Geberit AG

Ladies and gentlemen, welcome to the Geberit conference call on the first information of the year 2022. I am Sandra, the chorus call operator. I would like to remind you that the conference is being recorded. The presentation will be followed by a Q&A session. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Christian Buhl, CEO. Please go ahead, sir.

Thank you for the introduction and good morning ladies and gentlemen. Welcome to our Gerrit's full year sales conference call. We will first comment on our fourth quarter sales figures, then review our full year sales performance, followed by our guidance for the operational and financial results in 2022 and finish with an outlook for this year. Let me start with the fourth quarter. We had a challenging fourth quarter. Net sales declined by minus 14%, negatively affected by a substantial negative currency effect of minus 6%. In local currencies, net sales declined by minus 7%. Net sales were driven by three factors. First, a positive impact of around 13% from price increases. Second, a negative effect of minus 2% from one working day less. And thirdly, a volume decline of around minus 18%. This significant volume contraction was mainly driven by two factors. First, a base effect from strong volumes in the previous year due to the benefits from the COVID-19-induced home improvement trend and the stock buildup of wholesalers. and secondly, destocking of wholesalers after the extraordinary strong price increases in the second half of 2022. We assume that with this strong volume decline in Q4, the majority of the excess stocks in the channel have been destocked until the end of 2022. Let me now comment on the development in the various regions in Q4. I start with Europe. where currency-adjusted net sales decreased by minus 8%. Growth was achieved in the Nordics with plus 1%, in the Benelux and Italy with plus 2%, and in the UK with plus 18%. Single-digit net sales declines were recorded in France with minus 1%, in Austria with minus 2%, and in Switzerland and Iberia with minus 4%. Net sales declined by double digits in Germany with minus 18% and in Eastern Europe with minus 19%. The stronger decline in Germany and Eastern Europe was driven by a stronger base effect compared to the other European countries and the impact of the war in Ukraine on our business in Russia and Ukraine. Outside Europe, we increased net sales in the Far East Pacific by plus 4% supported by growth in China. Net sales were down by minus 6% in America and minus 5% in Middle East Africa. The three product areas showed again a different sales dynamic in the fourth quarter. Piping systems grew currency adjusted with plus 1%, supported by a very good development of the new piping system flow feed. Bathroom systems net sales decreased by minus 4%, negatively affected by a base effect from the COVID-19-induced home improvement track. A decline of minus 16% was recorded in installation and flushing systems, as this product area was most affected by destocking effects at wholesalers. We will now comment on the full year 2022 sales performance. Net sales in Swiss francs decreased by minus 2% to 3.39 billion Swiss francs. This slight net sales decrease was driven by a substantial negative currency effect of 234 million Swiss francs, or minus 7%. In local currencies, net sales grew by 5%. The war in Ukraine led to a sales loss in Russia and Ukraine of around 1% of group net sales in the full year 2022. The full year sales growth of plus 5% was driven by strong sales price increases of around 9% and continued strong volume growth in the first half of the year. Volumes reached new record levels in the first half of the year also due to the further build-up of inventories at wholesalers and sometimes even at installer levels in light of the extraordinary strong price increase. In the second half of the year, volumes declined sharply due to the anticipated reduction in the general inventories. New product introductions considerably contributed to sales growth last year. For example, the new piping system FlowFit, which was rolled out to several new countries, or the new WSC flushing system Alpha launched in the emerging markets outside Europe. Compared to pre-crisis COVID-19 levels, hence without any base effect, current adjusted net sales in 2022 were 22% higher than in 2019. This comparison demonstrates the strong performance over the last three years. Let me now comment on full year sales in more detail again in local currencies. In our European mature markets, we achieved an overall growth of plus 3%. Strongest growth was recorded in Italy with plus 14% after an already strong previous year. Switzerland and Benelux grew by 4%, Austria by 3%, and Germany by 1%. The growth rate in the European expansion markets reached plus 6% in line with our strategy to grow faster in these more under-penetrated markets. The strongest growth rate was recorded in the UK and Ireland with plus 40%. Iberia grew with plus 10% after an already strong growth in 2021. Net sales in Eastern Europe were up by plus 6% despite the war in Ukraine. which accounted for a loss of around 10% in this region. In Nordics, net sales grew by plus 5% and in France by plus 4%. Let me now turn to the regions outside Europe. Net sales in the Far East Pacific were up by plus 7% in 2022, substantially driven by strong growth in India and Southeast Asia, which was partially offset by a decline in China due to the lockdowns in Q2. Net sales in the Middle East and Africa region increased by 21% with growth in all major countries and regions. In Americas, net sales increased by 3%. Let me now comment on the sales development per product area. All three product areas grew 2022 in local currencies. Piping systems grew by 11%, bathroom systems and installation flushing systems both by plus 2%. The stronger development of piping systems versus the other two product areas was driven by stronger price increases, a solid project business, and a very good development of the new floor-fit supply piping system. Bathroom systems were affected by a stronger base effect from the home improvement trend in the previous year compared to the other two product areas, whereas installation and flushing systems were affected by stronger destocking effects. Let me