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Geberit AG
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Good morning. I'm the Arkadin operator for this conference. Welcome to the Geberit conference call on the third quarter results 2020. [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 on our Q3 results. Let me start with a preliminary remark. Our Q3 results are in a contradiction to the most recent development in Europe over the last couple of days due to the fast developing second wave. So please keep in mind we talk about Q3 results with this conference call. I will start with the third quarter figures and then comment on our 9-month development. Geberit delivered very good results in the third quarter with a very strong top line growth and an excellent profitability driven by catch-up effect of the drop down in the second quarter. Net sales grew by 5.3% to CHF 794 million. In local currencies, net sales grew by 8.5%. Almost all countries benefited from catch-up and stock rebuilding effects due to the lockdown or other COVID-19 induced market restrictions during the second quarter. The degree of the catch up effects varies country by company driven by the severity and the length of the lockdown and the COVID-19 related business restrictions. Double-digit growth rates in local currencies were achieved in Italy with a plus of 24%; in Austria, with plus 13%; in Germany, with plus 12%; in France, with 11%. Single-digit growth rates were recorded in Eastern Europe with a plus 8%; Switzerland and Iberia, with plus 7%; Nordic and America, with plus 6%; and the U.K., with a plus of 3%. The only European region with the sales decline in Q3 was Benelux with minus 3% due to a very strong comparable from the previous year. Sales in Middle East Africa declined by minus 4%, and in Far East Pacific by minus 7%. Both regions suffered from countries still heavily affected from COVID-19 restrictions into Q3, in India, Australia or Singapore. The product areas have developed differently in the third quarter. Installation and Flushing Systems grew by 10%, and Bathroom Systems by plus 12% in the third quarter. Piping Systems showed a much lower growth dynamic with plus 3%, indicating to a weakening newbuild segment and project business during the third quarter. Let me now comment on the operational and financial results in the third quarter. EBITDA increased by 14% and the EBITDA margin reached 33.2%, an increase of 250 basis points compared to Q3 2019. This margin expansion was driven by 3 main factors: first, the operating leverage from the strong volume growth; second, lower material prices; and third, still relatively low SG&A costs due to COVID-19 restrictions. For example, still very low ground costs or costs for physical marketing events. Net income increased in the third quarter by 11% to CHF 189 million, negatively impacted by a higher tax rate compared to previous year. Earnings per share reached CHF 5.29, an increase of 12% versus previous year. Free cash flow increased in line with the operational results by 16% in the third quarter. I will now comment on our 9 months performance. Net sales in Swiss francs decreased in the first 9 months by minus 5% to CFH 2.3 billion due to substantially weakened foreign currencies. In local currencies, net sales reached with minus 0.4%, almost previously at level despite the COVID-19. The negative COVID-19 impact on demand vary substantially by geography, depending on the degree and the length of the local lockdown or the imposed business restrictions. In markets, reconstruction sites were closed. Around 20% of our sales exposure, net sales declined in average by around 15% in the first 9 months. These country includes: France with a minus of 10%; Italy with minus 11%; Spain with minus 15%; the U.K. with minus 22%; South Africa with a minus of 24%; and India with a minus of 29% in the first 9 months of the year. The remaining countries, around 80% of our sales exposure were also impacted by lower construction activities during Q2. However, the losses were largely compensated again in Q3. These countries include: Germany with a net sales growth of almost 6%; Austria with plus 5%; in Eastern Europe, with 4%; Nordics and Switzerland with 3%; the Benelux with minus 1%; and the U.S. with minus 2%, representing a slight sales decline. Let me now comment on the sales development per product area in the first 9 months, again, in local currencies. Installation and Flushing Systems reached previous year's level, and Piping systems declined by minus 1.6%. The only product area with a slight net sales growth was Bathroom Systems with a plus of 0.6% driven by strong growth of the shower toilet business. Let me now comment on the operational and financial results in the first 9 months of the year. All results decreased due to the negative translation effect from weaker currencies. However, in local currencies, all bottom line results from EBITDA down to EPS increased versus previous year. The negative currency development had only a minor impact on the margins due to our continued efforts to maintain a natural currency hedge. Let me now comment on the EBITDA development. The EBITDA margin reached 32.1% in the first 9 months of the year. Hence, we were able to increase the EBITDA margin by 130 basis points despite a net sales decrease of minus 5%. The main drivers for this margin improvements were: fast and targeted cost containment measures; secondly, a high and further increased flexibility in production and logistics to cope with a substantial decline in demand during the second quarter and a strong rebound in the third quarter; thirdly, lower material prices; and fourthly, increased sales prices. It is worth to mention that these results were achieved without restructuring, without any layoffs, without a salary cut for a single employee or material support from the public, for example, to short [indiscernible]. The EBIT margin reached 27.1%, 80 basis points above previous year level. The weak development of the EBIT margin versus the EBITDA margin was driven by higher depreciation