Good morning. I am the operator for this conference. Welcome to the Geberit conference call on the half year results, 2019. 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 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.
Thank you for the introduction. Good morning, ladies and gentlemen, and welcome to our Geberit interim results conference call. Geberit achieved good results in the first half of the year 2019, with a good top-line growth and a further improved profitability, despite a challenging business and currency environment. In the first six months, sales in CHF achieved with CHF 1.63 billion previous year's level. Sales in local currencies grew by 3.1%. The operating cash flow grew by 3.3% to CHF 501 million, corresponding to an EBITDA margin of 30.8% and an increase of 100 basis points. Operating profit increased, adjusted by 1.7% to CHF 431 million. This corresponds to an EBIT margin of 26.5%, an improvement of 50 basis points. Earnings per share increased, adjusted by 2.4% and reached CHF 10.40. Free cash flow increased by 35% to CHF 257 million.
While the margins improved in the first half of the year, the weak euro negatively impacted the financial results due to a negative translation effect, particularly in the second quarter. Due to the weaker euro, sales in CHF decreased by 1.3% to CHF 797 million in the second quarter. In local currencies, sales increased by 2.6% in Q2, negatively impacted by one working day less. Let me now comment in more details on the sales development of the first half year. The group's first half year sales amounted to CHF 1.63 billion, a minor decrease of 0.2% in CHF. The unfavorable currency development led to a sales decrease of CHF 54 million or -3.3% versus the previous year. Sales in local currency increased by 3.1%. Let me now comment on sales growth per region, always in local currency.
Sales in Europe increased by 3.2% with positive growth rates in almost all markets. In Germany, sales increased by 4.9% with strong sales in Installation and Flushing Systems and in Piping Systems. In Switzerland, sales grew by 2.0% despite the strong previous year's period. In the Nordic region, sales increased by 1.5% with strong growth in Installation and Flushing Systems. Eastern European sales achieved previous year's level despite a double-digit sales decrease in Russia and in Turkey. In Italy, sales declined in a weaker market environment and due to a strong comparison by 1.2%. Sales in Benelux grew by 5.2% with strong growth in all three product areas. France recorded a sales increase of 0.9% with strong growth in Installation and Flushing Systems, but sales declined in Bathroom Systems since we exited low-margin business in ceramics.
In Austria, a sales growth of 5.3% was booked with growth in all product areas. Sales in the U.K. increased by 10.6%. The Iberian Peninsula grew by 6.6% with a double-digit growth rate in Portugal. In North America, sales were flat with good growth in installation systems. In Far East Pacific, sales increased by 11.5% with strong growth in China. Sales in the Middle East and Africa region were down by -4%, driven by a strong decrease in the Gulf region. Let me now comment on the sales development per product area, again, in local currencies. Installation and Flushing Systems increased by 4.6% with strong growth with behind-the-wall flushing systems. Piping Systems grew by 6.7% with strong growth in both product lines, Supply Systems and Building Drainage Systems.
Bathroom Systems sales decreased by 1.7%, driven by a weak market environment in the Nordics, a strong comparison from strong sales for shower toilets in the first half 2018, weak sales from Keramag due to the brand phase-out, and the exit of low-margin business in France. Now, let me update you on the financial results. Geberit's EBITDA reached CHF 501 million, corresponding to an increase in CHF of 3.3% versus the first half 2018. The EBITDA margin reached 30.8%, 100 basis points above H1 2018. Roughly half of this improvement was driven by the new accounting standard IFRS 16. The remaining operational margin improvement was achieved despite a weaker market environment limiting top-line growth, the highest tariff increases since many years, and extraordinary marketing expenses for the brand harmonization. The main drivers for the operating margin improvement were firstly, increased sales prices in a challenging market environment.
Secondly, a positive product mix due to upselling of our product portfolio. Thirdly, efficiency improvement combined with strong cost control and cost discipline. Fourthly, slightly lower raw material prices. The currency fluctuation had almost no influence on the operating margin due to our continued efforts to maintain a strong natural currency edge. Operating profit achieved CHF 431 million, which is an increase in CHF of 1.7% compared to the adjusted previous year's level. EBIT margin reached 26.5%, 50 basis points above the adjusted H1 2018 level. Due to a higher tax rate, net income increased under proportionally by 0.9% compared to the adjusted previous year's level to CHF 365 million. Earnings per share grew by 2.4% to CHF 10.40 versus the adjusted previous year's number. Free cash flow increased significantly by 35%, driven by a positive development of the net working capital.