now comment on our guidance for our 2022 operational and financial results. Pressure on margins in 2022 resulted primarily from massively increased raw material and energy prices. Average raw material prices peaked in May and were slightly downwards pointing since then. In Q4, currently adjusted raw material prices declined slightly by minus 1% sequentially versus Q3 2022. Over the full year, prices for raw materials rose by plus 19%. Energy prices in Q4 were below Q3. For the full year, energy prices, however, approximately doubled compared to 2021. Due to the multilevel distribution channel in the sanitary industry, adjustments to the sales price can only be implemented with a delay, meaning it was not yet possible to compensate the higher raw material and energy prices in the full year period of 2022. Accordingly, we expect an EBITDA margin of around 27% for 2022. Due to an extraordinary one-time impact, we expect an extraordinarily low tax rate in the single-digit range. The reason for this low tax rate is a one-time impact of transitional measures in connection with the Swiss tax reform. This will also significantly impact 2020 to net income and EPS. We expect a positive one-time impact of around plus 10% on net income and EPS. CapEx for the full year is expected to be around 160 million Swiss francs. Before I come to the current business, let me briefly update you on our share buyback program. In total, we bought back 1,109,000 shares for a total amount of 570 million Swiss francs last year. that we distributed, together with the dividend payment, 1 billion Swiss francs to shareholders in 2022. This corresponds to around 6% of the market capitalization of GEBRIT per end of the year. Let me now comment on our outlook for the building construction industry and GEBRIT in 2023. Due to the ongoing geopolitical and macroeconomic uncertainties and risks, We expect overall a challenging environment for the building construction industry in 2023. Challenges for the sanitary industry emerge from potential pull forward effects from the COVID-19 induced home improvement trend over the last years. Secondly, from the increased interest rate environment, although it is important to note that many macroeconomic forecasts expect a stabilization, maybe even a declining interest rate environment as of Q2 or Q3 this year. A third challenge comes from the shift from sanitary to heating solution, mainly to heat pumps. However, keep in mind that this effect has also limitations due to the ongoing supply chain constraints for specific components in the heating segment and the fact that only a limited number of gabberit markets are affected. Positive catalysts for the sanitary construction markets emerge from the fundamental need for renovation and for new housing in several European countries. for example in Germany with a market requirement of around 400,000 new residential units per year at the upcoming renovation cycle from the last strong building boom in the 1990s. A second market catalyst is the structural trend to better sanitary standards for example in the context of the demographic change in many European countries. Outside Europe We expect a quite positive market environment in several emerging markets, for example in India or in the Gulf region. In the context of this challenging market environment, we defined for GIBRID two guiding principles for 2023. First, strategic stability and second, operational flexibility. The purpose of these principles is to manage volume uncertainties without harming the mid-term potential of the company. Short-term volume challenges emerge from the still existing, however significantly reduced excess stocks in the channel. As mentioned before, we assume that the majority of the excess stocks in the channel have been destocked and there is only a smaller part remaining. The overarching target this year is to gain further market shares regardless of the prevailing market environment. To do so, we will focus on several levers and initiatives. Let me give you three examples. First, we will strongly focus on new product introductions which proved to be an important contributor to growth over the last years. For example, the new supply piping system FlowFit or the new conceived WC flushing system Alpha. A second example is our focus this year on the full WC system to further penetrate the concealed system technology and to promote our best-in-class WC flashing performance. A third example of our market share initiative this year is prefabrication. We will put a stronger emphasis on our prefabrication business in the DACH region, to offer efficient solutions while at the same time addressing the bottleneck of qualified installers. On top of our efforts to gain market shares, Topline in 2023 will benefit from a positive price effect of around 6-7% due to the various sales price increases throughout last year and at the beginning of this year. On the cost side, we expect a wage inflation of around 5% to 6% for the full year 2023 and raw material prices in Q1 to be on the level of Q4 last year. Let me close our introduction with a short summary. Despite the record results in the previous year, EBRIT recorded a further sales growth in local currencies. The year was marked by the end of the COVID-19 crisis and historical high inflation, leading both to unprecedented stocking effects in our distribution channel. For 2023, we expect again a challenging market environment. However, we believe Gabriel is very well prepared to also master the uncertainties emerging from this environment, as already demonstrated several times during the past. Our confidence is based on the fundamental need for our products, our resilience strategy and business model, and our long-term focus and track record. Based on these fundamentals, we are also convinced to continue to achieve our mid-term targets of an average annual net sales growth in local currencies of 4% to 6%, and an average ABTA margin level between 28% and 30%. Thank you for your attention. We are now ready to answer your questions.

We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and 1 on the touch-tone telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and 1 at this time. The first question comes from Daniela Costa from Goldman Sachs. Please go ahead.