expenses from higher investments in the previous year. Net income reached CHF 504 million, corresponding to a net income margin of 22.3% or 20 basis points below previous year. The lower net income margin was mainly driven by a higher tax rate due to the new tax regime for corporates in Switzerland. Earnings per share reached CHF 14.06, a decrease of minus 5.5% versus previous year driven by the weaker currency. In the first 9 months of the year, almost 270,000 shares have been bought back. Thereof, 262,000 shares at an average share price of CHF 406 under the program launched in June 2017. Under this new program just launched recently in September, additional 8,000 shares were bought back. Free cash flow decreased in the first 9 months of the year by minus 9% to CHF 454 million. This slide is disproportional decrease versus the operational cash flow, but mainly driven by the strong comparables with a strong free cash flow growth of plus 20% in the previous year. The strong results further improved the cash position of Geberit. For end of September, we hold a cash position of around CHF 600 million and an unused revolving credit facility of CHF 500 million. Let me now comment on our outlook for the remaining year. The uncertainties around the COVID-19 crisis increased again, especially since the second pandemic wave has reached Europe. The situation with new restrictions across Europe is currently changing day by day. This makes an outlook highly uncertain and almost impossible. Please also keep in mind that we have a very low visibility with an order book of less than 2 weeks. Therefore, let me first comment on the latest business performance. After the strong business rebound and stock rebuilding effects of customers in Q3, demand slowed down significantly in October, with sales in October being slightly below previous year level. Based on a weaker October result and delayed or stopped projects, especially in the nonresidential segment due to the COVID-19 crisis, we currently expect a weaker Q4. For the full year, we expect currency adjusted net sales to be slightly below previous year, and the full year EBITDA margin above previous year's level. However, we expect the EBITDA margin in Q4 to be substantially below Q4 last year due to: a negative operating leverage for volume decline; second, higher personnel costs due to wage inflation and the easing of the hiring freeze; thirdly, increasing raw material prices and tougher comps from lower raw material prices in Q4; and fourthly, additional costs for the brand switch. Let me close our introduction with a short summary. The COVID-19 crisis led to an unprecedented business collapse in terms of speed and expense also at Geberit. The decline in the second quarter was followed by an almost equally strong catch up in the third quarter. We believe Geberit has marched this roller coaster ride very well so far and delivered very strong results. The main reasons for these results were: a strong financial fundamental, combined with a stable strategy and a resilient business model; second, a fast and prudent crisis management, avoiding overreactions; third, the ability of our supply chain to cope with unseen business restrictions and extraordinary volatility in customer demand; and finally, our conscious decision not to reduce our presence with customers throughout the crisis. Finally, we achieved these strong results without hardening our future position, without restructuring or changing our strategic agenda. Indeed, unprecedented times of uncertainties, we found the right balance between short-term flexibility and long-term stability, which gives us confidence to emerge stronger from this crisis, which is obviously still far from over. This is the end of our introduction. Before I hand over to the Q&A, let me make a short remark on our presentation we just published this morning. There was a small mistake in the presentation on the EBITDA bridge on Page 13. Some figures were wrong. We uploaded a new version just half an hour ago with the right figures on the EBITDA bridge on Page 13. We are now ready to answer your questions.
[Operator Instructions] You have one first question from Mr. Andre Kukhnin from Crédit Suisse.
Can I start with clarification first on your remarks on the margin outlook for Q4? Did I hear that right that you expect it down meaningfully?
Yes. We expect a substantially lower EBITDA margin in Q4.
Okay. And just in terms of the reasons you cited there, one that I picked up is the labor rates. I think our last quarter discussion was that you had some new rates kicking in from kind of middle of the year or something like that, but I didn't get impression that you had kind of higher rates kicking in from 1st of October as well. Is that the case? And what countries are we talking about here?
It's still the case. We expect a somewhat higher wage inflation in the fourth quarter, mainly driven by Germany.
Okay. Great. And on Q3, in terms of the top line performance and that bounce back that you cited, is it possible to give any quantification or even indication of how much was restock and how much was kind of less holidays being taken on construction sites?
No, that is not possible to quantify. Sorry.
But do you think that covers the whole of 8.5% growth for -- on a...
I also cannot answer this question, also as I won't be able to quantify.
Fair enough, fair enough. And on October, being down slightly, I mean, can I just double check? How was the comp for October from last year?
We had a normal October last year, not special.
Okay. And the reason I'm asking is that some of your kind of lateral peers like Moscow indicated no slowdown. And I think [ Porr ] brand as well, no slowdown into October from kind of strong end of the Q3. So just wondering if there's anything kind of specific there to you. Or is this really the market performance that you're seeing this cooling down in October?
As usual, we do not comment on competitors, especially not on a monthly basis. And obviously, also our competitors, which have a completely different geographical space than we have.
