Good morning. I'm the Arkadin operator for this conference. Welcome to the Geberit Conference Call on the Third Quarter Results 2020. Please note that for the duration of the presentation, all participants will be in a 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 the star key and 0 on their telephone. This call must not be recorded for publication or broadcast. At this time, I would like to turn the conference over to Mr. Christian Buhl, CEO, accompanied by Mr. Roland Iff, CFO, and Mr. Roman Sidler, Head of Corporate Communications and Investor Relations. Please go ahead, sir.
Thank you for the introduction. Good morning, ladies and gentlemen, and welcome to our conference call on our Q3 results. Let me start with a preliminary remark. Our Q3 results are in a contradiction to the most recent developments in Europe over the last couple of days due to the fast-developing second wave. Please keep in mind we talk about Q3 results in this conference call. I will start with the third quarter figures and then comment on our nine months development. Geberit delivered very good results in the third quarter with a very strong top-line growth and an excellent profitability driven by catch-up effects after the lockdown in the second quarter. Net sales grew by 5.3% to CHF 794 million. In local currencies, net sales grew by 8.5%.
Almost all countries benefited from catch-up and stock rebuilding effects due to the lockdown or other COVID-19-induced market restrictions during the second quarter. The degree of the catch-up effect varied country by country, driven by the severity and the length of the lockdown and the COVID-19 related business restrictions. Double-digit growth rates in local currencies were achieved in Italy with +24%, in Austria with +13%, in Germany with +12%, and France with 11%. Single-digit growth rates were recorded in Eastern Europe with +8%, Switzerland and Iberia with +7%, Nordic and America with +6%, and the U.K. with +3%. The only European region with a sales decline in Q3 was Benelux with -3% due to a very strong comparable from the previous year. Sales in Middle East Africa declined by -4% and in Far East Pacific by -7%.
Both regions suffered from countries still heavily affected from COVID-19 restrictions into Q3, e.g., India, Australia, or Singapore. The product areas have developed differently in the third quarter. Installation and Flushing Systems grew by 10% and Bathroom Systems by +12% in the third quarter. Piping Systems showed a much lower growth dynamic with +3%, indicating to a weakening new build segment and projects business during the third quarter. Let me now comment on the operational and financial results in the third quarter. EBITDA increased by 14% and the EBITDA margin reached 33.2%, an increase of 250 basis points compared to Q3 2019. This margin expansion was driven by three main factors. First, the operating leverage from the strong volume growth. Second, lower material prices, and third, still relatively low SG&A costs due to COVID-19 restrictions. For example, still very low travel costs or costs for physical marketing events.
Net income increased in the third quarter by 11% to CHF 189 million, negatively impacted by a higher tax rate compared to previous year. Earnings per share reached CHF 5.29, an increase of 12% versus previous year. Free cash flow increased in line with the operational results by 16% in the third quarter. I will now comment on our nine-month performance. Net sales in CHF decreased in the first nine months by -5% to CHF 2.3 billion due to substantially weakened foreign currencies. In local currencies, net sales reached -0.4%, almost previous level despite the COVID-19 crisis. The negative COVID-19 impact on demand varied substantially by geography, depending on the degree and the length of the local lockdown or the imposed business restrictions.
In markets where construction sites were closed, 10% of our sales exposure, net sales declined on average by 15% in the first nine months. These countries include France with -10%, Italy with -11%, Spain with -15%, the U.K. with -22%, South Africa with -24%, and India with -29% in the first nine months of the year. The remaining countries, 80% of our sales exposure, were also impacted by lower construction activities during Q2. However, the losses were largely compensated again in Q3. These countries include Germany with a net sales growth of almost 6%, Austria with +5%, in Eastern Europe with 4%, Nordic and Switzerland with 3%, the Benelux with -1%, and the U.S. with -2%, representing a slight sales decline.
Let me now comment on the sales development per product area the first nine months, again, in local currencies. Installation and Flushing Systems reached previous year's level and Piping Systems declined by -1.6%. The only product area with a slight net sales growth was Bathroom Systems with a +0.6%, driven by strong growth of the shower toilet segments. Let me now comment on the operational and financial results in the first nine months of the year. All results decreased due to the negative translation effect from weaker currencies. However, in local currencies, all bottom line results from EBITDA down to EPS increased versus previous year. The negative currency development had only a minor impact on the margin due to our continuous efforts to maintain a natural currency hedge. Let me now comment on the EBITDA development.
The EBITDA margin reached 32.1% in the first nine months of the year. We were able to increase the EBITDA margin by 130 basis points despite a net sales decrease of - 5%. The main drivers for this margin improvement were first, targeted cost containment measures. Secondly, a high and further increased flexibility in production and logistics to cope with the substantial decline in demand during the second quarter and the strong rebound in the third quarter. Thirdly, lower material prices, and fourthly, increased sales price. It is worth mentioning that these results were achieved without restructuring, without any lay-offs, without a salary cut for a single employee, or material support from the public. For example, through short-time work. The EBIT margin reached 27.1%, 80 basis points above previous year level.
