Geberit AG

Good morning ladies and gentlemen, welcome to Gebril's 9-month results conference call. We will start with the third quarter figures, then comment on the 9-month development and finish as usual with an outlook. Gebril delivered strong top and bottom line results in Q3 despite continued challenging market conditions. Net sales grew in local currencies by 6%. EBITDA margin increased by 40 basis points despite the substantial wage inflation and less tailwind from lower direct material prices in Q3. EPS grew currently adjusted by 8% despite the significantly higher tax rate. Let me now give you some comments on the sales development in the third quarter. net sales increased by 5% and reached 762 million Swiss francs. The currency impact affected the top line negatively by 10 million Swiss francs, or minus 1%. Hence, in local currencies, group net sales increased by 6%, all driven by volume. Volumes benefited from a base effect due to wholesaler destocking in the previous year and one additional working day. However, also a strong business performance contributed to the strong top line development in Q3. It is worth to note that wholesaler stocking effects did not materially influence volumes in Q3. Let me turn to the regional development in the third quarter, again in local currencies. In Europe, net sales increased by 5%. Significant growth was recorded in all regions, except for Switzerland, which was stable year over year, and Northern Europe. Excluding the effect of the divestment of the Nordic shower business per end of last year, also Northern Europe was stable year over year. Outside Europe, net sales increased in Middle East Africa by 45%, driven by the continued very strong growth in the Gulf region, and in America by plus 6%. Net sales in Far East Pacific declined by 2%, driven by the market contraction in China, partially offset by growth in rest of Asia. I continue with the sales development per product area in Q3, again in local currencies. Installation and flushing systems increased by 12%, piping systems by 1%, while bathroom systems increased by 6%. Installation and flushing systems benefited from the strong destocking effects in the previous year. The relatively weaker development of piping systems was driven by a less favorable base effect and its higher exposure to the declining new bill sector. Let me now turn to the operating and financial results in Q3. We managed to grow all bottom line results from ABTA down to EPS both in local currencies and in Swiss francs. ABTA grew by 8% in local currencies and the ABTA margin reached 31.0%. This represents a margin increase of 40 base points with the positive operating leverage and lower direct material prices outweighing the effect of a strong wage inflation. EBIT and the EBIT margin developed slightly more positive than the EBITDA and EBIT margin due to a lower depreciation this year. Net income increased in local currencies with plus 7% at a slightly lower rate due to a significantly higher tax rate due to the new OECD minimum taxation law in Switzerland. Net income margin reached 19.7%. Earnings per share reached 4 Swiss francs 55 and grew by 8% in local currencies supported by share buybacks. We launched in September the new share buyback program as planned. We bought back 18,000 shares for a total amount of 10 billion Swiss francs until end of Q3. Let me continue with a review of our net sales development in the first nine months of the year. Net sales were stable at 2.4 billion Swiss francs since the net sales growth in local currencies was compensated by negative currency effects. The negative currency effect led to a net sales loss of 62 million CHF, or minus 3%. In local currencies, net sales increased by 3%, supported by a minor price effect at the beginning of the year. The volume growth of around 3% was mainly driven by three factors, which compensated the declining end-market demand. A positive base effect from restocking of wholesalers last year. Second, selective restocking of wholesalers in the first half of this year. And thirdly, strong sales with new products such as Flowfit, the new supply piping system Matris Therm and the new shower toilet Alva. The sales development of ALBA is above expectations and led to a strong double-digit volume growth and a double-digit sales growth for shower toilets in Europe. This brings me to the regional net sales development in the first nine months. Again, all figures refer to growth in local currencies. In Eastern Europe, net sales increased by 10%, supported by a strong base effect. In Italy, net sales increased by 6% in a still quite favorable market environment. In Benelux, net sales increased by 4%, driven by growth in the Netherlands. In Germany, net sales increased by 3%, supported by a strong base effect. Note that last year's nine-month sales in Germany were down minus 13%. In Austria and Switzerland, net sales were stable year over year. In Western Europe, Net sales declined by minus 1%, driven by sales declines in France and the UK. Net sales in Northern Europe decreased by minus 4%, negatively affected by the divestment of the Nordic shower business per end of last year, with a negative effect of 2% on net sales. Let me now turn to the regions outside Europe. In the Middle East Africa region, net sales increased by 19%, driven by the Gulf region. In America, net sales increased by 3%. In Far East Pacific, net sales increased also by plus 3%, with strong growth in India and Australia, partially offset by the market decline in China. Let me now comment on the sales development of product area, again in local currencies. Installation and flushing systems grew by 5% and piping systems and bathroom systems both increased by 2%. Please note that installation and flushing systems benefited more from stocking effects of wholesalers compared to the other two product areas. Furthermore, bathroom systems were negatively affected by the already mentioned divestment of the Nordic shower business during the last year. I continue with the operating and financial results in the first nine months. Despite the significant negative currency effect, EBITDA and EBIT increased also in Swiss francs. In local currencies, not only EBITDA and EBIT, but also net income and EPS grew versus previous year. EBITDA in Swiss francs increased by 1% to 750%. 