Okay. So you see October slowdown is entirely underlying rather than anything kind of timing or one off?
I just repeat that sales in October are slightly below October 2019.
Next question is from [ Dean Bernadine ] from Exane BNP Paribas.
It's Yves Bromehead for Exane. Just a few questions. I guess on the pricing side, we've heard a lot of companies, not necessarily in the sanitary industry, but elsewhere, essentially saying that the market is relatively tight with low inventories, and the outlook for pricing going into 2021 is looking incredibly positive. I just -- I think we understand that there's a bit of inflation coming back, but it's moving also in a very volatile environment. So could we maybe get a sense of what is your view in terms of that price/cost spread near-term into Q4, but also how you think about your pricing negotiations in 2021?
We increased prices this year as planned by around 1% as of the second quarter. The next price change is planned regularly for Q2 next year. We have not yet decided by what degree we want to increase prices. That is still too early. But we do not change, at the moment, our process, meaning that we plan to adjust, most probably increase prices in the second quarter of next year.
Okay. And just on the second question, I mean, a lot of countries are now announcing lockdown measures, which is really sad, but necessary. I just -- I guess it's really hard to understand what that implies in terms of the opening or not of showroom centers and whether or not renovation work can be carried at people's home with a plumber and artisan. So I just wanted to understand given that Germany is one of your major country, and France has announced also their lockdown measures, what is your view and understanding so far as to what that can do to your kind of industry?
Our view and understanding is the same as your view and understanding, just reading the newspapers this morning what was decided yesterday in Germany. I can't give you any flavor, idea what we believe that would mean now short term in Germany. It's by far too uncertain to make any prediction. So we are on the same page at the same level of information as you are currently. Sorry.
So you don't know if the showrooms are going to be open or closed essentially?
As far as I understood from this morning's newspapers, they are not closed at the moment. But they make any predictions. I don't know what happens in 5 days. At the moment, I understand the showrooms are open as of today in Germany.
Okay. And just a last question on the free cash flow. Should we expect that to be slightly up on the full year basis versus 2019, given the first 9 months? Or is there a reversal in Q4?
We don't make any guidance on free cash flow, but that it is down by the end of the first quarter. Has a lot to do that the good performance of Q3 has not yet materialized in the cash flow statement, that is coming in Q4 then. There's a certain delay there.
The next question is from Daniela Costa from Goldman Sachs.
I first wanted to ask regarding sort of you mentioned the brand switching costs in Q4, if you could sort of remind us, sort of what was the guidance there? And whether the brand switches and movements that you planned are all done? Or if there's anything left on that front for 2021? And I think last year, you had also mentioned IT cost increases, whether you ended up doing that this year, and that should be a reversal and a tailwind for next year. How should we think about those 2 things?
The switch project -- the brand harmonization project went very well. We are a little bit delayed compared to the original plan due to the showroom closures. So we originally planned to be finished by the end of September that will now last into Q4. But for the entire year, we are on track. We spent about CHF 10 million marketing on this brand harmonization in the Netherlands, France and Italy. The second question around our increased activities in the area of digitalization. Also, this initiative has been unchanged. We are spending around CHF 15 million this year for further competencies and also resources in this area, and that is also running according to plan.
And both things are done. So in 2021, we're not going to have increased costs from them?
I can't yet talk about digitalization. We do not -- we are currently in the budgeting process, so I don't know yet there. But from the brand perspective, we are done. We do not have any further brand harmonization activities next year and also no additional cost from brand harmonization next year.
Our next question is from Dean Grant from Bank of America.
I've just got one specifically relating to Bathroom Systems and the outperformance there, having previously lagged. I wonder if you could just perhaps highlight the country specifically where you saw sort of the largest improvement here. And perhaps, just an outlook going forward into Q4 for Bathroom Systems specifically.
Bathroom Systems developed across the country very well. And the main driver is also similar across the countries in the shower toilet business. The shower toilet business is developing very well this year mainly driven by new products, which we introduced over the last couple of years. I refrain from making any outlook for patencies for Q4. I just stick to our guidance that we expect Q4 to be weaker than Q4 last year overall.
The next question is from Martin Flueckiger from Kepler Cheuvreux.
I've actually got 4, if I may, and I'll go one at a time. Just starting off with Piping Systems. Can you elaborate a little bit on the key drivers there? And what kind of market environment you're seeing? And particularly, if you saw any outstanding country performance within Piping Systems? That's my first question.
Piping Systems underperformed the other 2 product areas, basically in all countries. The main driver for this underperformance is, as I outlined in the introduction, a weaker performance of newbuild. And it's also an indication that the business might become more difficult because, as you know, Piping Systems are installed quite early in the building construction process. For example, in Germany, where we recorded a growth of 12% in the third quarter, Piping Systems was on previous year's level. So also highlighting again the strong growth of Bathroom Systems in Germany. At this picture, the piping is weaker than the other 2 product areas is facing the sales across the countries.
