Geberit AG
SIX:GEBN
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Geberit AG
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Ladies and gentlemen, welcome to the Geberit Conference Call on the Third Quarter Results 2022 Conference Call. I'm [indiscernible], the Chorus Call operator. The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Christian Buhl, CEO. Please go ahead.
Thank you for the introduction, and good morning, ladies and gentlemen, and welcome to Geberit 9-month conference call. We will start with the third quarter key figures, then comment on the 9-month development and finish with an outlook for the rest of the year.
Let me start with our key messages for the third quarter. The third quarter was marked by strong sales price increases to mitigate the unprecedented cost inflation; second, a substantial volume decline in Europe due to an anticipated, however, unexpected strong destocking at wholesalers; third, a strong volume growth outside Europe; fourth, an unexpected explosion of energy prices; and fifth, a strong negative currency effect substantially impacting all lines of the P&L.
Let me now come to the review of the top line development in the third quarter in more detail. Net sales decreased by 7% and reached CHF 791 million. The unfavorable currency development led to a substantial negative currency effect of CHF 78 million or minus 9%, the strongest negative currency effect since 2015. Therefore, in local currency, net sales increased by 2%, driven by price increases of around 10% and a volume decline of minus 8%.
The volume decline was driven by Europe due to, first and most importantly, an anticipated, however, stronger-than-expected destocking at wholesalers after the extraordinary strong price increase as of July; second, a base effect from the COVID-19 induced trend to home improvement in the previous year; and third, a shift from sanitary to heating solution in several European countries, triggered by the energy crisis, encouraging building owners to exchange their fossil driven heating systems with alternatives, for example, heating pumps.
Strong positive volume drivers in Europe were several new product introductions, for example, the new supply Piping Systems, FlowFit, which grows also this year faster than expected.
Outside Europe, we recorded strong volume growth in many countries. Net sales in the Middle East/Africa region grew in the third quarter extraordinarily with plus 49% in local currencies, driven by strong double-digit growth in the Gulf region, Israel and Northern Africa.
Net sales in Asia Pacific grew by 10%, with strong double-digit growth in all major regions except China, where sales were slightly below previous year level due to the lockdowns and the weakened building construction industry. In America, net sales grew by 7%.
The 3 product areas showed a different sales dynamic in the third quarter. The strongest growth was recorded in Piping Systems with [indiscernible] of 10%, due to a solid project business, the new Piping Systems, FlowFit and strong price increase.
Bathroom Systems net sales increased by 2%, negatively affected by a base effect from the COVID-19 induced home improvement trend last year. A decline of minus 5% was recorded in Installation & Flushing Systems as this product area was most affected by destocking effects at wholesalers.
Let me now turn to the operating and financial results in Q3. EBITDA in Swiss Francs reached CHF 206 million, negatively affected by the beforementioned substantial unfavorable currency effect. In local currencies, EBITDA decreased by [indiscernible], and EBITDA margin stood at 26.1%. The margin decline of 520 basis points was driven by 3 main reasons: First, the operating leverage from the unexpected destocking driven volume decline, which reduced the EBITDA margin by approximately 2 percentage points; second, the unexpected explosion of energy prices, which were up by plus 69% in Q3 compared to Q2. This led to an average energy price level in Q3, which was 184% above Q3 last year and hampered the EBITDA margin in Q3 by 260 basis points. Third reason, with the raw material price level still being 16% above previous year's Q3 period despite a small sequential decrease quarter-on-quarter. And the fourth reason for the margin decline was a further accelerated wage inflation to 3.1% to normalization of cost levels after the COVID-19 driven lower levels last year and the planned investments in digitization.
To mitigate the input cost inflation, we increased sales prices as of Q3 for the fourth time this year. With the total sales price increase effect of 10% in Q3, we managed to almost fully compensate for the still record high raw material prices and the unexpected literally exploding energy prices in Q3.
After the discussion of the EBITDA margin in Q3, let me now comment on the other operating results in Q3. EBIT stood at CHF 170 million, with an EBIT margin of 21.5%. Net income decreased in line with EBIT to CHF 139 million, leading to a net income margin of 17.6%. Earnings per share reached CHF 4.05 and developed better than net income due to the accelerated share buyback program. In total, we bought back 331,000 shares for a total amount of CHF 154 million in the third quarter. This corresponds to a buyback of around 1% of all outstanding shares in just 1 quarter.
Let me now continue with our 9 months development. Net sales in Swiss Francs increased by 1% to CHF 2.72 billion, impacted by a substantial negative currency effect. The negative currency impact amounted to CHF 184 million or minus 7% of net sales. Hence, in local currencies, net sales increased by 8%, driven by a positive sales price impact of 8% and a stable volume development.
Compared to 2019, net sales are up 26%. This year's volumes were affected by an extraordinary strong comparison basis with record high volumes last year. Compared to 2019, again, the volumes are still up 14%. The main volume drivers this year were, first, several successful new product introductions, for example, the already mentioned Piping Systems, FlowFit or our new [indiscernible]. Second, a positive development in several European countries, for example, in Switzerland, Italy or Eastern Europe. Third, a strong performance in many emerging markets outside Europe. And fourth, the beforementioned shift from sanitary to heating solution in several European countries.
Also based on the strong price increases, all European markets delivered positive sales growth rate in local currencies in the first 9 months. Double-digit growth rates were achieved in Italy with plus 17%, the Iberian Peninsula with plus 15%, Eastern Europe with plus 14% despite [indiscernible] of the business in Ukraine and the suspension of the business in Russia in March this year, and U.K./Ireland with plus 13%.
Single-digit growth was achieved in Switzerland with plus 7% and Germany, France and the Nordic region with plus 6%. And Austria and Benelux with plus 4%.
Let me now turn to the regions outside of Europe for the first 9 months of the year. Net sales in the Middle East and Africa region increased by 29%, with growth in all major countries and regions. Net sales in Far East/Pacific were up by 7%, negatively affected by the lockdowns in China. However, many other countries delivered strong double-digit growth rates, for example, India. In America, net sales were up by 6%.