Weaker development of the EBIT margin versus the EBITDA margin was driven by higher depreciation expenses from higher investments in the previous years. Net income reached CHF 504 million, corresponding to a net income margin of 22.3% or 20 basis points below previous year. The lower net income margin was mainly driven by the higher tax rate due to the new tax regime for corporates in Switzerland. Earnings per share reached CHF 14, a decrease of -5.5% versus previous year, driven by the weaker currencies. In the first nine months of the year, almost 270,000 shares have been bought back. Thereof, 262,000 shares at an average share price of CHF 406 under the program launched in June 2017. Under the new program just launched recently in September, additional 8,000 shares were bought back.
Free cash flow decreased in the first nine months of the year by -9% to CHF 454 million. This slight ly disproportional decrease versus the operational cash flow, but mainly driven by the strong comparable with a strong free cash flow growth of +20% in the previous year. The strong results further improved the cash position of Geberit. For end of September, we hold a cash position of around CHF 600 million and an unused revolving credit facility of CHF 500 million. Let me now comment on our outlook for the remaining year. The uncertainties around the COVID-19 crisis increased again, especially since the second pandemic wave has reached Europe. The situation with new restrictions across Europe is currently changing day by day. This makes an outlook highly uncertain and almost impossible.
Please also keep in mind that we have a very low visibility with an order book of less than two weeks. Let me first comment on the latest business performance. After the strong business rebound and stock rebuilding effect of customers in Q3, demand slowed down significantly in October, with sales in October being slightly below previous year's level. Based on the weaker October results and delayed or stopped projects, especially in the non-residential segment due to the COVID-19 crisis, we currently expect a weaker Q4. For the full year, we expect Geberit net sales to be slightly below previous years and the full year EBITDA margin above previous year's level. We expect the EBITDA margin in Q4 to be substantially below Q4 last year due to a negative operating leverage from volume decline. Second, higher personnel costs due to wage inflation and the easing of the hiring freeze.
Thirdly, increasing raw material prices and tougher comps from lower raw material prices in Q4. Fourthly, additional costs for the brand switch. Let me close our introduction with a short summary. The COVID-19 crisis led to an unprecedented business collapse in terms of speed and extent, also at Geberit. The decline in the second quarter was followed by an almost equally strong catch-up in the third quarter. We believe Geberit has mastered this rollercoaster ride very well so far and delivered very strong results. The main reasons for these results were a strong financial fundament combined with a sustainable strategy and a resilient business model. Second, a calm and prudent crisis management, avoiding overreactions. Third, the ability of our supply chain to cope with unseen business restrictions and extraordinary volatility in customer demand. Finally, our conscious decision not to reduce our presence with customers throughout the crisis.
Finally, we achieved these strong results without harming our future position, without re structuring or changing our strategic agenda. In these unprecedented times of uncertainty, we found the right balance between short-term flexibility and long-term stability, which gives us confidence to emerge stronger from this crisis, which is obviously still far from over. This is the end of my introduction. Before I hand over to the Q&A, let me make a short remark on our presentation we just published this morning. There was a small mistake in the presentation on the EBITDA bridge on page 13. Some figures were wrong. We uploaded a new version just half an hour ago with the right figures on the EBITDA bridge on page 13. We are now ready to answer your questions.
Thank you. We will now begin our question and answer session. If you have a question for our speakers, please dial zero one 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's your turn to speak, you can dial zero two to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment please for the first question. We have one first question from Mr. Andre Kukhnin from Credit Suisse. Your line is now open.
Good morning. Thanks so much for taking my questions. Can I start with clarification first on your remarks on the margin outlook for Q4? Did I hear that right that you expect it down meaningfully?
Yes, we expect a substantially lower EBITDA margin in Q4.
Okay. Just in terms of reasons you cited there, one that I picked up is the labor rate. I think our last quarter discussion was that you had some new rates kicking in from kind of middle of the year or something like that, but I didn't get impression that you had kind of higher rates kicking in from 1st of October as well. Is that the case? In what countries are we talking about here?
It's still the case. We expect some higher wage inflation in the fourth quarter and mainly driven by Germany.
Great. Thank you. On Q3, in terms of the top line performance and that bounce back that you cited, is it possible to give any quantification or even indication of how much was restock, and how much was kind of less holidays being taken on construction sites?
No, that is not possible to quantify. Sorry.
Do you think that covers the whole of 8.5% growth or?
I also wondered that. I never answered this question, otherwise I would be able to quantify.
Fair enough. On October, being down slightly, can I just double-check, how was the comp for October from last year?
We had a normal October last year. Nothing special.
Okay. The reason I'm asking is that some of your kind of sectoral peers, like Masco, indicated no slowdown. I think Fortune Brands as well, had no slowdown into October from kind of strong end of the Q3. Just wondering if there's anything kind of specific there to you, or is this really the market performance that you're seeing is cooling down in October?