Okay. Great. And then my second question is just to come back on the shower toilet's growth you were referring to, which was very strong. Could you provide a little bit more granularity on what we're talking about here? I guess we're talking double digit, but we're talking about above 20%, that will be helpful, and what you're expecting in terms of the volatility for Q4. And I remember 2 -- 1, 2 quarters ago, you were talking about these temporary showroom closures in Q2 and how that would impact Q3 and Q4, which we haven't seen for the mentioned reasons. But just a little bit more granularity on the growth in Q3 and the outlook for Q4 in shower toilets would be great.
The growth rate shower toilets is double digit, and all the product categories are growing nicely. The premium level, the mid-level and the entry level driven by the new product introductions over the last couple of years. We do not see, for example, any cannibalization between the different price levels also this year. Regarding the showroom closures in spring or during the lockdown in April and May, what we hear from customers is that the showroom closures have been catched up to a certain extent in the third quarter because installer worked more, there was more workload. And these effects have been leveled out in the third quarter. We do not expect a negative impact anymore from the showroom closures in spring for our fourth quarter. Of course, we can't quantify. That is not science, that is what we just hear from our customers.
Okay. Fair enough. And then just on the Germany installers' order books, has there been a recent autumn survey? Or what's the latest number here? That would be great.
The latest number is that the order backlog came back to pre-COVID '19 levels. Actually, the order backlog of Germany installers is at 12 weeks again, that is more or less on the level of autumn 2019.
12.0 weeks, yes?
12.1 weeks, I think, to be exact.
Okay. Great. And then just final one, sorry. Raw material prices, could you talk about the quarter-on-quarter and year-over-year growth rates you have seen overall on average for raw material prices, and what you're expecting here for Q4?
Raw material prices for the first 9 months are down 3.8% versus the first 9 months 2019. And for the fourth quarter, we expect sequentially increasing raw material prices versus Q3 2020, mainly driven by metal-related raw material prices. Plastics, we expect more a sideway development in Q4 versus Q3. The metal price increases are basically driven by the observation that pulp prices for the industrial metals increased substantially over the last 2, 2.5 months from aluminum, copper, nickel, zinc, all these pulp prices went up by around 5% to 10% over the last 2 months, and that will have or might have an impact on our raw material prices in Q4.
Okay. Sorry. And the raw material price evolution for Q3 was how much?
In Q3 versus?
Year-on-year.
Year-on-year, that was down around 4%.
Next question is from Bernd Pomrehn from Vontobel.
Impressive results, no doubt. Could you try to quantify the onetime benefit from COVID-19 related low marketing and administration expenses in the third quarter? Or asked differently, what are your sustainable cost savings at this line going forward?
We cannot really scientifically quantify the impact because some marketing activities have been shifted, obviously, to a more online and digital activities. But what is clear is it is not a sustainable effect. If we would have been able to spend more marketing, we would have done it, but we have just been restricted. Therefore, this low-cost base, especially in the SG&A area of Q3 is not sustainable. And as soon as we are able to do marketing again in normal terms, we will also, again, spend the money.
The next question is from Manish Beria from Societe General.
The first question is, are you still gaining market share? And what are the opportunities you have seen from this crisis? You have definitely told about the shower toilet doing well, so it should be linked. I mean, is it related to hygiene and things like that? This is the first question. The second one is like Germany is up like 5.8% in the first 9 months. It seems like there is no COVID impact. I mean, you were up 6% despite Germany doing well last year. So just trying to see what drives this growth. Maybe there is like a lot of inventory buildup here, but 6% is without inventory. I mean then, it's a great result, I mean. So just a little bit of explanation, more color on that. And the third is in most probability, I mean you are going to end up this year with more than 30% EBITDA margin. And I see your guidance is like to reach like 28% to 30%. So obviously, you are going to give up that. And the last year pricing, does it come, I mean, like you want -- don't want to take pricing highs because you want to be within this range. So how does the pricing decision will be decided? Or we should build -- start building like you are comfortable with higher than 30% margins in the medium term?
The first question about market shares. As you know, we are very cautious to talk about market share quarter-by-quarter. But I think if you look at the first 9-month development, we have been able to gain market share versus competitors driven also by the fact that some competitors have delivery issues, some plans for closed down, but also by the fact that we have been always with our customers. We did not reuse our [ presence with customers ]. So we believe the first 9 months, we gained market shares. A little bit supported by, what you called, hygiene-related products. We have, obviously, hygiene-related products, touch-free products, be it at the toilet, be it faucet or urinal.We see a strong growth for this product since the COVID-19 crisis. However, the share of sales of this product is very limited. It's really a low -- not a material part of our business, so it has not a material impact on the top line growth. The second question around Germany. Also in Germany, we believe we are gaining market shares driven by the fact that we have seen delivery issues with competitors or even supply chain interruptions. But also most probably in the third quarter, we believe we have seen some positive impact from the VAT reduction in Germany. There's a 3% VAT reduction, which might have been one of the reasons why installment of our products have been growing so much faster in Germany in the third quarter compared to taxing products behind the wall. Third question about EBITDA margin and pricing 2021. As I said before, we have not yet decided about our price changes, most probably price increases and next year. In general, we plan to have a certain stability also in terms of pricing, which would mean that we're trying to increase prices constantly at a certain constant rate. That is the working hypothesis at the moment, but it's not finally decided.
