Geberit AG

Good morning, ladies and gentlemen. I am the entity operator for this conference. Welcome to the Gaborit conference call on the half-year results 2020. Please note that for the duration of the presentation, all participants will be in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. This call must not be recorded for publication of broadcast. At this time, I would like to turn the conference over to Mr. Christian Buhl, CEO, accompanied by Mr. Roland Ich, CFO, and Mr. Roman Wiedler, Head of Corporate Communications and Investor Relations. Please go ahead.

Thank you for the introduction. Good morning, ladies and gentlemen, and welcome to our conference call on our Q2 results. The grid delivered very good results during the COVID-19 crisis in the second quarter. Let me start with the key statements. the APDA margin reached in the second quarter previous year's level despite a substantial decline in net sales of minus 16%. The resilience of the margin in the second quarter led to an increase of 70 base points of the APDA margin in the first half of the year and reached 31.5%. The APD's margin reached 26.3% almost previous year's level. The net income margin decreased slightly by 1% in the first half of the year to 21.4% due to an increased tax rate and a weaker financial result. Before we discuss the financial results of the first half of the year, let me briefly summarize our sales results which we already communicated on July 6th. Net sales in Swiss francs decreased in the first six months by minus 98%, driven by the COVID-19 crisis and a negative currency development. In local currencies, net sales decreased by 4.5% in the first half and by minus 10.7% in the second quarter. The negative COVID-19 impact on demand varied substantially by geography, depending on the degree of the local lockdown. In markets where construction sites were closed around 20% of our sales exposure, volumes declined substantially or in some cases even collapsed in the second quarter. These countries include Italy, France, Spain, the UK, India and South Africa. The remaining countries were also impacted by lower construction activity imposed by COVID-19 restrictions. which led to a sales decline in Q2, however, much less pronounced. Let me now comment on the operating and financial results in the first half of the year. APTA decreased under proportionally compared to net sales by minus 7.8% to 452 million Swiss francs. The APTA margin reached 31.5%. Despite the net base decrease of minus 10%, we were able to increase the APK margin by 70 basis points. The main drivers for this margin improvement were soft and targeted cost containment measures, a heightened, even further, increased flexibility in production and logistics to cope with the substantial decline in volume, lower armature prices, and increased sales prices. It is worth to mention that these results were achieved without restructuring, salary cuts or support from the public sector, for example through short-time work. The public support from short-time work was minimal, since we consciously decided to introduce short-time work only very selectively and for a very short period of time in France, UK and Italy, the countries which were most hit by the lockdown. The negative currency effect of minus 5.3% on net sales in the first half of the year had only a minor impact on the ABDA margin due to our strategy and our continued efforts to achieve a natural currency edge. AG decreased in the first six months by minus 10.5% to 386 million Swiss francs in line with net sales, leading to an EBIT margin of 26.3%, 25 points below previous year's level. The slightly weaker development of the EBIT margin versus the FDA margin was driven by higher depreciation costs from higher investments in previous years. Net income decreased by 13.9%, slightly disproportionally to EBIT, to 350 billion Swiss francs due to a higher tax rate driven by the new tax regime in Switzerland effective as of this year and the weaker financial results in 2012. Earnings per share decreased by minus 13.5% to 8.77 Swiss francs, positively affected by the share buyback program. In the first half of the year, 262,000 shares have been bought back under the program launched in June 2017 and an average share price of 406 Swiss francs. In total, 1,026,000 shares have been bought back since 2017 for a total consideration of 440 million Swiss francs. The share buyback program has been finished in April this year according to plan. Free cash flow decreased in the first half of the year by minus 32% to 174 million Swiss francs. This over-proportional decrease was driven by two factors. First, a negative base effect with an extraordinary strong free cash flow in the previous year when free cash flow increased by 35%. And second, an increase in network capital due to the strong data dynamic within Q2, starting with a substantial decline in April and a recovery towards the end of June. In order to leverage the low interest rate environment and the strong debt capacity of our balance sheet, we issued in April a standard Swiss franc bond in the amount of 300 million Swiss francs with a maturity of two and a half years and a coupon of 35 basis points. With this, Gabrit remains to be very solidified. By the end of June, we hold a cash position of 350 million Swiss francs and an unused revolving credit facility of 500 million Swiss francs. Let me now comment on our outlook for the remaining year. Let me start by saying that ongoing uncertainties around the COVID-19 crisis make an outlook still very difficult and uncertain. Accordingly, our outlook is subject to uncertainties and based on the assumption of no lockdowns or material business restrictions driven by the COVID-19 pandemic. Let me start with the current business performance. In July, safe to a slightly above previous year level, driven by stock rebuilding effects of wholesalers in countries which were severely hit by the lockdown, for example in Italy or in France. Under the adoption of no COVID-19 imposed lockdown or material business restrictions, we expect in the second half of the year further normalization of the building construction industry. However, delayed or stopped projects, especially in the non-residential segment, and the temporary closure of custom showrooms in the second quarter might have an increasingly negative impact on demand during the second half of the year. Under these assumptions, we expect curtly adjusted net sales in the second half of the year to be slightly below the second half of 2019, and an ABA margin for the full year slightly below 2019 level. The weaker outlook for the ABDA margin in the second half of the year compared to the margin increase we achieved in the first half of the year is driven by three factors. First, generally increasing costs again due to the normalization of the business after the sharp decline in Q2. For example, the marketing or the relief of the higher increase. Second, raw material prices, which started to increase again since June, and tougher comps from lower raw material prices in the second half of 2019. And thirdly, a higher wage inflation, since several tariffs increases this year become only effective as of the second half of the year. Let me close. Our introduction with a short summary. The last couple of months were marked by a historical business collapse in terms of speed and extent. However, it delivered very good results. First, our supply chain was not materially affected by the COVID-19-imposed restrictions, and the availability of our product assortment was ensured. The stability of our supply chain was largely driven by our strategy to pursue a high degree of vertical integration in manufacturing, decreasing the dependencies from suppliers, and our strategy to source and to manufacture locally, close to our customers in our end markets. Secondly, we were able to maintain our industry-leading profitability on previous year's level, He signed the unprecedented collapse in volume in the second quarter, and this without restructuring efforts or support for the public sector. Lower raw material prices helped, but were not the main driver. The main reasons for the strong profitability were a half and consequent crisis management based on short decision-making processes and the lean organizations. the continued investment in further automatization and process flexibility over the past years, and finally, the flexibility and the high commitment of our employees based on good and trustful relationships between employees and management. This unprecedented crisis reveals the fundamental strengths and resilience of our strategy, our business model, our stability, and our strong company culture. key assets during times of crisis. Thank you for your attention. We are now ready to answer your questions.

Ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speakers, please dial 0 and 1 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial 0 and 2 to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment please for the first question. And the first question is from Andre Cogman, Credit Suisse, your line is now open, please go ahead.