As usual, we do not comment on competitors, especially not on a monthly basis. Obviously also on our competitors which have a completely different geographical split than we have.
Okay. You see October slowdown as entirely underlying, rather than anything timing or whatnot?
I just repeat that sales in October are slightly below October 2019.
Got it. Thank you for your time.
You're welcome.
Next question is from Yves Bromehead from Exane BNP Paribas. Your line is now open.
Hi there. It's Yves Bromehead . Just a few questions. I guess on the pricing side, we've heard a lot of companies, not necessarily in the sanitary industry but elsewhere, essentially saying that the market is relatively tight with low inventories and the outlook for pricing, going into 2021, is looking incredibly positive. I think we understand that there's a bit of inflation coming back, but it's moving also in a very volatile environment. Could we maybe get a sense of what is your view in terms of that price-cost spread near-term into Q4, but also how you think about your pricing negotiations in 2021?
We increased prices this year as planned by around 1% as of the second quarter. The next price change is planned regularly for Q2 next year. We have not yet decided at what degree we want to increase prices, that is still too early, but we do not change at the moment our process, meaning that we plan to adjust, most probably increase prices in the second quarter next year.
Okay, thank you. Just on the second question. A lot of countries are now announcing lockdown measures, which is really sad but necessary. I guess it's really hard to understand what that implies in terms of the opening or not of showroom centers and whether or not renovation work can be carried at people's home with a plumber in situ. I just wanted to understand, given that Germany is one of your major country and France yesterday announced also their lockdown measures, what is your view and understanding so far as to what that can do to your part of the industry?
Our view and understanding is the same as your view and understanding, just reading the newspapers this morning, what decided yesterday in Germany. I can't give you any flavor idea what these leaks that would mean now short-term, in Germany. It's by far too uncertain to make any predictions. We are on the same page, at the same level of information as you are currently. Sorry.
You don't know if the showrooms are going to be open or closed essentially?
As far as I understood from this morning's newspapers, they are not closed at the moment. To make any predictions, I don't know what happens in five days. At the moment, I understand the showrooms are open as of today in Germany.
Okay. Just a last question on the free cash flow. Should we expect that to be slightly up, on the full year basis, versus 2019, given the first nine months? Is there a reversal in Q4?
We don't make any guidance on free cash flow, this being down now by the end of the third quarter has a lot to do that the good performance of Q3 has not yet been crystallized in the cash flow statement. That is coming in Q4. There is a certain delay there.
Okay, great. Thank you so much, guys.
The next question is from Daniela Costa from Goldman Sachs. Your line is now open.
Hi, good morning. I first wanted to ask regarding, you mentioned the brand switching costs in Q4, if you could remind us what was the guidance there and whether the brand switches and movements that you were planned are all done or if there's anything left on that front for 2021. I think last year you had also mentioned IT cost increases, whether you ended up doing that this year and that should be a reversal and a tailwind for next year. How should we think about those two things? Thank you.
The brand harmonization project went very well. We are a little bit delayed compared to the original plan due to the showroom closures. We originally planned to be finished by the end of September. That will now last into Q4. For the entire year, we are on track to spend about CHF 10 million marketing on this brand harmonization in the Netherlands, France, and Italy. The second question around our increased activities in the area of digitalization. Also, this initiative has been unchanged. We are spending around CHF 15 million this year for further competencies and also resources in this area and that is also running according to plan.
Both things are done, so in 2021, we're not going to have increased costs from that?
I can't yet talk about digitalization. We know that we are in a currently negotiating process, so I don't want to get there. But from the brand perspective, we are done. We do not have any further brand harmonization activities next year and also no additional costs for brand harmonization next year.
Okay. Thank you very much.
You're welcome.
The next question is from Dean Grant from Bank of America. Your line is now open.
Hi there. Thank you very much for taking my question. I've just got one specifically relating to Bathroom Systems and the outperformance there, having previously lagged. I wonder if you could just perhaps highlight the countries specifically, where you saw the largest improvement here, and perhaps just an outlook going forward into Q4 for Bathroom Systems specifically. Thank you.
Bathroom Systems developed across the country very well, and the main driver is also similar across the countries is the shower toilet business. The shower toilet business is developing very well this year, mainly driven by new products which we introduced over the last couple of years. I refrain from making any outlook for Bathroom Systems for Q4. I just speak to our guidance that we expect Q4 to be weaker than Q4 last year, overall.
Great. Thank you very much.
You're welcome.
The next question is from Martin Flueckiger from Kepler Cheuvreux. Your line is now open.
Yeah, good morning, everyone. Thanks for taking my questions. I've actually got four, if I may, and I'll go one at a time. Just starting off with Piping Systems, can you elaborate a little bit on the key drivers there and what kind of market environment are you seeing? Particularly, if you saw any outstanding country performance within Piping Systems. That's my first question.