And you are comfortable with more than 30% EBITDA margin, even if you reach it, I mean, are you comfortable with that? Because the guidance was at 20% to 30%.
As I said before, the margin we have seen now in Q3 was very much driven by COVID-19 restrictions, which drove our SG&A costs down. This is not sustainable. If we are able to spend more marketing money again, we will spend more marketing again. So don't take the current margin level as the new norm or a sustainable basis.
The next question is from Christian Arnold from MainFirst Bank.
On Germany, I mean, this 12.4% organic growth in Q3, I mean that's just impressive, just fantastic. And you just mentioned before that you had some positive impact from the VATs or in the Bathroom Systems. But nevertheless, I mean, thinking of the limitations from the installer side, I mean, how is that possible? This 12.4% in Q3? Maybe if you can then add here some more explanation.
So if you just look at the third quarter, the 12% is also impacted in Germany by catch-up effects from Q2. We had also, in Germany, a weak Q2. Obviously, not as weak as in Italy or France or other countries, but there was also in Germany, an impact from the COVID-19 business restrictions on the construction activities. So also there, there was a catch-up effect that was also driving the 12% in Q3. Besides the fact that I just mentioned for VAT, delivery issues from competitors.
Okay. So now thinking that -- I mean, you mentioned before that Piping Systems were flat in Germany in Q3. So that's somewhat implied then for installation systems as well as Bathroom Systems that you have seen some growth of 15% to 20% in Q3?
Sorry, I didn't understand. Can you repeat -- acoustically, didn't understand.
Yes. I mean before in the call, you were saying that the Piping System business in Germany was flat in Q3. Did you see then some 15%, 20% growth in both Bathroom Systems as well as installation systems? Or have we had here a differentiation between the other 2?
No. You're correct. Both other product areas were strongly growing in the area, you just mentioned. That's correct.
Okay. Then in October, when you were saying slightly down overall, any differentiations between countries or product area? Or some outliers, so to say?
Yes. There is one. Let's say, observation is still Piping System. What we have seen in the third quarter is also visible in October, Piping System is systematically weaker than the other 2 product areas, also in October.
Okay. And maybe on the personnel cost. Going into Q4, I mean, having now the situation we have, are you expecting -- I mean, on the one side, you have higher wages. So you have a negative impact from this price inflation, so to say, on the personnel. On the other side, probably many, many people are going on holiday, right? Any thoughts on that?
We have seen, especially this year in Q2, an extraordinary low position for personnel cost. And Q3, again, was more in line with previous years. The vacation quarter and Q4 will also be in terms of difference to Q3, more in line with previous years. And in addition, we said that we still have an increase in tariffs coming mainly out of Germany. So the exceptional quarter in 2020 was Q2, where mainly in operations, we could very well adjust our capacity to the demand. But as now, demand, et cetera, was normalizing. This effect is gone, and we have a more normal pattern again.
Okay. Last question on material prices. You mentioned before that you are expecting in the fourth quarter a sequential increase of material prices. So not saying year-over-year, does it mean that year-over-year, you still have a tailwind from raw materials in Q4?
Yes. Year-over-year, we still expect to have a tailwind in Q4.
The next question is from Patrick Rafaisz from UBS.
I have 2 follow-ups, please. The first one is around your comments you already made on October and the catch-up section in Q2. I'm just wondering in that comment you made, on October being slightly down, do you think there is still a bit of catch up and restocking in there and spillovers from Q2, so that the underlying run rate will be even a bit lower? Or was that pretty much all done in the second quarter?
Again, we do not exactly know, but we believe that the inventory levels of wholesale in general was on a normal level at the end of September.
Okay. Good. Great. And the second question is around the EBITDA bridge. And I know it's very early days, but looking into 2021, there's a lot of moving parts with the corporate savings, raw materials going up and down, et cetera. But just directionally, how should we think about the reversal effect next year? Obviously, you will end this year with a very solid margin higher than last year. You think you can maintain this sort of level also next year? Or should we assume that maybe it will be a bit more a challenging year with potentially marketing expenses, et cetera, coming back?
I'm sorry, I'm not able to give you an answer to this question. We refrain for making any answer to 2021. The situation is so highly uncertain, volatile just the last couple of days. So any statements we would make to any direction next year will not be professional. I'm sorry, I can't give you an answer.