Let me now comment on the sales development per product area in the first 9 months, again, in local currency. The strongest growth was recorded in Piping Systems with a net sales growth of plus 14%, driven by a solid project business, a strong price increase compared to the other 2 product areas and the very good development of the new FlowFit Piping Systems.
Installation & Flushing Systems net sales grew by 7% and Bathroom Systems net sales grew by 4%. The lower growth of Bathroom Systems was driven by smaller sales price increases compared to the other 2 product areas and the base effect from the home improvement trend in the previous year.
Let me now comment on the operating and financial results in the first 9 months of the year. EBITDA in Swiss Francs decreased to CHF 767 million. Thereof, CHF 60 million were lost by the unfavorable currency effect. Excluding this unfavorable effect, EBITDA decreased by minus [ 8% ]. EBITDA margin reached 28.1%, a decline of 520 basis points versus last year. This margin decline was mainly driven by 2 factors: first, a record and historical high margin level of 33.3% in the previous year's period; and second, the unprecedented input cost inflation.
Let me elaborate in more detail on this unprecedented inflation effects in the first 9 months of the year. Raw material prices increased currency adjusted by 21% and energy prices by 131%. In absolute terms, this means that we have to bear additional costs of around CHF 210 million only because of raw material and energy price inflation. This CHF 210 million corresponds to [indiscernible] to a margin loss on EBITDA level of around 8 percentage points. This input cost inflation has not been fully compensated in the first half of the year due to the general time delay to pass on price increases in the sanitary industry. However, and as already mentioned before, we almost fully compensated the raw material and energy price inflation in the third quarter and expect to overcompensate these 2 inflation drivers in Q4 under the assumption of no further turmoil on the raw material and energy markets, of course.
In other words, we consider the extent of the margin decrease in the first 9 months not as sustainable due to the just beforementioned delay effects of sales price increases. Other, however, less pronounced negative margin drivers in the first 9 months were wage inflation of 2.8%, higher than in the recent past, the normalization of marketing and travel costs after COVID-19 and planned investments in digitalization as presented in our full year analyst conference this year.
However, it is important to notice that the EBITDA margin is 28%, still on a very high level, outperforming the average industry level.
After this discussion of the EBITDA margin, let me now comment on the other operating and financial results in the first 9 months of the year. EBIT decreased in local currency by minus 9%. The EBIT margin reached 24%. Net income decreased in local currencies, in line with EBIT by minus 10%. Earnings per share decreased in local currencies disproportionately by minus 7% and reached CHF 15.62 due to the accelerated share buyback program. In total, we bought back 837,000 shares for a total amount of CHF 448 million. This means that we distributed together with the dividend payment in spring this year CHF 881 million to shareholders in the first 9 months of the year. This corresponds to around 6% of the current market capitalization of Geberit.
Free cash flow decreased in the first 9 months by minus 33% to CHF 412 million, mainly driven by the significant negative currency effect to lower operating cash flow and negative net working capital effects. Capital expenditures were at previous year's level.
Let me now comment on the current business environment. I'll start with the gas situation and the risk of gas shortages at Geberit, which is mainly driven by our 2 ceramic plants in Germany. The risk of gas shortage this winter has somewhat eased due to the high stock level of gas in Germany and the relative warm autumn so far. Nevertheless, we took several contingency measures to mitigate potential gas shortages in Germany. For example, the buildup of our inventories or the upgrade of the larger of the 2 plants to LPG gas.
Let me now comment on our outlook for the full year. The ongoing geopolitical risks, the ongoing uncertainties around COVID-19 and the increased macroeconomic risk, not least driven by the energy crisis in Europe, make an outlook, also short term, obviously extremely challenging. However, short term, we expect further destocking in our distribution channel due to the improving supply chains. The overall availability of raw materials has improved, which led to decreasing spot prices for selected raw materials. Therefore, we expect raw material purchasing prices for Geberit in Q4 to be slightly lower compared to Q3. However, purchasing prices remain on a record high level of around 10% to 12% above the level of Q4 last year.
With regards to energy prices, we expect, at the moment, lower levels in Q4 compared to Q3. But of course, energy price forecasts are highly speculative in this environment as we have seen in Q3.
Despite the increased risks and uncertainties until the end of the year, we will continue to stick to our priorities defined for 2022 and our long-term strategy execution. First priority remains the consequent pricing management to address the unprecedented input cost inflation. Of the 4 price increases this year, we will again increase sales prices as of beginning of next year in selected countries to also mitigate wage inflation. The total sales price effect on group level is expected to be around 1.5% as of Q1 2023.
A second priority remain our newly introduced product, especially the further rollout of the new supply Piping Systems, FlowFit and the execution of various improvement projects along our strategic agenda, for example, in the area of digitalization. And finally, based on our strong balance sheet and strong cash generation, we continue in this market environment with our accelerated share buyback program.
In light of the soft top line growth and softer operating margins in the third quarter, mainly driven by the unexpected magnitude of destocking of wholesalers and the very strong increase of energy prices, we expect for the full year a mid- to high single-digit net sales growth in lower currencies and an EBITDA margin of around 27%. This is a prudent guidance in an environment of high macroeconomic uncertainties.
The 2 main reasons why we expect a full year EBITDA margin slightly below our midterm target range of 28% to 30% are the unexpected strong destocking and energy price increase in H2 and the beforementioned channel delay to pass on price increases in our industry.
Let me close our introduction with a short summary. Geberit achieved good results in the first 9 months with a strong net sales growth in local currencies. After volume growth in the first half of the year, we have seen a substantial volume decline in Q3 due to a higher destocking than anticipated. Record high material and energy prices led to an unprecedented inflationary margin pressure. Despite the unexpected energy price surge in Q3, we managed with several price increases to almost fully compensate the raw material and energy price inflation in Q3, confirming our pricing power.