Piping System underperformed the other two product areas, basically in all countries. The main driver for this underperformance is, as I outlined in the introduction, a weaker performance of new builds, and it's also an indication that the business might become more difficult. As you know, Piping Systems are installed quite early in the building construction process. For example, in Germany, where we recorded a growth of 12% in the third quarter, Piping Systems was on previous year levels. Also highlighting again the strong growth of Bathroom Systems in Germany. This picture that Piping is weaker than the other two product areas is basically the same across the country.
Okay, great. Thanks. Then my second question is just to come back on the shower toilet growth you were referring to, which was very strong. Could you provide a little bit more granularity on what we're talking about here? I guess we're talking double digits there, but are we talking about above 20%? That would be helpful and what you're expecting in terms of the volatility for Q4 and I remember one, two quarters ago, you were talking about these temporary showroom closures in Q2 and how that would impact Q3 and Q4, which we haven't seen for the mentioned reasons, but just a little bit more granularity on the growth in Q3 and outlook for Q4 in shower toilets would be great. Thanks.
The growth rate of shower toilets is double digits. All the product categories are growing nicely. The premium level, the mid level, and the entry level, driven by the new product introductions over the last couple of years. We do not see, for example, any cannibalization between the different price levels, also not this year. Regarding the showroom closures, in spring or during the lockdown in April and May, what we hear from customers is that the showroom closures have been caught up to a certain extent in the third quarter, because installers worked more, there was more workloads, and this effect has been leveled out in the third quarter. We do not expect a negative impact anymore from showroom closures in spring for our fourth quarter. Of course, we can't quantify. That is not science. That is what we just hear from our customers.
Okay, fair enough. Just on the Germany installers order books, has there been a recent autumn survey or what's the latest number here? That would be great.
The latest number is that the order backlog came back to pre-COVID-19 levels. Actually, the order backlog of German installers is at 12 weeks again. That is more or less on the level of autumn 2019.
12.0 weeks, yeah?
12.1 weeks, I think, to be exact.
Okay, great. Thanks. Just the final one. Sorry. Raw material prices. Could you talk about the quarter-on-quarter and year-over-year growth rates you have seen overall on average for raw material prices and what you're expecting here for Q4?
Raw material prices for the first nine months are down 3.8% versus the first nine months 2019. For the fourth quarter, we expect sequentially increasing raw material prices versus Q3 2020, mainly driven by metal-related raw material prices. Plastics, we expect more sideways development in Q4 versus Q3. The metal price increases are basically driven by the observation that stock prices for the industrial metals increased substantially over the last two and a half months. From aluminum, copper, nickel, zinc, all these bulk prices went up by around 5%-10% over the last two months, that might have an impact on our raw material prices.
Okay, sorry. The raw material price evolution for Q3 was how much?
In Q3 versus?
Year-over-year.
Year-on-year, that was down around 4%.
Thanks.
You're welcome.
Next question is from Bernd Pomrehn from Vontobel . Your line is now open.
Yes. Good morning, gentlemen. Impressive results, no doubt. Could you try to quantify the one-time benefit from COVID-19 related low marketing and administration expenses in the third quarter? Ask differently, what are your sustainable cost savings at this line going forward? Thank you.
We cannot really scientifically quantify the impact, because some marketing activities have been shifted, obviously, to more online and digital activities. What is clear is this is not a sustainable effect. If we would have been able to spend more marketing, we would have done it, but we have just been restricted. Therefore, this low-cost base, especially in the SG&A area of Q3, is not sustainable. As soon as we are able to do marketing again in normal terms, we will also, again, spend the money.
Okay, very clear. Thank you, Christian.
Welcome.
The next question is from Manish Beria from Société Générale. Your line is now open.
The first question is are you still gaining market share? What are the opportunities you have seen from this crisis? You have definitely told about the shower toilet doing well, so we should relate it, I mean, related to hygiene and things like that. This is the first question. The second one is Germany is up 5.8% in the first nine months. It seems like there is no COVID-19 impact. I mean, you're up 6% despite Germany doing well last year. Just trying to see what drives this growth. Maybe there is a lot of inventory build-up here, but if 6% is without inventory, I mean, then it's a great result. Just a little explanation, more color on that.
The third is, in most probability, I mean, you are going to end up this year with more than 30% EBITDA margin, and I see your guidance is to reach 28%-30%. Obviously, you are going to be above that, and the next year pricing, does it come, I mean, you don't want to take pricing hikes because you want to be within this range? How does the pricing decision will be decided? We should start building like you are comfortable with higher than 30% margins in the medium term? Thank you.
The first question about market share. As you know, we are very cautious to talk about market share quarter by quarter. I think if you look at the first nine months development, we have been able to gain market share versus competitors. Driven also by the fact that some competitors have delivery issues, some plants were closed down, but also by the fact that we have been always with our customers. We did not refuse our customers. We believe the first nine months we gained market share. A little bit supported by what you call hygiene-related products. We have, obviously, hygiene-related products. Touch-free products, be it AquaClean, be it faucet or urinal. We see a strong growth for these products since the COVID-19 crisis. However, the share of sales of these products is very limited.