54 million Swiss francs. Excluding negative currency effects, ABTA increased by 5%. The ABTA margin increased slightly by 10 basis points and reached 31.4%. The 6% lower direct material prices and the operating leverage from the volume growth compensated the following three main negative margin drivers. First, a wage inflation of around 5%. Second, several dedicated growth initiatives, marketing efforts, and additional expenditures for IT and digitalization. And thirdly, a negative currency effect of 40 basis points. EBIT, grew in local currencies slightly better than EBITDA by 6% to 643 million Swiss francs, corresponding to an EBIT margin of 26.8%. Net income increased in local currencies slightly by 1% and reached 501 million Swiss francs. This, compared to the operating results, lower increased was driven by a significantly higher tax rate of 19.5% due to the new OECD minimum taxation law in Switzerland. Earnings per share reached 15 Swiss francs per 13 and increased by 3% in local currencies. A better development versus net income due to the share buyback programs. In total, 164,000 shares were bought back in the first nine months for a total amount of 86 million Swiss francs under the old and the new share buyback program. CapEx decreased by 25 million or minus 19% to 103 million Swiss francs due to the phase-out of some large strategic planned expansions. Free cash flow increased slightly by 1% to 426 million Swiss francs the strong operational performance and lower capex were compensated by a less favorable net working capital. Let me now comment on our outlook for the rest of the year. Overall, the building construction market is declining this year, especially driven by the new-build sector. Building permits in Europe declined by 15% last year, mainly driven by the residential sector, leading to a contraction of the European new-build construction business this year. Building permits in Europe continued to decrease in the first half of this year, however, with minus 3% at a substantially lower pace. The strongest decline of the new-build sector is recorded in Austria, Northern Europe and Germany. Unlike the new-build sector, the renovation business, in which we generate around 60% of our sales, is moreover mainly driven by the fundamental need for renovation in several European countries and no additional pressure from the shift from sanitary to heating solutions as experienced last year. Despite the overall decline of the European building construction industry this year, the turnaround in interest rates in Europe and the structural trend towards higher sanitary standards should positively stimulate demand. Furthermore, we see a continuously strong demand in several markets outside Europe, for example in India or the Gulf region. On the cost side, we expect in Q4 slightly lower direct material prices compared to Q3. However, keep in mind that the benefit from lower direct material prices compared to the previous year will continue to weaken in Q4, as you can see on page 14 of our PowerPoint presentation. The top and bottom line results of the first nine months confirm that we are able to strengthen our market position also in a declining market environment. This achievement is based on our two guiding principles this year, strategic stability and operational flexibility. This means that we continue to execute on our strategic agenda as presented at the Capital Market Day last year and that we will further invest into our businesses, into innovation and also into efficiency. Important initiatives are, for example, dedicated sales initiatives in emerging markets or our specialization strategy in our ceramics plants. Under the assumption of no material change of this challenging market environment, we expect for the full year a net sales growth in local currencies of 1 to 2%, an EBITDA margin of around 29.5% and capex between 170 and 180 million Swiss francs. Please note that net sales in October were like for like slightly below previous year's levels. Please also keep in mind that net sales in Q4 last year were up 80% and that Q4 this year has one working day less than last year. Let me close our introduction with a short summary. Gebrit delivered strong results in Q3, both on the top and the bottom line. Despite a very difficult market environment with declining underlying demand, net sales grew and operating margins exceeded the previous year's high level. Earnings per share grew despite a significant higher tax rate driven by the new OECD minimum taxation. For the full year 2024, we continue to expect an overall declining market. However, some building construction indicators in Europe started to bottom out. A specific margin challenge for Q4 emerges from the less favorable base effect from falling direct material prices in the course of last year. However, Kipris is well prepared for this challenging 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. Before we start the Q&A session, a short administrative information. We communicated a wrong date for our first information on the full year sales development 2024. This publication date will take place on Thursday, January 16th, and not on Friday, January 17th, have communicated until today. The calendar on our homepage will be adjusted accordingly. 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 one on the touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone with a question may press star and 1 at this time. Our first question comes from Daniela Costa from Goldman Sachs. Please go ahead.

Hi, good morning. Thank you for taking my questions. I have a more longer-term one and then a shorter-term one. I will ask them at a time. But first, I guess sort of like looking at what you're saying now, you had very strong volume developments, but there's no restocking at the wholesalers yet. The permits are still negative and about, I guess, to turn as interest rates decrease. You haven't done extra pricing this year. The raw materials are still a positive. It sounds like it's a fairly depressed backdrop and you're already doing quite close to the top end of your margin range of the 28 to 30 or 29.5. So when we look through next year, the bar seems pretty low to get to the top end or above the top end. You always said you don't want to go above 30% margins. If you hit that scenario that things recover, what would you reinvest on to prevent you from going materially above the top end? So what's the plan there?