We reached with an EBITDA margin of 28.1% in the first 9 months, a still very strong and clearly industry-leading margin level. To mitigate wage inflation, we will further increase prices in selected [ share profits ] as of Q1 next year. We accelerated our share buyback program based on our strong financial position and the strong cash generation of our business also in difficult times. Together with our regular dividend payment this year, we distributed CHF 881 million, around 6% of our current market cap in the course of the first 9 months, showing our confidence in our ability to generate further high margins and strong cash flows.
The geopolitical risks remain high, and the economic outlook has worsen. Nevertheless, Geberit is really very well prepared to also master the challenges and uncertainties emerging from this environment, as already demonstrated several times during the past. Our confidence is based on the fundamental demand for sanitary products, our resilient strategy and business model, our innovation capabilities and strong customer relations, our pricing power, our excellence in operations, our financial strength with an industry-leading profitability and finally, our long-term value creation focus and strong track record.
Based on these fundamentals, we are convinced to continue to achieve our midterm target of an average annual net sales growth in local currencies of 4% to 6%, and an average EBITDA margin level between 28% and 30%.
Before we start the Q&A session, allow me to address 2 topics upfront. First, we are aware that the market expectation was higher with regards to the top and bottom line in Q3. The 2 main reasons for this gap were the strong and expected destocking at wholesalers and the explosion of energy prices in Q3, which surprised everybody. Second, please keep in mind that the visibility in our business is very low, with an order book of less than 2 weeks. Due to the high uncertainties and this low visibility, we refrain from answering questions about the market outlook 2023.
Thank you for your attention. We are now ready to answer your questions.
The first question come from Daniela Costa from Goldman Sachs.
I have 3 things relatively quick. First, on your commentary in terms of wholesalers' inventories, I think in -- earlier in the year, you said there were very high compared to past. Can you give us some indication of like how many weeks or months are they now, where they have troughed in the past just to get a sense of like this destocking that has started, how much further it can still go?
And the second question, just on the price increase, I wanted to clarify if I heard this correctly that you're going to do 1.5% increase in 1Q '23 in January. But what's the full carryover that goes into next year from all the price increase that you've done, including the October 1? And then third, on the buyback, it sounds like you've recently invested on capacity, on marketing, on IT. So given the current environment and that you already done these investments, could we expect a further acceleration on the pace of buybacks in the coming months?
Thank you for your question. Number one, we don't have any [ positive ] information about the inventory levels at wholesalers, but the destocking in the third quarter obviously led to substantially lower inventory levels at the wholesalers. But we do not believe that we are back to a normal inventory levels at wholesalers. Second question, you're right, we increased prices in selective countries as of January this year. In average, the total impact on group level is 1.5%. And we have, you're right, a spillover effect from the other 4 price increases, which we have done so far this year. And question #3 will be answered by Tobias.
We remain with an accelerated share buyback. But at this stage, we refrain from quantifying an increase or a slight slowdown.
The next question come from Andre Kukhnin from Credit Suisse.
I really want to dig into the pricing dynamics just to make sure we have all the numbers right. So can I first check that of the price increase as of 1st of July of 7.5%, that only partially materialized in the first quarter, right? I think we were calculating the total impact from kind of all the price increases you've done with that 7.5% would have been 11.8% for the third quarter, and it came in at 9.6%. So I want to check if that math is right. And then secondly, whether that [ 2.2 ] points that didn't come in Q3, is that now coming in Q4?
So question with regards to price increases in Q3. First, [ a general ] remark. Pricing is not an exact [ science ]. So I will be careful with too much digit numbers, single-digit numbers. So it's always around. But you're right, technically expect the price increase in Q3 should have been a bit higher than the 10% what we have achieved. That was just driven technically by some deliveries or larger-than-expected deliveries in July and August still on the lower price levels from Q2 because this 7.5% price increase as of Q3 was [indiscernible]. So we had higher volumes still delivered on lower price levels from Q2 that led to technically a little bit of lower price effect as of Q3, but that will vanish out over time.
Okay. That's great. That's helpful. And so from the 1st of October, you implemented a 2% price increase, is that right?
This is correct. Again, the selective price increase comes [indiscernible] higher, but the impact overall is around 2% on group level.
Great. And then the one that you mentioned for the beginning of next year, is that sort of from 1st of January? We should think about the 1st of January 2023 and magnitude of 1.5% at group level?
Correct.
Okay. I'll go back and add all of these up. And if I may, just on energy, do you buy energy at spot? What kind of contract length on average do you have so that we can kind of track where you are versus spot prices and how that may evolve going forward?
That depends on company level and also on site level. In average, we have at the moment, still 20% of our energy price hedged to time contracts and 80% is exposed to spot prices also in Q4.
The next question is from Matthias Pfeifenberger from Deutsche Bank.
Really no offense, just what do you take as a takeaway from this set of results? It was obviously below market expectations, but also I think below your expectations. So 2 points specifically on the pricing. Where is the balance of kind of cutting [ your ] customers some slack and then being surprised by sudden changes in input costs, i.e., could you have implemented the 2% October price increase earlier like at the beginning of the month? Or can you explain how the lag works? How really tough it is to increase prices that frequently? Can you price out a little bit more? I mean, you undercut your long-term margin guidance, clearly not what you had in mind, I guess, at the beginning of the year. And then secondly, energy is only 1% if you think of the cost. So it wouldn't be much costly to hedge power, for instance, will you contemplate that when prices normalize?
That was a basket of questions. I think number one, I'll try to answer. First of all, the general delay which we have in our industry to pass on price increases is driven by the fact that we are selling to distributors, which they're selling to plumbers and the plumbers are selling to you as an end consumer. So we need to give time to our customers, on the distribution level, on the installation pumping level to increase their prices. This is the reason why we have not been able, for example, to implement the price increase as of Q4 earlier because of the energy prices, which exploded unexpectedly in Q3.