It's been a low, not a material part of our business, so it has not a material impact on the top-line growth. The second question around Germany. Also in Germany, we believe we are gaining market share, driven by the fact that we have seen delivery issues with competitors or even supply chain interruptions. Also, most probably in the third quarter, we believe we have seen some positive impact from the VAT reduction in Germany. The 3% VAT reduction, which might have been one of the reasons why in-front-of-the-wall products have been growing so much faster in Germany in the third quarter compared to technical products behind the wall. Third question about EBITDA margin and pricing 2021. As I said before, we have not yet decided about our price changes, most probably price increases next year.
In general, we plan to have a certain stability also in terms of pricing, which would mean that we try to increase prices constantly at a certain constant rate. That is the version we have published at the moment, but it's not finally decided.
You are comfortable with more than 30% EBITDA margin, even if you reach it? I mean, are you comfortable with that? The guidance was at 28%-30%.
As I said before, the margin we are seeing now in Q3 is very much driven by COVID-19 restrictions, which drove our SG&A costs down. This is not sustainable. If we are able to spend more marketing money again, we will spend more marketing again. Don't take the current margin level as the new norm or a sustainable basis.
Okay. Thank you.
You're welcome.
The next question is from Christian Arnold from MainFirst Bank. Your line is now open.
Yes. Good morning, gentlemen. On Germany, this 12.4% organic growth in Q3, that's just impressive. Just fantastic. You had mentioned before that you had some positive impact from the VAT or in the Bathroom Systems. Nevertheless, thinking of the limitations from the installer side, how is that possible, this 12.4% in Q3? Maybe if you can add here some more explanation.
If you just look at the third quarter, it does have an awful impact in Germany by catch-up effect from Q2. We had also in Germany with Q2, obviously not as big as Italy or France or other countries, but there was also in Germany an impact from the COVID-19 business restrictions on construction activity. Also there was a catch-up effect that was also driving the 12% Q3. Besides the facts I just mentioned before, VAT, the delivery issues from competitors.
Okay. I was thinking that, you mentioned before that the Piping Systems were flat in Germany in Q3. That somewhat implies then for Installation and Flushing Systems as well as Bathroom Systems, that you have here some growth of 15%-20% in Q3?
Sorry, I didn't understand. Acoustically, I didn't understand.
Yes. Before in the call, you were saying that the Piping Systems business in Germany was flat in Q3. Did you see some 15%-20% growth in both Bathroom Systems as well as Installation Systems, or have you had here a differentiation between the other two?
No, you're correct. Both other product areas were strongly growing in the areas you just mentioned. That's correct.
Okay. In October, when you were saying slightly down overall, any differentiations between countries or product areas? Some outliers, so to say?
There is one observation in Piping Systems. What we have seen in the third quarter is also visible in October. Piping Systems is systematically weaker than the other two product areas, also in October.
Okay. Maybe on the personnel cost, going into Q4, having now the situation we have. On the one side, you have higher wages, so you have a negative impact from this price inflation, so to say, on the personnel. On the other side, probably many people are going on holiday, right? Any thoughts on that?
We have seen, especially this year in Q2, a extraordinarily low position for personnel costs. Q3, again, was more in line with previous years, the vacation quarter and Q4 will also be, in terms of difference to Q3, more in line with previous years. In addition, we said that we still have an increase in tariffs coming mainly out of Germany. That the exceptional quarter in 2020 was Q2, where really in operations, we could very well adjust our capacity to the demand. As now demand, et cetera, was normalizing, this effect is gone and we have a more normal pattern again.
Okay. Thank you. Last question on material prices. You mentioned before that you are expecting in the fourth quarter a sequential increase of material prices. Not saying year-over-year, does it mean that year-over-year you still have a tailwind from raw materials in Q4?
Yes. Year-over-year, we still expect to have a tailwind in Q4.
Okay. Thank you.
You're welcome.
The next question is from Patrick Rafaisz from UBS. Your line is now open.
Thank you, good morning, everyone. I have two follow-ups, please. The first one is around your comments you already made on October and the catch-up effect in Q2. I was just wondering, in that comment you made on October being slightly down, do you think there is still a bit of catch-up and restocking in there, still over from Q2, so that the underlying run rate would be even a bit lower? Was that pretty much all done in the second quarter?
Again, we do not exactly know, but we believe that the inventory levels of wholesalers in general were on a normal level at the end of September.
Okay. Good. Great. Thank you. The second question is around the EBITDA bridge. I know we're very early days, but looking into 2021, there's a lot of moving parts with the COVID savings, raw materials going up and down, et cetera. Just directionally, h ow should we think about the reversal effects next year? Obviously, you will end this year with a very solid margin, higher than last year. Do you think you can maintain this sort of level also next year? Or should we assume that maybe it will be a bit more a challenging year with potential marketing expenses, et cetera, coming back?