Okay. The next question is from Remo Rosenau from Helvetische Bank.
We understood that Q4, we'll see lower margins, I mean significantly lower margins compared to the previous year, not to the third -- but of the previous year. However, at the same time, is that at -- in the press release that you see slightly lower sales for the full year and an EBITDA margin above previous year's level. You didn't say slightly above, and that is not a coincidence. So if you say EBITDA margin above previous year's level for the full year, it is not 10 or 20 basis points, it must be a bit more. That, again, in my calculation, puts a certain limit to the significantly lower margin in Q4, i.e., it's rather 200 basis points than 400 basis points. Is that kind of a sensible thinking?
Our margin guidance for the full year on EBITDA level, which we expect to be above previous year level means that we expect an EBITDA margin, which is higher than 29.3%. That's the guidance. Every figure, above 29.3%. And I can't and do not want to go into more detail on which level it could be. I'm sorry, Mr. Rosenau.
Okay. I'm just used that you're very precise with your wording. So it is likely that there is a reason for it.
Exactly. We are precise. Everything cost 29.3% [ in the mall ].
Okay. Fair enough. Then a more general question. And we didn't talk about innovation that much today. How is Geberit ONE actually doing, which you introduced some time ago? Is it making progress? Is the response positive? And then adjacent to that, can we look forward to any other kind of groundbreaking innovations in '21 or '22, like the introduction of Geberit ONE or, for example, the Monolith [ Puro ] tank at the time.
Geberit ONE, we are very happy with the development this year, especially with certain product categories within this new bathroom series. I would say they are, all in all, on our expectations. Some product categories slightly higher, some a little bit lower. But as a series, it's going as planned. But still, as you know, it's not really contributing a material part to our group sales. But it's developing very nicely. Referring to other new product innovations, we will talk about that in January. We will give you a flavor about new innovations next year. But we will have, again, also next year, a beautiful mix of very important, strategically important innovations and also, again, add-ons continuing evolutionary innovation, but I don't want to go into details at this moment in time.
Next question is from Arnaud Lehmann from Bank of America.
2 questions left on my side. Firstly, on your Q4 margin comment, I think you said you think Q4 EBITDA margin should be down year-on-year. Does that also apply to the gross margin? Or is it mostly related to SG&A and possibly higher marketing cost? That's my first question. My second question is on the U.K. I appreciate it's not a very large market for you, but do you feel ready for Brexit in terms of sourcing supply chain? Or do you think there might be any disruption from next year?
I'll answer -- you asked a question to the U.K. We believe we are operationally ready for the Brexit in the U.K. At the moment, we do not see or expect any special effects like what we have seen last year or a couple of times already last year, we do not expect anything specific from that side. And honestly, I also believe that the COVID-19 crisis and all the restrictions or the further development might seem more -- might have more impact than the Brexit changes driven by Brexit. And regarding this [ year's ] margin, I'll ask Roland to answer.
As we are still expecting year-on-year lower raw material prices for Q4, it's not linked to the gross margin. It's more linked to the operating leverage as we are seeing sales below prior year. It's linked to the -- and higher personnel expenses. Those are the main drivers. But the main driver is the operating leverage.
The next question is from Martin Husler from Zürcher Kantonalbank.
Yes. I have 2 questions left. First of all, an add-on to Germany. The topic was touched on capacity of installers. And actually, you didn't really answer that. How was it possible that with limited installer capacities, the growth was so strong in the third quarter or also for the first 9 months? Or is it that this capacity constraints kind of eased and which should also be then positive for the future? That's the first question. And the second question is on Switzerland. Can you just elaborate a bit, also very good sales development in Switzerland? Is this -- I assume more refurbishment as well. Do you see there some cooling effect out from the pandemic or lockdowns because I think you were rather more cautious at the beginning of the year for Switzerland?
Referring to your first question. Please keep in mind that we had, in all countries, including Germany, rebuilding effects of the inventories of wholesalers. So wholesalers were rebuilding their inventories also in Germany. So the 12% growth in the quarter doesn't mean 12% growth on the level of the installer. That is valid for all the countries. Secondly, we have heard from many installers, indeed, that there is more work also in Germany this summer than in previous year's summers by over time, by using their vacation. So there was a certain elasticity of the capacity in the summer. By the way, if you look to Italy, we had the growth of 24% in Q3. That was very much driven by the fact that in August, where normally nothing happens on construction sites in Italy, installers, plumbers still worked this year. And to [ ascertain it ], lower effect, we have seen that in Germany. So it's a combination of inventory effect at wholesalers and a short-term flexibility of capacity on an installer level during summer. And to your second question around Switzerland. In Switzerland, the renovation business is doing well. We still believe also that the newbuild segment is doing well. We have projects which were launched or which were running. Pre-COVID-19, they basically got completed. Maybe they have been a little bit delayed in the second quarter. Also there, in Switzerland, we see some catch-up effects to the same reasons, as I mentioned before in Germany, basically. But if you look at the first 9 months, we are doing well. Also in Switzerland, we believe we have been able to gain market share. Don't forget that a lot of our market outperformance in Switzerland, in general, is driven not by volume, share gain but by offsetting our product portfolio. So we see, for example, in Germany and in Switzerland, not a down selling effect due to COVID-19 crisis. Or we do not see a negative effect, for example, shower toilet -- so for shower toilet, an important growth driver in Switzerland is doing very well, growing double digit in the first 9 months.