The second part, I think, of your first question was what is our take from the Q3 results. As I said during our introduction, we anticipated the destocking that was clear that we will see a destocking due to this historical high price increase as of July. However, we underestimated the magnitude of this destocking. But if you allow me to comment on that, it's not only negative, this destocking. It's also kind of positive because that means we are moving more to normalization. We get more transparency again about the real market demand and we have also less uncertainties and risks in terms of our volumes. So it's not only negative, this destocking. But we have been kind of surprised you could say about the magnitude and the speed in the third quarter.
The second question was around energy and energy hedging. We are not massively hedging energy. We have had a higher hedge last year. Some of them were not valid anymore this year. We still have 20%. What will happen once we are back to a normal environment for energy prices, if we would change our strategy with not material hedging prices, we will see -- we have not yet made a decision. Obviously, that depends also on the level. I can't give you a clear answer at the moment.
The next question is from Arnaud Lehmann from Bank of America.
Two questions on my side, please. Firstly, could you give us an indication of volume trends in October? Are they consistent with the kind of mid-single-digit decline that I suspect you get in the later part of Q3? So minus 5%, minus 6%, is that a reasonable assumption for Q4?
And secondly, more, let's say, strategic questions. I think you mentioned a couple of times the shift in demand from sanitary to heating solution due to the energy crisis and that may be heat pump were more popular in the short term than sanitary products. Is it something -- is it an area that you're looking at? Because this could be more than a short-term trend. This could be something that lasts a few years. Would you consider the acquisitions in heating solutions?
The first question is the sales development in October. Sales in October were slightly below previous year and in line with our full year top line guidance. Second question, the shift from sanitary to heating, no, it doesn't trigger any strategic discussions or maybe shift at Geberit to move into this sector. This is too far away from our core business. So that doesn't trigger any strategic considerations to shift, for example, our business more to heating solutions. So that's a clear no.
The next question come from Martin Hüsler from ZKB.
First of all, how do you measure the effect of the destocking of the wholesalers? Is this just talking to them? And how do you measure the underlying demand, let's say, of the installers? What do you see there, inventory level of the installers, this also come down? That's the first question.
So to answer -- the short end is clear, we are not measuring. We are not able to measuring inventory levels of wholesalers and also obviously not on a plumber level. So the only one we have is some qualitative feedback from more or less individual selective feedback discussions with customers. So we don't have a systematic way and no KPI or a quantitative measure to measure the inventory level for wholesalers. This is not possible.
Okay. And when you look at the installer side, what are their inventory levels?
Even worse, obviously, because they are more far away from us. We are not selling to installers. But in channel, plumbers don't have really high inventory level. The inventory in our distribution channel, in our value chain is managed by the distributor, by the wholesaler that is [indiscernible] core value adds to manage inventory levels and the plumber typically does not have a high inventory level, especially not a small one.
Yes. Sorry, I was wrong in my formulation. So if you look at the German plumbers, what's the order that you see there, the order situation? How many weeks?
That hasn't changed since our H1 results, still the same number. We don't have new numbers at 17.9 weeks, which is a record high level, which is the current order backlog of plumbers in Germany.
Okay. And then my second question would be, if I look at the sequential development of personnel cost, it came down a bit more than I was expecting. Is there something special apart from like a seasonal effect, do you already implemented cost-cutting measures on personnel?
No. We have not implemented any special cost cut on the personnel. So it's really the seasonal patterns and the normal flexibility that we have with the personnel.
And usually, in Q4, the seasonal pattern would mean that the costs would move up a bit again. Is this correct?
It's flat, I would say. What is correct is that we -- it moves up in as much as we're closing the plants over Christmas, and therefore, the ratio actually goes up. Yes, there you're correct. But let me be precise, no change year-on-year, same effect than you would see every year.
The next question come from Cedar Ekblom from Morgan Stanley.
A couple of questions and follow-ups. So could you give us some color on the run rate of volumes over July, August, September, October? The reason why I ask is to understand, firstly, how far we are through the destocking process.
And then also just with reference to a comment that you made that you see sales in October below the previous year. And I would expect that the pricing contribution in October should be higher than it was in the third quarter. So I'm just trying to understand what that means for your volume development. Does that mean that your volumes are weaker in October than they were in the third quarter considering you had positive currency top line growth or constant currency top line growth in the third quarter? So that's the first question.
The second question is in terms of your cost of materials, how much is energy and how much is other raw materials so we can try and understand the blended sequential and year-on-year increase in your overall cost of materials into the fourth quarter?
Third question is on the pipe business, how much of that business is exposed to sanitary versus heating markets? I'm just trying to understand if there is potential for you to benefit from some of the investments around heat pump adoption in Europe considering that might require some investments in underfloor heating and how much of your pipe business is exposed to that?
And then just on the last point on pricing. If I look at your commentary, you're saying the price increases haven't fully come through, and there's 2 ways we could interpret that, that you're going to secure the price increases but with a delay or that your price increases are actually not sticking. I would tend to lean towards the second option because your volumes are significantly negative. Could you explain to me why I'm wrong and why you actually think all of your pricing will come through but just with a delay?
Quite a number of questions. I hope we can remember all of them. We'll start the first one. The volume were -- if I start with the first one, I think coming down to the volume in October. So we had obviously still positive volume development. In Q2 also, in the course of Q2, a very good volume also at the end of Q2, then the negative volume development of minus 8% in Q3. In October, sales were only slightly below previous year, slightly below previous year. A little bit of stronger price increase impact than in Q3 means volume where most probably be less negative than in Q3.
The second question about energy and cost of materials will take Tobias.
Energy are not in raw materials. So raw material line is purely the raw material. Energy, which is shown with the maintenance and supply, was last year around [indiscernible] million. And we provided the increase for this year.