I'm sorry, I'm not able to give you an answer to this question. We refrain from making any answers to 2021. The situation is so highly uncertain, more tied just the last couple of days. Any statement we would make to any direction for next year would not be professional. I'm sorry, I can't give you an answer.
Okay, understood. Thank you.
You're welcome.
The next question is from Remo Rosenau from Helvetische Bank. Your line is now open.
Yes. Hi. Thank you for taking the question. We understood that Q4 will see lower margins, I mean, significantly lower margins compared to the previous year, not to the first part of the previous year. However, at the same time, you said in the press release that you see slightly lower sales for the full year and an EBITDA margin above previous year's level. You didn't say slightly above. That is not a coincidence. If you say EBITDA margin above previous year's level for the full year, it is not 10, not 20 basis points. It must be a bit more. That, again, in my calculation, puts a certain limit to the significantly lower margin in Q4. I read it's rather 200 basis points than 400 basis points. Is that kind of a sensible thinking?
Our margin guidance for the full year on EBITDA level, which we expect to be above previous year level, means that we expect an EBITDA margin which is higher than 29.3%. That's the guidance. Every figure above 29.3%. I can't and do not want to go into more detail on which level could be. I'm sorry, Mr. Rosenau.
Okay. I'm not used that you are very precise with your wording, so- there is a reason for it.
Exactly. We are precise. Everything above 29.3% is above.
Okay, fair enough. A more general question. We didn't talk about innovation that much today. How is Geberit ONE actually doing, which you introduced some time ago? Is it making progress? Is the response positive? Adjacent to that, can we look forward to any other kind of groundbreaking innovations in 2021 or 2022, like the introduction of Geberit ONE or, for example, the Monolith freestanding flush tank at the time?
Geberit ONE, we are very happy with the development this year. Especially, with certain product categories within these new bathroom series. I would say they are all in all on our expectations. Some product categories slightly higher, some a little bit lower. As a series, it's going as planned. Still, as you know, it's not really contributing a material part to our group sales. It's developing very nicely. Referring to other new product innovations, we will talk about that in January. We will give you a flavor about new innovations next year, but we will have, again, also next year, a beautiful mix of very strategically important innovations and also, again, add-ons, continuing evolutionary innovations. I don't want to go into details at this moment in time.
Okay, great. Looking forward to that. Thank you.
You're welcome.
The next question is from Arnaud Lehmann from Bank of America. Your line is now open.
Thank you very much. Good morning, gentlemen. Two questions left on my side. Firstly, on your Q4 margin comment, I think you said you think Q4 EBITDA margin should be down year-on-year. Does that also apply to the gross margin, or is it mostly related to SG&A and possibly higher marketing costs? That's my first question. My second question is on the U.K. I appreciate it's not a very large market for you, but do you feel ready for Brexit, in terms of sourcing, supply chain, or do you think there might be any disruptions from next year? Thank you.
I already answered the question to the U.K. We believe we are operationally ready for the Brexit in the U.K. At the moment, we do not see or expect any special effects like what we have seen last year or couple of times already last year. We do not expect anything specific from that side. Honestly, I also believe that the COVID-19 crisis and all the restrictions or the further development might have more impact than the Brexit. Changes during that Brexit. Regarding the Q4 margin, I ask Roland to answer.
As we are still expecting year-on-year lower raw material prices for Q4, it's not linked to the gross margin. It's more linked to the operating leverage as we are seeing sales below prior year, linked to the and higher personnel expenses. Those are the main drivers. The main driver is the operating leverage.
Very clear. Thank you very much.
The next question is from Martin Hüsler from Zürcher Kantonalbank. The line is now open.
Yes. Thank you. I have two questions left. First of all, an add-on to Germany. The topic was touched on capacity of installers, and actually, you didn't really answer that. How was it possible that with limited installer capacities, the growth was so strong in the third quarter or also for the first nine months? Is it that this capacity constraint kind of eased, which should also be then positive for the future? That's the first question. The second question is on Switzerland. Can you just elaborate a bit there also, very good sales development in Switzerland? Is this, I assume, more refurbishment as well? Do you see there some cooling effect out from the pandemic or lockdowns? I think you were rather more cautious at the beginning of the year for Switzerland.
Referring to your first question, please keep in mind that we had in all countries, including Germany, rebuilding effects of inventories of wholesalers. Wholesalers were rebuilding their inventories also in Germany. The 12% growth in the quarter doesn't mean 12% growth on the level of installers. That is valid for all the countries. Secondly, we have heard from many installers in meetings that they did more work, also in Germany this summer, than in previous years' summers, by overtime, by using their vacations. There was a certain elasticity of the capacity in the summer. By the way, if you look to Italy, we had growth of 24% in Q3. That was very much driven by the fact that in August, where normally nothing happens on construction sites in Italy, installers, plumbers still worked this year. To a certain extent, similar effects you see that in Germany.