Okay. And fair enough, your answer on Germany. I was -- if I refer to the first 9 months, whereby, your growth was about 6%. There, I assume there wouldn't be much of a stocking/destocking effect for the whole period and still the 6% looks quite impressive.
This is correct. And that's why I mentioned before that we feel confident that we are gaining market share in this -- for the first 9 months. And secondly, also driven by maybe the VAT effect in the third quarter, which led to a strong growth of -- in front of the valve products in the third quarter because they are more related, obviously, to this VAT program, which gives an incentive to end consumers to buy a new bathroom or to make the renovation.
The next question is from Bernd Pomrehn from Vontobel.
So thank you for an add-on question regarding CapEx. Could you provide a quantitative update for your full year '20 CapEx guidance? And then maybe could you also talk a little bit qualitatively regarding investments and further improving your sustainability profile? For example, improving the environmental standards of your ceramics production. Obviously, you have a very strong cash position, and there's probably a limited need for significant capacity additions. So you are in a position to increase spending on more sustainable production methods.
CapEx 2020, we expect to be around CHF 150 million, a tick less than what we expected in summer because we had also there some restrictions from COVID-19. We are not able to complete all the investment projects which we had in mind. Regarding our sustainability investment, that is a constant effort. As you know, we are constantly investing also into a more sustainable asset base, especially in ceramics manufacturing. We have been doing very well over the last couple of years, also this year. We have reduced the CO2 emissions since the Sanitec acquisition by 26% over the last 4 years. So that's on average, around 7% decrease of CO2 emissions annually. And as I said, that is a constant effort. It's embedded in our strategy, in our investor projects, and we also expect a further reduction of the CO2 emissions this year. That's maybe a good example where COVID-19 does not have a structural impact on Geberit. The COVID-19 crisis did not change our agenda in terms of sustainable investments.
Next question is from Alessandro Foletti from Octavian.
Yes. I have one left remaining regarding your midterm growth outlook, I think it's about 4%. In the last couple of years, organically speaking, you have been trending slightly below that. Can you give your thoughts about how you may be able to reach that? If and when, if you have an outlook, leaving for a moment the pandemic aside.
It's very difficult to comment or give an answer at the moment by putting it -- the pandemic aside. So if we expect midterm that the pandemic is resolved, then we stick to our mid-term targets. Or in other words, the pandemic does not have an impact on our view on our mid-term potential to grow the business without the pandemic, obviously. We do not see that the pandemic has any structural impact on our potential to grow in the various markets. We do not see -- do not expect that there is a structural impact if it comes to geographies or if it comes into product areas.
All right. And the driver to reach debt, so to speak, makes the last step between the average of the past years to that growth of 4%. Is it -- do you need a more normalization in Germany, for instance, on the installer base? Or can you overcome that with your upselling strategy, innovation, gaining market share, et cetera?
We have reached, in average, sales growth of 4% since the acquisition of Sanitec. We have been at the lower end of this range of 4% to 6%. The main reason that we have been at the lower end but not more in the mid of this range was a geographical market reason. As outlined very often already, the capacity bottlenecks in Germany, the weaker structure, the weaker markets in Nordics, but also the lower -- much lower growth dynamic or even nongrowing growth dynamic in Switzerland. These were the main reasons why we have not been able to [indiscernible]. And COVID-19 does not change anything structurally, how we look at the business and what we see in terms of potential. Of course, if you put the pandemic aside, as you mentioned in your question.
Yes. Yes. Okay. So -- and that by inference also, the Q3 reading doesn't change that overall picture?
The Q3 reading. So a quarterly result does not have any impact on our thinking about mid-term targets.
The next question is from Cedar Ekblom from Morgan Stanley.
I've got 2 questions. Firstly, can you please give us a little bit of guidance on your sales split via showrooms or direct to wholesalers? And then secondly, can you give us some understanding on what percentage of your sales relate to new products now and potentially a target on that number, where you see that evolving over the medium term? Would it be fair to say that a rising percentage of new products in total sales is positive for the pricing dynamic?