Question #3 was around the exposure of our piping business towards heating solution, for example, heating pumps. Yes, there is a certain business or a certain share of our piping business, which is exposed to heating because that is one of the applications that you transport over this warm water, [indiscernible] in a building and also with -- in connection with the heating pump, there is a certain demand for pipes. But however, the larger part, the larger part of our business within piping is towards sanitary and the smaller part towards heating. And the fourth question was about the price increase in [indiscernible].
Yes, so should we interpret the fact that the Q3 pricing was a bit lower than the price...
Yes, I remember the question. Yes. And you have 2 hypothesis, number one is just a time delay; and number two is we have not been able to implement price increases, we believe, clearly, it's #1. The volume decline in Q3 was driven by destocking, not by kind of a price sensitivity. And the reason is, as I explained before, the price increase as of July, the 7.5%, was a historical high price increase. We had a historical high order book end of June still at the lower price levels. So the volume, which we still delivered in July, even in August on -- from the high order book on our side, with lower price [indiscernible] Q2 was somewhat higher than normal. And this is the reason why we have not seen a full impact so far in Q3, just at around 10% and not maybe 11%, 11.5%. So it's a time delay. In fact, it's not a sensitivity argument that volumes are coming down because we are not able to implement price increases.
Okay. And then sorry, I just didn't understand the one answer on volumes. So in the second half, your volume -- sorry, in the third quarter, your volumes were down 8%. And to understand correctly, you're saying your volumes are down less in October [indiscernible].
[indiscernible]. The price increase is stronger in -- or this price effect is strong in October. So the volume decline is stronger than in Q3, slightly in October most probably.
The next question come from Martin Flueckiger from Kepler Cheuvreux.
Just to clarify on that, I'm a little bit puzzled now myself. The volume trends when you -- originally, you said slightly below previous year and in line with full year guidance. Now was that an absolute or a relative statement because we had, what, minus 8% volume decline in Q3. So are you saying it's worse than the minus 8% in Q3? Or are you saying it's better than the minus 8% in Q3?
Yes. Let me repeat, Martin. Let me repeat. Net sales in October were slightly below previous year. The price effect, most probably [indiscernible] was stronger, more positive than in Q3. So volumes were worse than minus 8% as of Q3. We don't have yet the numbers, but that's what we are seeing. And this is in line and maybe I have to repeat that this is in line with our full year guidance for the top line.
Okay. Got it. So volume is a little bit worse than the minus 8% in Q3 for October.
And if I may add one remark. I think it is very highly uncertain environment, and I think we have seen it also in Q3, the unexpected magnitude of the destocking. I would not put too much emphasis on monthly numbers.
Sure. Okay. Got it. As regards to price increase statement that you've made for 1.5% as of Q1 or January 1, 2023, I think you guys were also mentioning the spillover effects from the other 4 price increases now. I realize that we can do a lot of math ourselves, but it's getting pretty complex these days, to be honest.
Just wondering what kind of total price increase for next year are we looking at? Because I was already looking at around 5% to 6% increase based on the price increases, the 4 price increases that you had announced so far, should I think of around 7% now? Or what kind of magnitude are we looking at? And I'll take my last question after this one.
In all fairness, we also do our math. At the moment -- I don't have the number in mind at the moment. So I can't give you the sharp answer, therefore, I want to refrain from giving you an answer. But it's technically calculated. You can calculate it, I haven't [indiscernible] mind at the moment. And don't forget, they're still not clear what happens is obviously other price development last year. It's not yet clear what we do with our regular price increase, which we do typically as of Q2. We have not yet decided what we will do. And it all depends, obviously, on the raw material development as well. So I'm sorry, I can't give you the -- the sharp number right at the moment.
Okay. Not even for Q1?
[indiscernible] at the moment.
Okay. And then my final question is on the installers assessment of consumers' preference with regards to HVAC over sanitary products. Now based on what I've seen from the German Sanitary Industry Association, the 17.9 weeks that you've -- that you've talked about earlier on, it's quite a bit of a difference when you look at HVAC installations as opposed to sanitary ones.
Just curious here, are we -- or at least that was the summer survey that I had seen. I'm just curious, are we still looking at a clearly higher HVAC order book level for installers here? And I'm just wondering how -- whether that trend is going to continue in Q4 and potentially even into H1 next year or even beyond that? Just trying to get a little bit of color on that, if I could, please.
So first, for Q4, I agree. I think there is still a shift from or a demand for heating solutions, especially in Germany. And by the way, it's only a number of companies in Europe. It's not everywhere. For example, in Switzerland, this is not a big topic because we have already a high share of, for example, heating pump solution. It's typically Germany [ a topic ], Austria, but it's not across Europe.
And this might will definitely be the case also in the fourth quarter. I don't know about next year, and again, don't overestimate this shift here because you still need a bathroom, you still need a bathroom [indiscernible]. It's not that vanishes completely. There is a certain temporary shift to this topic, but I would not overestimate it. And I don't know what happens next year.
The next question come from Yassine Touahri from On Field Investment Research.
A couple of questions on my side. I think you did very well in the past couple of years in an environment where you had supply chain disruption. And you probably gained a little bit of market share versus your competitors that were not as organized as you are. Do you see a reversal of those market share gains in an environment where supply chain constraints are easing? That would be my first question.
And then second question, when we look at the long term and the long-term growth prospects of your company, do you feel that there might be an opportunity for you to make an acquisition or to invest into more products related to energy efficiency and to heating to capture the long-term growth in this subsegment [indiscernible] Europe want to become carbon neutral?
The first question, we believe that we have gained a disproportional market share over the period of the last 3 years, especially with tailwind from COVID-19 and the way how we managed the COVID-19 crisis. At the moment, we believe that we are more back to a normal market share gain. We don't think that we are disproportionately gaining market shares at the moment.
The second question, if I understood correctly, if we are thinking about strategic moves into more energy-oriented solutions, the answer here is, as I said before already, it's no. We don't shift or change our strategic agenda due to the current environment of the energy crisis in Europe. We speak to water management. This is our core business. Also there, you have a very important sustainability dimension. Don't forget that we are contributing substantially towards saving in buildings in mid-Europe and outside Europe. So we stick to our core competence, order management, and we don't shift that to more energy efficiency-oriented solutions due to the current energy crisis.