We further continued our share buyback program and have now repurchased a total of 702,000 shares for CHF 296 million per end of Q2 this year. Let me now comment on our market outlook for 2019. Our view has not changed significantly since our publication of Q1 results in May this year. The uncertainty and volatility of the building industry remain, and selected markets are slowing down, driven by a weaker new residential sector. In Europe, we expect overall a favorable but mixed construction market environment. We remain confident about the construction amount in Germany, although the limited qualified installation capacity might remain a bottleneck. In Switzerland, we expect on a high level, a slight decline in construction market.
In the Nordic region, we expect at best a stagnating market driven by a positive outlook for Denmark, a slight growth in Norway, a stagnation in Finland, and a decline in Sweden. In Italy and France, we expect overall a stagnating market environment driven by the decline in new build segment compensated by a more robust renovation sector. We expect overall a declining market environment in the U.K. driven by the non-residential sector due to the Brexit uncertainties. In Austria, we expect a positive construction market with a slight growth. We are positive for Benelux, although the strong construction growth in the Netherlands over the last years led to shortages of qualified installer capacity. The outlook for the Eastern European markets remains mixed, with a weak environment in markets like Russia or Turkey. Finally, on the Iberian Peninsula, we expect an ongoing recovery of the building construction sector.
In North America, we foresee a moderate improvement of the institutional construction market driven by the educational sector. In Asia Pacific, we see a mixed picture across the region. We expect a moderate increase of the residential construction market in China. We are positive for India and expect a decline in building construction market in Australia. Let me finalize our market outlook 2019 with the Middle East and Africa region. We expect overall a weak market environment in the Gulf and a stagnating but building construction market in South Africa. We remain cautious and foresee a mixed picture for the Northern Africa and the Near East region. Now a few words about the raw material price environment. The raw material markets remain uncertain and volatile due to the increased uncertainties about the global economy.
After increased raw material prices in the second quarter, we expect now a mixed picture in the third quarter with overall stable raw material prices compared to the second quarter this year. Finally, let me briefly update you on the Geberit outlook 2019. We expect for the full year a sales growth in local currencies between 3% and 4% and an EBITDA margin between 28% and 29%. CapEx should reach around CHF 180 million. This is the end of our introduction. We are now ready to answer your questions. Hello?
Would you like to start the Q&A now?
Yeah, please. Yes.
Okay. Ladies and gentlemen, we will now begin the 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 is your turn to speak, you can dial zero two 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. The first question is from Andrej Kukhnin of Credit Suisse. Your line is now open. Please go ahead.
Good morning. Thank you very much for taking my questions. I'll go one at a time, please. Firstly, on your growth guidance of 3% to 4%, you've delivered three in H1 and obviously day's effect was negative in there. Can I ask whether you're seeing improvement of momentum anywhere in the business, hence that guidance to three to four? Is it just purely mechanically taking three in H1 should get a bit better in H2 given the days?
We do not expect in the second half of the year structural acceleration or change of the market environment. It's basically driven by the more favorable year-on-year comparables in the second half of the year, and we have also one working day more in the second half of the year. That is the reason for the 3%-4% sales growth guidance for the full year.
Right. Certainly clear on no expectation of end market structural pickup, but is there anything within Geberit own actions that you're seeing that maybe is gathering pace? We saw quite a few new products introduced at ISH, for example.
No structural acceleration in the markets and no structural changes in the second half of the year for Geberit internally. Purely technical.
Very clear. Thank you. Can I also just double-check on Germany, the growth of 4.9% was on a higher comp from last year. Is there anything for us to be aware of in that growth in H1 2019 that you delivered in what seems to be a flat market?
I think our colleagues in Germany did a very good job on the various initiatives which are running there. Our upselling initiative or activities are going very well, upselling to higher end products, which are especially easier and faster to install. We have also a lot of success with new products which we introduced in Germany, for example, in drainage pipes, which introduced an important new test in 2016, and we see a nice growth here. We had also a little bit more courage price increase this year in Germany, increased prices a bit more compared to the last two years.
