around 1% as of second quarter, and we do not foresee any specific extraordinary pricing actions. Question number 2 about shortages of plumbers, mainly in Germany, nothing has changed since our full year publication 6 weeks ago. It's still the same situation. Also the latest statistics is still an order backlog at least -- almost of 12.0 weeks. So no structural fundamental changes since the full year presentation, mid-March.
Next question received is from Martin Flueckiger, Kepler Cheuvreux.
I'll go one at a time as well. I've heard your elaborations on the organic declines for Bathroom Systems. Could you just remind us what the comps look like for the shower toilets going forward, i.e., Q2 up to Q4? That will be helpful.
We had a strong first half of the year last year for shower toilets. Of course, we have dedicated marketing initiatives. So with strong growth in the first half of the year 2018 for shower toilets and the lower growth rate in the second half of the year last year.
Okay. That's helpful. Then the -- on the EBITDA margin bridge, could you talk a little bit or quantify preferably the impact from the efficiency gains that you had cited in your press release?
No. I can't quantify the total effects of deficiency gains. As you know, we have been running a top-down program, that is a bottom-up-driven approach, therefore, I can't quantify. But it had a substantial impact, of course, on our cost structure. Besides the efficiency improvement program and project, which are running in many plants, it's also very much driven by our cost control and cost discipline, which is also having a positive impact on the margin and the bridge you're referring to.
Okay. And then just a clarification question. On the order -- installer order books that you just mentioned, the number of 12.0 weeks in Germany. Is that the Spring survey? Or is that still the Winter survey?
Still the Winter survey. We do not have yet actual figures.
Okay. And then my final question. Given the high EBITDA margin level in Q1 and also the IFRS 16 impact, 50 bps, is Geberit thinking about adjusting its target EBITDA margin range? Because 31.6% is quite a different league compared to 28%, 29%?
First of all, keep in mind that, there is the seasonal effect as well. Q4 EBITDA margin is always lower. So it's also a seasonal effect for full year. And we are not considering to adjust our EBITDA margin guidance 28% to 30% due to the first quarter results. Again, just no.
Next question received is from Martin Husler, Zurcher Kantonalbank.
I have 2 questions. First of all, several construction companies have pointed to a positive leverage effect in the first quarter. And I was just thinking what's your thoughts on that cap rate. Also profit from positive quarter?
That is always very difficult to chops, to just be honest. We haven't seen -- if I talk to the market to customer fundamental, systematic positive effect of the rate, to be honest. Difficult.
And working days is also more or less no impact, right?
No. There was no working day back in the first quarter. In the second quarter, we expect long working day less in the second quarter. But no working day effect in the first quarter.
Okay. And then just maybe 1 question to U.K. where you said the because of Brexit, you expect a slight decline in the first quarter. It seems like there were still some growth there. Do you think Brexit even had a positive impact because of inventory buildup?
Yes. We have seen strong sales in February, especially March in the U.K., Brexit orders, I think, it was wholesale wanted to build up their inventory. On the other side, we are now seeing very weak sales in April in the U.K., so that is kind of compensating now in April. But we have seen a positive effect in the first quarter.
The next question is from Charlie [ Furnbach ], HWP [indiscernible].
We see this negative growth in Bathroom Systems. And if I remember correctly, also last year, this -- the reason was on personnel. The development. You see there that you can come out of this trend soon?
As I said, the developing in the first quarter this year was relatively specific and not comparable to the second half of last year. And the first quarter was driven in IAS. First by the marketing environment in Nordics, which was difficult, especially in Sweden, where we have seen a declining market. Secondly, we have tough comps due to the shower toilet business. As I mentioned before, we had a strong growth of shower toilets in the first half of last year due to dedicated marketing activities. And thirdly, the phaseout of the Keramag brand in the second quarter had an impact on the sales, especially in March, which were weak because wholesale didn't order any more Keramag-branded products, of course, which was ahead.
The next question received is from Bernd Pomrehn from Bank of Vontobel.
Two questions left please. You mentioned some phaseout effect for Keramag, some pre-buying effects in the U.K. Were there any further prebuying or phasing effects?
No. These were the main, the 2 most important phasing effects in first quarter.
Okay. Excellent. And then 1 question regarding your tax rate, please. As you know, the road on the corporate tax reform in Switzerland will be held this month, currently supported rising. So I would like to know whether you ran a simulation on the impact on your Swiss tax reform, should the vote be positive. And if so, what would be the impact on your corporate tax rate in the mid and long term versus an unchanged tax regime?