The next question come from Patrick Rafaisz from UBS.
Thanks for taking my 3 questions. Maybe first on the destocking cycle. I'm just curious about regional differences. Would you say, just looking at the Q3 local currency net sales development, that's a good indicator for how far advanced you are in the destocking, i.e., Switzerland, nothing yet; Italy, nothing yet; U.K., nothing yet, but ongoing in Germany and maybe France, Iberia, does that make sense? That's the first question.
There is a regional difference in terms of destocking. For example, in Switzerland, we have seen much less destocking in the third quarter, just driven by the fact that we had much lower -- or the inventory level at wholesalers were not as high because we had lower price increase in Switzerland. That's, by the way, a good indication how we see that the price increase mainly triggered the destocking effect, not demand.
So the Switzerland destocking effect in the third quarter was smaller because the buildup of stock was lower due to lower price increases. And the same is in Italy or with a different -- for a different reason. In Italy, we have seen also a strong third quarter, less destocking, but that is driven by a structural reason. The wholesaler market structure in Italy is much more fragmented than in other countries. So there was less of stock built up in Italy, or in other words, less destocking than in the third quarter.
U.K. was a bit a different case. U.K. is just a base case, a base effect reason. We had a very -- or relatively a weak Q3 in the previous year. So that was the main reason for the U.K. that we have a double-digit growth.
That's helpful color. Now staying on that topic, maybe the -- what your updated guidance implies for the fourth quarter. It's a very wide range on potential local currency growth outcomes, and I agree with you, minus 8%, 9%, 10% is still within that range. But you seem to be much more confident on the margin, right, which should be somewhere in line with Q4 last year. Does that make sense? So your confidence level is much higher profitability than it is on the volume outcome for the year given the uncertainty in the channel.
It depends how you define the word around. Therefore, I would not completely agree with you that depends just the word what is around. We just didn't give you a range, but around 27%.
Okay. Okay. Okay. Good. And then the last question on cash flow. Q3 was the first quarter now this year where free cash flow was down sort of in line with EBITDA, right? So even though you may have still built up some safety stocks in ceramics due to potential energy situations, it seems that the working capital build did not continue on the broad scale, right? And what's your view for the excess quarter for Q4? Will we see a disproportionately better performance now for free cash flow given that the channel build has stopped and probably your safety stocks are at a sufficient level [indiscernible] internally?
So at this stage, we -- so the largest effect definitely, I would say, is over. We're still continuing with a moderate buildup of safety stock due to the uncertainties in the supply chain and on the energy side. But indeed, at that stage, and remind you that it is always especially with the other elements of the net working capital a bit difficult to forecast, but we do not expect major shifts, which would be outside the normal seasonal fluctuations.
The next question is from Emrah Basic from Baader-Helvea.
I have 3 questions. Maybe I'll go one-by-one. First one, what are the main growth drivers in your international regions? Or what product segments grew the best in each region?
Basically, all our product areas developed similarly strong. However, we have the strongest product area outside Europe in Installation & Flushing Systems for various reasons. So that's just the biggest one. We have a disproportionate share of Installation & Flushing Systems in that region. Therefore, this was the biggest contributor. But also the other smaller parts in these areas grew very nicely in the third quarter.
The second one, how much did FlowFit actually grow approximately? And approximately, what percentage of sales are you hoping to get from FlowFit in around 5 years?
The first number doesn't make sense because we just introduced FlowFit last year. So there is no base. So that doesn't make sense. We don't communicate numbers, but FlowFit have substantial contribution already this year to sales growth of Piping Systems as an indication.
Okay. Great. And then my last one, a bit more granular. When looking at the operating cash flow in the first 9 months versus the first 9 months of the last year, could you elaborate a bit on the main driver of the decline of around CHF 200 million for the 9 months, given that net income decreased by around [ CHF 110 million ] and net working capital increased by around CHF 40 million? So what's the rest?
Yes, sure. So again, you see this CHF 200 million includes, by far largest part, obviously, is the lower operating result, the EBITDA decrease, but then we also had negative development of net working capital. And it's really the [indiscernible] that you need to apply on the net working capital. So net working capital development was driven by accounts receivable. And then the same comment that we had in the last quarter, it's a lower value that we had at the year-end of '21 compared with the year-end of '20, and that's by far the largest negative contributor in the net working capital and much smaller effect came from accounts payable.
And again, most of that, to be precise again, is really driven by the unfavorable start at year-end and not by a general increase whatsoever on the net working capital. So if you look at the balance sheet figures, you wouldn't see big, big changes on year-on-year base.
Yes, exactly. That's why there's no big change. But when looking at 9 months 2021 and 9 months 2022, the operating cash flow is still down to [indiscernible] that's why I was wondering.
But you need to take the starting point at the end of December, and that explains actually and a largest contributor for that is accounts receivable.
The next question comes from Marta Bruska from Berenberg.
I have 2 questions, please. I will take them one-by-one. I was just wondering, you mentioned several times on the call that you considered the EBITDA margin of around 28% to be at a very good level, clearly industry-leading. And so why do you increase extraordinary prices again as of Q1 given that raw materials have weakened again and you already mentioned that the Q4 should be sequentially better than Q3, and in particular, into the weakening demand environment? Does this incentivize your customers to switch to Geberit brand? And perhaps you risk market share loss in volume terms?
The reasons, first of all, it's not a price increase broad across countries. It's a very selective price [indiscernible] in a number of countries as of Q1. And the main reason is the extraordinary high wage inflation, which we have to expect for next year in a couple of countries. So that's the main driver. But you're right, in tendency, we're expecting slightly lower raw material prices. In Q4 -- also energy prices should hopefully come down in Q4. The main reasons here selectively due to the selectively very high wage inflation, which we expect next year.