Very helpful. Thank you. Can I also check on the ceramics business exit? Is this new to the two sites that you closed, or is that still a follow-on effect from that?
No, that is completely independent of the site closure in France.
Right.
That's simply due by the fact that we had a part of the ceramics business in France with very low and unacceptable margins, and it was a conscious decision to exit that business. Nothing to do with the site closure.
Could you give us some idea of the size of that business?
No, I can't, because it was with a dedicated customer, therefore, I can't disclose to you any figures.
Right. That was specifically in Q2?
In the first half of the year.
Okay, great. Thank you. Finally, just on the other cost effects line on the profit bridge, when I look at what you give in H1 versus what you gave in Q1, the implication for second quarter is that it stepped up by more than CHF 6 million. Just wanted to firstly ask if my math agrees with yours and, if it does, then I think one item that we had in there was the Keramag rebrand cost that was supposed to step up. I thought we were talking about CHF 10 million for the whole remainder of the year there. Just wanted to check if there was any front-loading of that in the second quarter.
No. We have said that we spend CHF 10 million marketing expenses during the entire year as of Q2, and roughly one third of that was now spent in the second quarter as planned.
Okay, the rest of the step up is wage rates ticking up.
Exactly. We had also in the previous year, we had a positive one-time effect in the second quarter in 2018. Also a little impact on the margin development for this year.
Got it. Thank you very much.
You're welcome.
The next question is from Daniela Costa, Goldman Sachs. Your line is now open. Please go ahead.
Oh, hi. Good morning. Thanks for taking my question. The first question, just wanted to follow up on the new product launches on Geberit ONE, when do you expect to start to see the contributions from that into growth? I guess you have commented previously on your 4%-6% medium term target includes a bit of innovation-led growth, when will this step kick in? The two other ones are a bit more technical. I wanted to check on the tax rate, given I think there were the results of the Swiss referendum in May, and you had in prior quarters commented on that your views on the tax rate would depend on that. Where do you stand for the future based on that?
The third one on IFRS 16 impact, I think was a bit higher into Q than it had been in 1Q. Where do you stand for the full year? Thank you.
I start with the first question. The first impact on sales from the new bathroom series, Geberit ONE, which we launched this year, will be earliest as of next year. We do not expect any substantial sales this year, earliest next year. For the tax rate and IFRS 16, I ask Roland to answer the question.
The mid-year tax rate is higher than last year. That doesn't have anything to do with the referendum in Switzerland. That's mainly because of positive one-off effects in 2018 in H1 and some mix effects. The referendum, yes, was passed in Switzerland, and we also know now that the tax rate in the canton of St. Gallen, where we are paying taxes, is going down. However, not all the implementation details are known yet, so we still believe that we might pay a little bit higher taxes than in 2020 going forward. Tax, the guidance is around 16% versus around 15% for this year. We had a minor positive impact now mid-year because we could release some deferred tax liabilities in our P&L. This has a minor effect, not material. For IFRS 16, the impact for the full year will be around 0.5%, 0.6%.
No significant change compared to what we have seen in H1 and the difference between Q1 and Q2 is just normal volatility driven by FX and other items.
Thank you.
The next question is from Martin Hüsler, Zürcher Kantonalbank. Your line is now open. Please go ahead.
Yes, good morning. I have two questions. First, maybe to the strengthening of the Swiss franc. Do you foresee any changes in your pricing strategy in Switzerland? Do you have to adjust your prices there or doesn't it have any impact at this stage?
Of course, we are closely observing the situation and the currency development. At this moment in time, we do not foresee or plan any extraordinary price changes due to the currencies in Switzerland.
Okay. The other question is about your guidance or outlook. We talked about the 3%-4% in sales growth. If I assume you would achieve 3% and then I look at your margin band that you give with 28%-29%, I think the lower end of this band is quite pessimistic then. Assuming that raw materials stay more or less where they are and you have some scale effect due to the volumes, what's the biggest risk for you that the lower end of the band might seem to be realistic?