Yes. They -- what we are voting on now on the 19th of May, is only the first step of this implementation of the new tax law for corporates. There will be a second step then on the Canton level later in the year. So if the law as it is proposed now by the Canton of St. Gallen, we are paying the taxes which is the implementation of what we will vote for now in the 19th of May. If this is accepted, if this is adopted, our tax rate probably would go -- will go up to around 16%. But that's not sure yet because there could also be a popular vote then on the implementation strategy of the Canton we are paying taxes in -- later in the year. So really what's coming out, we only will know by the end of the year. But we're sure, we will pay more taxes in either scenario.
The next question we received is from Manish Beria from the SocGen.
Yes. I have 3 questions. The first is on the growth rate, I mean. So Geberit has been doing something like 3% to 4% organic revenue growth from last many years. So I wanted to know, is there anything that we can do to significantly take the growth trajectory to a higher level? So will it need like a favorable market environment? Or your recent innovation probably will provide the necessary base? Or should you focus on more underpenetrated market, like emerging market or to drive the growth? Or should we look at maybe the inorganic growth route to take the higher level of revenues? So this the first question. The second one is basically like if I see, I mean, the raw material cost inflation, we are already talking about the first half 2019 to be lower than the first half 2018. So if I look at the full year 2018, raw materials price increase was something like 2.7%. So should we think, I mean, in the full year 2019, probably the raw material inflation would be lower than last year? Is the inflation rate will be lower than the last year? The third one is on like you're already disclosing that the base of shower toilet is impacting the performance of Bathroom Systems. So can you tell us what is this shower toilet contribution to these divisions?
So the first question about the overall growth aspiration, the growth aspiration as you know is 4% to 6%. It's our midterm target. And that is basically driven by organic growth of core space on a normal market environment. The solid growth of the market. And secondly, the 2 main levers: one, penetrates further technologies in the markets, also in European expansion markets; and secondly, penetrate all the markets we do in these solutions. We do not consider any substantial part from inorganic growth in that midterm growth target. Question number 2 about raw material environment for the full year. As I said before, I don't want to speculate about the raw material prices in the second half of the year. There's a high uncertainty and volatility in the raw material markets. The only thing I can say is that we expect higher raw material prices in the second quarter of this year, but still below the second quarter of last year. We will see what the 2nd half of the year will bring. And question number 3, I'm sorry, I can't disclose the share of shower toilet business within Bathroom business because we are not disclosing these figures.
And the next question received is from Christian Arnold from MainFirst.
Two questions from my side. On the one side, a large real estate consultant recently stated that building applications for rental flats in the Swiss urban centers increased by 59% at the beginning of the year. You, on the other hand, are still quite cautious on Switzerland. Maybe you could elaborate a little bit on that? And the second question would be on the strong development in piping. Assuming the piping is more exposed to new construction, where we see a kind of a normalization, this came quite as a surprise. And could you give us here a little bit more color? Any particular strong performance in market or products?
Question number one about the residential market in Switzerland. We are a bit cautious for the residential markets, mainly driven by the fundamental sectors, which is immigration, which was driving the market heavily over the last couple of years, which came in more or less to a halt and a high -- still high level, but it's not growing anymore. And secondly, the vacancy rate of empty apartments in Switzerland has constantly increased and it is on a historically high level, that is the reason why we're little bit more cautious for the residential sector in Switzerland. About the strong performance in piping, it is very much driven by new product introductions, especially in drainage pipes. We introduced the new noise-regulating drainage piping systems 3, 4 years ago in Europe. And that is doing very well across the markets. So it's more a product-related growth and not that much a geographical-related growth. But we also introduced new product in the Piping Systems, which are doing also very well.
The next question we received is from Fabian Haecki from UBS.
Yes. I'll state a question on raw material price impact. Could you say -- share with us what was the biggest positive factor into raw materials for metals or other plastics? And when I look at the polyethylene pricing, that's actually -- that was down in September, but has not really recovered recently. So can you share with your view on metals and plastics and the [ blocks ]?
So the lower raw material price environment in first quarter was driven by both -- by plastics and also metals. You have seen both price areas incoming and come down. And regarding the plastics, we expect basic mainly the commodity prices to rise again in the second quarter. Also, for example, for polyethylene. And for the more technical plastics, we do not expect the same effect. It's mainly the commodity plastics, which are going up currently.
And just to clarify, when you say you expect these raw material price increases, is the impact you feel on your P&L? Or is there also a delay then when you expect them to increase and not [indiscernible]?