Yes, that I understood, but the wage inflation is unlikely to provide the same level of magnitude of the pressure on your margins as the raw materials and the energy costs taken together, right?
Sorry, I didn't understand. Can you repeat it?
Yes. So this I understood that it's driven by the -- your expected wage inflation. However, given your personnel costs, I would just imagine just to provide the same level of pressure on your margins as the raw materials and then energy cost combined so far in the third quarter.
You're right. But don't forget that we've seen stabilization on the raw material and energy. But year-on-year, they're still slightly up, so it doesn't put into question the increases we have so far. But we see sector round effects on the wages as Christian just said, and that's why we decided selectively to increase the prices.
All right. And then my second question is with regards to your strategy for the -- purchasing the energy. So it seems quite odd, to be honest, that the 2 ceramic plants in Germany wiped out more than 2% of your EBITDA margin. And so I do understand the spike in energy costs, but it's a bit surprising to find out that you don't hedge 80% of your energy costs given that these plants are -- it's known that they are very energy intensive. So a couple of other companies have this level of energy intensity, and they typically have an agreement with the local energy providers.
So just was wondering sort of again what caused you to choose this strategy? And when would we expect to see some easing from your LPG installation in Germany? When this is getting -- going online?
Maybe it's a misunderstanding. The 2 plants in Germany we were talking about, we just talked about that occurs of cost supply shortages. These 2 plants are consuming energy, but they are a small proportion of the entire energy consumption, which we have. Half of our energy exposure or consumption is electricity-driven, and the other half is gas driven. And part of this half are the 2 plants in Germany. So it's a smaller part, is driven by the energy by the gas consumption of the 2 ceramic plants in Germany. The hedging strategy has nothing to do with 2 plants in Germany specifically.
The decision that we are not hedging energy prices or not massively hedging energy prices, that was taken a couple of years ago, and we benefited for many, many years substantially by this strategy because the energy prices, obviously, as you know, came down massively over the last 5, 10 years. And at the moment, obviously, we only have still 20% hedged. Now we're [ paid, ] that's true. And we will see what we will do after this energy crisis in terms of strategy. But overall, we benefited also over years from lower energy prices.
That was helpful. And when the LPG is going online?
That will be in the course of next year.
The next question come from Christian Arnold from Stifel.
Two areas for my side I want to discuss. First, again, destocking effects. You were mentioning very, very high stock levels in the midyear, then this the negative impact from the higher prices so that we had this destocking effect in Q3. I want to readily stand now in terms of stocking levels, from a high, very high level, you said still above average now to a normal level. Are we halfway through? What are your assumptions here?
Honestly, I can't give you a precise answer. I would love to be able to give you a precise answer. But I can't. So what is clear is that we are lower in terms of inventory levels at wholesalers compared to the record high level end of June. I think that is clear. But what is also clear, what we hear from wholesalers, we are not yet back to normal. Where we are exactly in between? Honestly, I don't know.
Okay. But linking these destocking effects to this very high price increase you implemented last summer would somehow imply that the destocking effect should be lower going forward given your lower price increases, right?
I don't want to speculate, to be honest. Because I don't have enough information than factoring figures. So that's speculation. I can't tell you anything about that.
Okay. And maybe comparing the destocking effect to the heating/sanitary effect. Is it fair to say that the destocking effect was much larger than the sanitary/heating effect?
That's, I would say, yes, that seems to be very clear. Yes. It is mainly the destocking effect. And the sanitary is switched from [indiscernible] lower. There we are pretty sure.
Okay. And then looking at the development of Germany, which was -- I mean, rather positive still in Q3, and also thinking that the heating impact could be probably most importantly be in Germany, do we have to fear that this heating impact will become bigger in the next quarters?
The next quarters, I don't know. I think it will remain for Q4, specifically for Germany, what we have seen for Q3 in terms of magnitude of this effect. For the quarters, I don't know. But for Q4, I would agree, will remain.
Okay. And the heating effect, I mean, that's mainly Germany, that's mainly Austria, maybe a couple of other European companies, but it's definitely not Switzerland, it's definitely not international?
I agree. It's not Nordic. It's not Switzerland. The most important ones are Germany, Austria, maybe also include Netherlands and Belgium. These are the 4 main countries where I would say we see a certain effect from this temporary shift to heating solution.
The next question come from Alessandro Foletti from Octavian.
Just a few follow-ups, please. This heating effect, does that also imply a competition on the workers? I mean, are these the same installers working for sanitary as well as heating? So if they run after heat pumps, they cannot make sanitary? Or are these 2 different group of people?
No, it's the same, typically the same plumper. So it's a double effect, you could say. From an end consumer perspective, when you shift somewhat a little bit maybe to heating, but also from the installation level, plumbers, they shift a little bit more at the moment, for example, in Germany to heating solution instead of sanitary. So its typically the same plumper doing both.
Okay. And second question is on the EBITDA margin. You mentioned that the current level is not sustainable. I understand that you telling us it's lower than normal. Are the price increases enough to bring you back into the range, into the target range? Or do you need more, i.e., if you have volume declines, it will be more difficult for you to go back into the range?
So as you have seen and as we have also provided in our presentation, which is online, you see that we have been able to almost fully compensate energy and raw material prices with our sales price increases in the third quarter. However, in the first half of the year, we have not been able because of the delay effect of these price increases. And this is the main reason why we expect that the EBITDA margin is below 28% this year. So in other words, if we have the full impact of the price increases [indiscernible], we expect that should help to bring us back to 28%.
Okay. So not a meaningful operating leverage in this sense?
No.
The next question comes from Remo Rosenau from Helvetische Bank.
Will you train around 80,000 plumbers a year? So you not only get qualitative feedback from your wholesalers in order to judge the destocking effect, but also constant qualitative feedback from your many thousand plumbers who are much nearer to the market. So what kind of qualitative feedbacks are you actually getting from them about the actual development of the underlying marketing, the sanitary market at the moment? I mean, is it only a [indiscernible] to heating? Or is also the underlying demand getting softer if you listen to your plumbers?