That is the raw material price development in the fourth quarter. Our outlook for the raw material price is only for Q3. We have a very low visibility and, as I said before, a high volatility also in the raw material markets. You might have seen that some prices like nickel went up massively. Nickel went up the spot price by 30% in the last three months. Nickel is now up 45% up here today. There is a risk in the fourth quarter about raw material prices, and keep in mind, last year in the fourth quarter, raw material prices also went down already. That is the biggest risk for our margin guidance this year.
Okay. Thank you.
You're welcome.
The next question is from Matthew Spurr, Exane BNP Paribas. Your line is now open. Please go ahead.
Hi there. Just a couple from me. Can you say how the price raw materials developed in Q2 versus Q1? Obviously, can see the year-on-year, but just wondered sequentially whether you can give us some guidance on what happened.
Yes. The raw material prices in the second quarter went up compared to the first quarter.
The pricing was the same as its prices went up in the start of the year, and so it's the same price effect year-over-year and the same sequentially, yeah?
Sorry, can you repeat the question? Sorry.
Your pricing was basically the same year-over-year Q2 as it was in Q1?
We increased prices, as you know, typically for the second quarter. The sales price increase this year was somewhat higher than what we planned for. Finally, we achieved more sales price increase between 1% and 1.5%, a little bit more than what we initially planned.
All right. Your thoughts on Germany. You said the market's healthy. How worried are you? Obviously, the manufacturing sector, big part of the economy, is looking in trouble. We had noises in the quarter about rent freezes coming in Berlin. What are your overall thoughts on? Do you think German housing market is going to be resilient to these sort of headwinds?
We believe still the biggest challenge from a market perspective for our markets is the question of the capacity of installers, of qualified installers, or not that much the demand. There is still a strong demand in the market for building constructions. There is also an inventory level for tasks which have to be fulfilled. There is a renovation need. We are not that much worried about demand, although the general economy in Germany obviously seems to slow down, especially exports.
All right. Thank you.
You're welcome.
The next question is from Martin Flückiger, Kepler Cheuvreux . Your line is now open. Please go ahead.
Thanks for taking my questions. Martin Flückiger, Kepler Cheuvreux. First one, I'll go one at a time. Coming back to the issue of Germany and the problem you just mentioned about the lack of qualified installers. Could you talk a little bit about any dynamics that you have seen with respect to this issue? Particularly, I'm interested to learn what kind of order book levels in weeks for installers you saw in Q1 and Q2. I think the last number you provided was by the end of last year. Also, if you could talk a little bit about your own training programs for installers in Germany, how that's going, that would be my first set of questions.
There is no fundamental change in Germany regarding the situation of the capacity of qualified installers. You're referring to the statistics of the order book levels. The latest figure is that the order book level in Germany even slightly increased to 13 weeks, around 13 weeks currently. There is no relief from that side. Regarding to our trainings, we are still very happy that we are able to attract many installers despite the bottleneck to our trainings. We do not see a lower demand. On the contrary, we see even a higher demand for support, services, be it training or via our sales force, to support these customers. Which is of course one of the elements of this bottleneck of qualified installers. The people are there, qualification levels are lower.
The need for support and service is increasing, and we are focusing on that, and we see that also in our numbers.
Perfect. Thanks. Just to clarify that, those 13 weeks you just mentioned for order books among installers, is that a Q1 or Q2 survey?
That is a summer survey. The latest summer survey.
Okay, perfect. Thanks. Then, my second question is on the bathroom business. Can you talk a little bit about your organic growth in the shower toilets business, AquaClean, in Q2, and maybe also elaborate more on the reasons for the decline of the ceramics business. Was that just Nordics driven, or what was that?
Shower toilet was growing in the first half of the year, only single digits due to the fact that we had a very strong first half of the year last year for shower toilets, driven by some dedicated marketing initiatives. In general, Bathroom business, as I said during my introduction, there were basically four levers influencing the business in the first half of the year. One was the strong comparison for shower toilets. The second one was the weak market environment in the Nordics. As you know, the Nordics is the most important market for our ceramics business. We had also weak sales from Keramag due to the phase-out of the brand in the second quarter. We had the effect, which I mentioned before in France, where we decided to exit low-margin business also for ceramics in the French market.