That is what I expect and what we are paying on our invoices for raw materials, that's what I'm talking about. Our price increased.
Okay. Okay. That's clear. And then just a question on wage inflation. Is there any remaining kind of upward risk to tariffs or negotiations on the wages? Or is this kind of done with the level in Q1?
No. It's not the risk in a sense that there is uncertainty, it's just the fact that some of the countries the tariffs are increased, not at the beginning of the year, but as of the second quarter of the year. For example in Switzerland, we increased salaries as of April 1. So it's clear that it will go up to tariffs a little bit more. Overall, we still expect, for the entire year, around 3% wage inflation.
Okay. And then maybe just also on Swiss market. Do you feel any negative base effect from the prebuying impact you had last year? Can you elaborate a bit on the market, how it stayed in Q1?
That is true. We had a little bit of lower growth rate in Switzerland in the first quarter. It's still positive, but lower growth rate compared to the first quarter last year because of the strong base effect from the prebuying in Switzerland. You're right.
That's the same growth. So, okay.
Yes.
The next question we received is from Andre Kukhnin.
I just wanted to check on the Keramag impact in Germany in Q1. Can you give us an idea of kind of significance of that in size? And whether that -- whether you see that now coming back now that you've launched it under a new brand?
I can't quantify the impact, but we have seen now at the beginning of the April some signs that it's going up again. And we have seen the signs, but it's a little bit too early to quantify the impact because the brand phaseout is not the phaseout that we switch at one day, it will be during entire second quarter. So it will last a couple of weeks or more or less and up to months until the complete switch is implemented. Therefore, I can't yet quantify the full impact.
Okay. But would you say it's bigger than the U.K. pre no Brexit pre-buy?
Since I can't exactly quantify Brexit. It's very -- to compare 2 figures, which I can't quantify. So the answer is no. I can't.
Okay. Got it. Just on the labor increases, I think, you've given the full year number already in the previous question. But the timing of tariff going up in 1st of April, I presume is annual. So in terms of step up in Q1 versus Q2 in terms of sales, should have been material? Is there actually kind of increase in the tariff step up this year compared to how much you were going up last year or not?
Yes. In Switzerland, we have a stronger wage inflation this year compared to last year.
All right. Got it. And any mode of magnitude?
We increased salaries in Switzerland 1.5%. We have increase as of April 1st this year, around 1.5%.
Great. And last one, just much broader question. Just thinking on kind of the visits to those 2 trade fairs and seeing a lot of traditional ceramics players launching or having launched, now launching kind of second derivatives or some kind of Installation Systems offerings and often in response to you buying Sanitec a few years back. Does that concern you? Or maybe asking another way, kind of in terms of list of concerns or worries that you have on your strategic list, where is that development in terms of the order priority?
I would not agree that we have seen a structural change in competition in a sense that ceramic players have start to launch products behind the wall. That has happened already a couple of years ago. So we haven't, in my own point of view, it's not a structural new observation. It hasn't changed.
Yes. I agree. That was 2 years ago when some of them came out. But I guess they're now kind of launching reiterations of it or becoming a bit more mature in it. I guess am I right to read your answer is that this is something that started happening already 2 years ago? And at the moment you're not seeing any intensification on that investing pressure?
You're right. It's more in 2 years that we have seen ceramic players providing also ceramic systems. I think more even than 2 years, even before we acquired Sanitec this to those players. So that has not a new quality also but the new quantitative dimension or new quality of competition. We don't see that structural change.
We received a follow-up question from Christian Arnold from MainFirst.
Yes. A follow up on the wage inflation. You were saying that in Switzerland, wage inflation only to took place in Q2. What about Germany? Have you already increased here the salaries at the beginning of the year? And as a whole, how much has already been done in Q1? How much will follow in Q2?
I can't give you an exact answer. The reason is we are not in 1 tariff association in Germany. We are in several different tariff organizations or associations. So most of them have been increased as of January 1, but not all of them. We therefore also can't quantify exactly and how much we have already seen in Germany in the first quarter. But I would assume it's the majority.
Okay. And on group level, maybe, I mean, for other countries then assuming having the largest headcount in Germany. So that means that more than half has already been done in Q1, right?
The tariff increase, which we expect a wage inflation, overall 3% the entire year has been below 3% in the first quarter on a group level.
[Operator Instructions]
Okay. It seems there are no further questions, thank you for your interest and participation. We wish you all have a great day. Goodbye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.