It's a combination of inventory effects of wholesalers and a short-term flexibility of capacity on an installer level during summer. To your second question around Switzerland. In Switzerland, the renovation business is doing well. We still believe also that the new build segment is doing well. The projects which were launched or which were running pre COVID-19, they basically get completed. Maybe they have been a little bit delayed in the second quarter. Also there in Switzerland, we see some catch-up effects for the same reasons as I mentioned before in Germany, basically. If you look at the first nine months, we are doing well also in Switzerland. We believe we have been able to gain market shares. Don't forget that a lot of our market outperformance in Switzerland in general is driven not by volume share gain, but by upselling our product portfolio.
We see, for example, in Germany and in Switzerland, not a downselling effect due to COVID-19 crisis. We do not see a negative effect, for example, on shower toilets. Also shower toilets, important growth driver in Switzerland, is doing very well, growing double digits, in the first nine months.
Okay. Thank you, and fair enough, your answer on Germany. If I refer to the first nine months, whereby your growth was about 6%, there I assume there wouldn't be much of a stocking, de-stocking effect for the whole period, and still the 6% looks quite impressive.
This is correct, that's why I mentioned before that we feel confident that we are gaining market shares in the first nine months. Secondly, also driven by mainly the VAT effect in the third quarter, which led to a strong growth of installers of our products in the third quarter, because they are more related obviously to the VAT program, which gives an incentive to end consumers to buy a new bathroom or to make the renovation.
Okay, thanks a lot.
You're welcome.
The next question is from Bernd Pomrehn from Vontobel . Your line is now open.
Yes. Thank you for an add-on question regarding CapEx. Could you provide a quantitative update for your full year 2020 CapEx guidance? Then maybe could you also talk a little bit qualitatively regarding investments in further improving your sustainability profile? For example, improving the environmental standards of the ceramics production. Obviously, you have a very strong cash flow position, and there's probably limited need for significant capacity additions, so you are in a position to increase spending on more sustainable production methods. Thank you.
CapEx 2020, we expect to be around 150 million CHF, a tick less than what we expected in summer. Of course, we have also there some restrictions from COVID-19. We are not able to complete all the investment projects which we had in mind. Regarding our sustainability investment, that is a constant effort. As you know, we are constantly investing also into a more sustainable asset base, especially in ceramics manufacturing. We have been doing very well over the last couple of years, also this year. We have reduced the CO2 emissions since the Sanitec acquisition by 26% over the last four years. That's an average around 7% decrease of CO2 emissions annually. As I said, that is a constant effort. It's embedded in our strategy, in our investment projects, and we also expect a further reduction of CO2 emissions this year.
That's maybe a good example where COVID-19 does not have a structural impact on Geberit. The COVID-19 crisis did not change our agenda in terms of sustainable investment.
Very good to hear. Thank you, Christian.
You're welcome.
The next question is from Alessandro Foletti from Octavian. The line is now open.
Yes. Good morning, everyone. Thank you for taking my question. I have one last remaining regarding your midterm growth outlook. I think it's about 4%. In the last couple of years, organically speaking, you've been trending slightly below that. Can you give your thoughts about how you may be able to reach that, if and when, if you have an outlook, leaving for a moment the pandemic aside.
It's very difficult to comment or give an answer at the moment by putting the pandemic aside. If we expect midterm that the pandemic is resolved, then we stick to our midterm targets. In other words, the pandemic does not have an impact on our view, on our midterm potential to grow the business without the pandemic, obviously. We do not see that the pandemic has any structural impact on our potential to grow in the various markets. We do not expect that there's structural impact it comes to geography or it comes into product areas.
All right. Thank you. The driver to reach that sort of makes the last step between the average of the past years to that sort of 4%. Do you need more normalization in Germany, for instance, on the installer base, or can you overcome that with your upselling strategy, innovations, gaining market share, et cetera?
We have reached an average sales growth of 4% since the acquisition of Sanitec. We have been at the lower end of this range of 4%-6%. The main reason that we have been at the lower end and not more in the mid of this range was geographical market reason. As outlined very often already, the capacity bottlenecks in Germany, the weaker structure, the weaker markets in Nordics, but also the much lower growth dynamic or even non-growing growth dynamic in Switzerland. These were the main reasons why we have not been able more at the end. COVID-19 does not change anything structurally, how we look at the business and what we see in terms of potentials. Of course, if you put the pandemic aside, as you mentioned in your question.
Yes. Okay. Thank you. That by inference, although the Q3 reading doesn't change that overall picture.
The Q3 reading. A quarter result does not have any impact on our thinking about midterm targets.
Good. Thank you.
The next question is from Cedar Ekblom from Morgan Stanley. The line is now open.
Thanks. I've got two questions. Firstly, can you please give us a little bit of guidance on your sales split, via showrooms or direct to wholesalers? Secondly, can you give us some understanding on what % of your sales relates to new products now and potentially a target on that number, where you see that evolving over the medium term? Would it be fair to say that a rising % of new products in total sales is positive for the pricing dynamic? Thank you.