First of all, a fundamental answer, we are only selling to wholesalers. We are not selling 2 showrooms. So it's 100% wholesalers. For certain products, a showroom is then relevant for decision-making, but showrooms are not directly delivered by us. So we're always selling to wholesalers in some country showrooms who are managed by wholesalers, but become a differentiated technique.And second one, we do not have a quantitative figure where we differentiate new products versus old products. The main reason is the introduction time of a new product in our industry is very long. We talk about 2, 3 years about the new product. It's not a 1-year new product and the next year, we have the next new product. So we do not quantify what we look at. What we do not disclose is, of course, the growth of these new products, and it's an important contributor over time, but we do not disclose any quantitative figures.
Okay. Maybe I can ask a question on showroom differently then. So what percentage of your sales do you think the showroom is necessary in order to make the sales decision, even though you're then ultimately selling to the wholesalers?
Obviously, it's only relevant for the Bathroom Systems. Showrooms are not relevant, obviously, for Piping Systems, and they are almost not important for Installation and Flushing Systems because this business is basically behind the wall. A certain share of the Bathroom Systems is mainly driven by the end consumer market. So everyone who is privately deciding about this bathroom, this decision is made in a showroom. That's a part of the Bathroom Systems, which are 30% of our business, partly of that is decided in a showroom. But as I said before, because we are not managing showrooms ourselves, they're not delivering directly to showrooms. We do not know the exact -- how much this share of decision-making of the 30% Bathroom Systems is made in a showroom.
Our next question is from Pierre Rousseau from Barclays.
Could you first comment a little bit on your nonresidential exposure? I heard there was some weakness in newbuild. So I was wondering if you could give some granularity there. And also, what's the share of office, hospitality and travel-related projects? I think that would be helpful. And the second question is on personnel cost inflation. In a normal year, what would you expect to be the run rate going forward, if we exclude potential COVID-19 disruptions again?
We generate about 1/3 of our business with the nonresidential segment, that varies country by country. But for the group, around 1/3 is exposed to nonresidential. The more granular spread between hotel and other subsegment is very difficult because we are [ leveling ] to wholesalers. We do finally not exactly know where these products are going. Therefore, it's difficult, and we do not have a quantitative indication how much this is. The second question about wage inflation. A large part of the wage inflation, which is affecting leverage is not decided by us, but driven by external parties, basically in Germany. We are dependent on the negotiations between employee representatives, company representatives, and we just have to accept what the negotiation brings. In general, what we have seen over the last couple of years is that wage inflation has increased, especially in Germany, but also in Eastern European countries, which are important for us, which is Poland. What the COVID-19 crisis means now to the wage inflation, next year or maybe [indiscernible], which is very difficult to predict, and I don't feel myself in a position to make any prediction about that.
The next question is from Marta Bruska from Berenberg.
I have a few follow-ups. So with regard to growth in piping and the weaker newbuild project business, so could you please let us know what is the split residential versus commercial? Or what is the share of the project business for piping specifically? You just mentioned it 1/3 on the group level. I will have a few follow-ups after that, but let's take it one by one, please.
Sorry, can you rephrase the question? I did not understand.
Yes. You just said that 1/3 of your sales is generated from nonresidential segment on the group level? And what is that for the piping, please?
We do not know. We do not know if there is. It might be slightly higher. But to be honest, we never made the exercise, might be slightly higher, I would assume.
Okay. And with regard to Benelux, so you showed positive organic growth in local currencies for all countries you list in Europe, except for Benelux, so a minus 3.5% would happen there?
The main reason is, as I mentioned in my introduction, a base effect. We had a strong growth in Q3 last year of 19%, 1-9, in Benelux. That was the main driver. So [ I guess ], an increase this year.
And with regards to the extra cost for rebranding. In total, for the full year, you said you are on track to spend CHF 10 million. So how much of that was spent already year-to-date? And is that a fair assumption to assume that in Q4, it will be a proportional spend? Or is it more or less weighted in other quarters, please?
In Q4, there will be some expenses, but it's -- you cannot evenly distribute it over the years. It's part of the marketing cost. That's why we said that we will have a little bit more marketing cost, but it's not -- it's less than we spent in Q3 and we don't give the exact number.
Okay. Can I ask one more -- a more general. So why is this higher? You mentioned that you have some delay between your EBITDA and then when it comes into the -- through the cash flow statement. So is that linked to the payment terms that you have with the wholesalers and whether you give the volume rebates in the end of the year with Q4? If you can give us a little bit more details on how it works with the wholesalers, please.
No. That is just -- yes, it's linked to the payable terms, but it depends always what the seasonality in the quarter was. We had very good sales also in September that just leads them to the fact that the free cash flow represents the good result of the last days of the last month in the quarter, only in Q4, not yet as of the end of September. So nothing unusual.
[Operator Instructions] We haven't received further questions. I will hand you back over to the speakers.
So thank you all for your participation in [indiscernible] in this highly uncertain times. A good, obviously, a healthy rest of the week. Thank you. Have a good day.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.