Listening to our plumbers at the moment as one feedback is exactly what you said is that they are doing a bit more heating in some of the countries, and as mentioned before, due to the strength of heating pumps. In general, if you listen and they still have lot of work, they still have high order books also in terms of sanitary. So they don't see -- they are not at the moment seeing a deterioration of their business, not at all.
And maybe don't forget, these are small companies, an average company in Germany has 7 employees. If you talk with these companies, what is your expectations for the business? They're not doing business planning for next year. They don't have a number. They see their order books, they have a lot of work, that's what they say at the moment. We still have a lot of work. They are not doing forecasting or kind of macro analysis, not at all. At the moment, it is a good environment still in most of the countries.
I mean, I understand that the order books are very high. I mean, that's the case everywhere. But even talking to these guys, I mean, you also hear, yes, but I don't get many new orders actually. I mean, what about that?
To be honest, I can't give you here a clear answer because we are not collecting that in a systematic way. I can just say it's more a mood discussion here. And the general mood is at the moment, good. Obviously, that if I would summarize in my words, the uncertainties going forward also into next year, they, if I would try to summarize their feedback, soft feedback, that has increased. That is clear because they also read newspapers, they are also understanding the prices are going up, that they have an energy issue in many countries in Europe. So that's the uncertainty. As the normal uncertainty which you also observed, I would say, on the street, that has also increased.
The next question is from Stefanie Scholtysik from Mirabaud Securities.
I have 3 questions around your product. You mentioned the FlowFit, which is a great success. I mean can you share which countries you have rolled it out so far? And which will be the next? And do you see any cannibalization of other products? And is the EBITDA margin, is that comparable to other products you already have?
So FlowFit was introduced last year in the German speaking countries in Netherlands last year. And this year, we further rolled it out to Italy, Belgium, Nordics and some [indiscernible] countries. It's not cannibalizing our existing Piping Systems. So in total, we are growing, thanks to FlowFit. It's not substantially cannibalizing the other system.
And in terms of margins, we don't have an EBITDA margin on FlowFit -- product level. But the gross margin at the moment is still somewhat lower than group average, but that has to do with volume and scale effects. Once we are reaching higher volumes, we expect also group average margin level of FlowFit.
And then on the AquaClean, you didn't mention anything on it. It is more a consumer-related product, if you want. How is demand behaving for those products in the current inflationary environment?
So AquaClean in the first 9 months, sales and volumes are on previous year's level. So no growth. But keep in mind, we have had a very strong growth over the last 2, 3 years, also driven by the tailwind from COVID-19. So compared to 2019, we are still have been growing with a CAGR -- with a substantial double-digit CAGR over the last [ 2 ] years. So we are selling, in other words, demand this year is on the very high level of last year.
Okay. Good to hear. And then also any comments on Geberit ONE? How is this product line doing?
We are very happy with Geberit ONE. It's really growing, and we are doing better year-by-year. However, that's not the same as for FlowFit. It's one product. It's basically 1 or 2 SKUs. The contribution in terms of absolute contribution is much, much smaller, but it's a nicely growing product.
The next question is from Manish Beria from Societe Generale.
So I will take my questions one-by-one. First is a clarification. So you said October sales is slightly down Y-o-Y. So I just want to understand, it's in local currency or in CHF, slightly down sales in October?
Everything we are talking about is in local currencies.
In local currency, okay, that makes sense. The second question is on the raw material. So if you look at the spot prices, so it's already coming down. So what is your estimate if you do the calculation that how much raw material prices will fall next year if the spot rate prevails and also on the energy cost and we need the energy cost stays here, so what will be the impact next year in terms of pricing, in the energy price increase or decrease now next year? Maybe it will increase energy price.
As I said during our introduction, I don't want to speculate about the next year, especially not about raw material and energy prices. So I can't give you an answer for next year, sorry.
Okay, no problem. And then this plumber order book is very high. So I think you mentioned something like 17 to 18 weeks. So do you think, I mean, next year, some of the weakness of the consumer demand could be mitigated by eating away the plumbers order book, I mean, maybe the consumer demand is lower, but plumber keeps on eating up their order book, and that's the reason you don't see much volume decline next year. So that -- these kind of trends can play out still?
Yes. Again, the same answer [indiscernible] before. At that stage, we do not speculate on '23.
We have a follow-up question from Laurent Runacher from Exane [ BNP Paribas ].
Just one question on the lag effect because I've been spotting that housing permits in Germany are very weak recently. So to what extent and with which lag can it be seen to have consequences on your sales? Is it about a 6-month lag? What would you pick as a guesstimate?
The typical time lag between building permits impact on our sales depends on the product area is around between 9 months, and maybe 15, 18 months. Typically, pipes are affected earlier due to the production process and Bathroom Systems typically have the longest lag effects from a building permits to a sales impact in our industry.
And I've got an additional question, because there are talks about, first of all, nonresidential outlook for 2023. Some people are thinking that there is a support from reindustrialization and people getting weary of too long supply chains. So reshoring some part of the industry in Europe, whilst the mortgage rates are obviously very negative, what would be your take? Do you see a support from reindustrialization? Do you see some orders or some inquiries regarding huge plants being built in Europe? What's your take?
As you know, 2/3 of our business is residential. So if I can understand your question correctly, that affects the nonresidential and the small part of this nonresidential is linked to maybe supply chain, logistics centers and so that's a relatively small business us. Whatever the impact is of reshoring or manufacturers are building plants more in Europe, that has a minor effect on our business. Because as I said, predominantly residential and even within nonresidential, large part is [indiscernible], commercial businesses, hotel business, hospitals and a smaller part in industrial plants.
There are no more questions at this time.
I think it's it. Thank you very much for your questions. We wish you all a great day. Thank you.