First of all, a fundamental answer. We are only selling to wholesalers. We are not selling to showrooms. It's 100% wholesalers. For certain products, a showroom is then relevant for exhibition making, but showrooms are not directly delivered by us. We're always saying wholesalers. In some countries, showrooms are managed by wholesalers, but you can't differentiate this figure. Second one, we do not have a quantitative figure where we differentiate new products versus old products. The main reason is the introduction time of a new product in our industry is very long. We talk about two, three years about a new product. It's not a one-year new product, and the next year we have the next new product. We do not quantify what we look at, but we do not disclose.
Of course, it's a growth of these new products, and it's an important contributor over time, but we do not disclose any quantitative figures.
Maybe I could ask the question on showrooms differently then. What % of your sales do you think the showroom is necessary in order to make the sales decision, even though they're then ultimately selling to the wholesaler?
Obviously, it's only relevant for the Bathroom Systems. Showrooms are not relevant, obviously, for Piping Systems, and they are almost not important for Installation and Flushing Systems. Of course, this business is basically behind the wall. A certain share of the Bathroom Systems, mainly driven by the end consumer market. Everyone who is privately deciding about his bathroom, this decision is made in the showroom. That's a part of the Bathroom Systems, which are 30% of our business, part thereof is decided in the showroom. As I said before, because we are not managing showrooms ourselves, we are not delivering directly to showrooms, we do not know exactly how much the share of decision-making of the 30% Bathroom Systems is made in a showroom.
Okay, thanks very much.
Our next question is from Pierre Rousseau from Barclays. The line is now open.
Yes. Good morning, everyone. Thank you for taking my question. Could you first comment a little bit on your non-residential exposure? I heard there was some weakness in new build, so it would be good to give some granularity there and also what's the share of office hospitality and travel related projects. I think that would be helpful. The second question is on personnel cost inflation. In a normal year, what would you expect to be the run rate going forward if we exclude potential COVID-19 disruptions again? Thank you.
We generate about one third of our business with the non-residential segment. That varies country by country, but for the group, around 1/3 is exposed to non-residential. The more granular split between hotel and other sub-segments is very difficult because we are delivering to wholesalers. We do finally not exactly know where these products are going, therefore it's very difficult, and we do not have a positive indication how much is it. The second question about wage inflation. A large part of the wage inflation which is affecting Geberit is not decided by us, but driven by external parties. Basically in Germany, we are dependent on the negotiations between employee representatives and company representatives. We just have to accept what the negotiation brings.
In general, what we have seen over the last couple of years is that wage inflation has increased, especially in Germany, but also in Eastern European countries which are important for us, which is Poland. What the COVID-19 crisis means now to the wage inflation next year or maybe even afterwards, is very difficult to predict, and I don't feel myself in a position to make any prediction about that. Okay. Hello?
Was the question answered for you?
Yes, thank you very much.
The next question is from Marta Bruska from Berenberg. Your line is now open.
Hello. Good morning. Thank you for taking my questions. I have a few follow-ups. With regards to growth in piping and the return new build project business, could you please let us know what is the split, residential versus commercial? What is the share of the project business for piping specifically? You just mentioned one third on the group level. I will have a few follow-ups after that, let's take it one by one, please.
Sorry, can you rephrase the question? I did not understand.
Yes. You just said that one third of your sales is generated from non-residential segment on the group level, and what is that for the piping, please?
We do not know. We do not know. It might be slightly higher, but to be honest, we never made the exercise. Might be slightly higher, I would assume.
Okay, thank you. With regard to Benelux, you showed positive organic growth in local currencies for all countries you list in Europe except for Benelux. - 3.5%, what happened there?
The main reason is, as I mentioned in my introduction, a base effect. We had a strong growth in Q3 last year of 19%, one nine, in Benelux. That was the main driver. We have seen decrease this year.
Thank you. With regards to the extra cost for rebranding, in total for the full year, you said you are on track to spend CHF 10 million. How much of that was spent already year to date? Is that a fair assumption to assume that in Q4 it will be a proportional spend, or is it more or less weighted than other quarters, please?
In Q4, there will be some expenses, but you cannot evenly distribute it over the year. It's part of the marketing cost. That's why we said that we will have a little bit more marketing cost, but it's less than we spent in Q3, and we don't give the exact number.
Okay. Can I ask one more general? You mentioned that you have some delay between your EBITDA and then when it comes into the cash flow statement. Is that linked to the payment terms that you have with the wholesalers and whether you give the volume rebates then in the end of the year with Q4? If you can give us a little bit more details on how it works with the wholesalers, please.
No, that is just. Yeah, it links to the payment terms, but it depends always what the seasonality in the quarter was. We had very good sales also in September. That just leads then to the fact that the free cash flow represents the good results of the last days of the last month in the quarter only in Q4, not yet as of the end of September. Nothing unusual.
Thank you. That's all. Thank you.
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