Perfect, thanks. Then a final question is on your EBITDA development in Q2 and also the guidance for 2019. I'm trying to doing the maths on Q2 profit bridge. Your volume mix effect has dropped quite significantly or is less positive, I should say. Looking at Q1, it was up 100 basis points, and I think for the H1 it was 70, so probably around 40 for Q2. What is the main reasons for that? With regards to your EBITDA margin guidance for 2019, have there been any recent unexpected developments that have impacted that range of 28%-29%?
Question number one, as I said before, we had somewhat stronger price increase this year or in the second quarter than in the previous periods. As I said before, we increased prices more in the range of 1%-1.5% across the group. That means that also the volume effect, of course, is a little bit lower towards the stronger price increase. To your second question, we have not seen any extraordinary short-term effects which had an impact on our EBITDA margin guidance for this year.
Thank you very much.
The next question is from Bernd Pomrehn from Bank Vontobel. Your line is now open. Please go ahead.
Yes, good morning, gentlemen. Two questions, if I may. Firstly, you mentioned Turkey. How important is Turkey about? How big is Turkey about for you within Eastern Europe? That's the first question. The second question is on the brand harmonization program. How is it progressing? Is everything going according to plan? Was there any impact, or will there be any impact this year on your cash flow, inventory management, et cetera?
Turkey has, within the region, of course, a substantial impact, especially if the sales decrease is double digits. For that region, it is important. On a group level, of course, it's not that much material, but for the region, it's an important contributor. To your second question about the phase-out of the brand. All in all, it is running according to plan, which means that we have stopped at the end of Q2 to produce and to deliver any Keramag branded products. You don't get any Keramag products anymore from Geberit. It's now all Geberit branded. What we have seen is, although that some of the wholesalers, and we have heard from wholesalers, used that Keramag brand switch to lower and to clean up their inventory levels.
They have lowered their inventory levels with old Keramag products and used that opportunity to clean up, so to say, their inventories. That's what we have also seen in the second quarter. As of now, the main focus is to refurbish the remaining showrooms. As you know, we have to refurbish many showrooms in Germany from our customers with the Geberit branded product. That takes time, and that is also the effort now towards the end of the year.
Okay, excellent. Thank you, Christian.
Welcome.
The next question is from Fabian Häcki, UBS. Your line is now open. Please go ahead.
Thank you very much. A few questions. The first one on the U.K., that was surprisingly up +10.6%. I think in Q1 you said you had quite a pre-Brexit benefit with customers refilling inventories. Can you tell us a bit how gross distribution was in Q1 and Q2, or was there any kind of reversal impacting Q2 at all? You see non-residential, which is nearly all of your business being down. Do you already see that visible in your numbers?
We had a strong dynamic in Q1 and Q2 in the U.K., meaning Q1 was very strong and then we have seen the reverse effect in Q2. Overall, the 10%, 11% growth in the first half of the year, has also been seen in the context of the relatively weak comps from the previous year. Previous year, we were minus 8%, so that was also driven by easy comps the entire first half of the year.
Okay. Thank you. On piping, that was also unusually strong. It's +6.7%. You mentioned the introduction of the new drainage pipes and also Piping Systems is strong. Structurally, the piping business is growing clearly below the Installation Systems. How long do you think will this effect of driven by the new products last, will it last through H2? Will it last into 2020? Before at some point, we can assume it will also normalize rather down to low single digit or what's your view on that?
I can't give you a quantify, quite an outlook for the Piping Systems. I can talk about the new products, which we believe they still have large potential in the geographies where we have introduced them. They're definitely not yet the full potential. How long it lasts in terms of structural growth rate, difficult to say. It's important that we are growing above the market with Piping Systems, and I'm confident that we will do that for the near and midterm future.
Okay. Thank you. My last question is on Bathroom Systems. With Villeroy & Boch also warning on the ceramics market in bathrooms in Europe for this year, and we know there is overcapacity in the market, and I don't know if everyone is so disciplined as you are in taking out capacity, shutting down some plants. Overcapacity is expected to persist and with now declining volumes and increasing competition, do you see anything moving on the pricing front, in an adverse direction?
No. No structural systematic differences in terms of pricing in Bathroom Systems compared to the other two product areas. I couldn't confirm or support your hypothesis.
Okay. Thank you, these were my questions.
Thank you.
The next question is from Yörk Schumacher, Berenberg. Your line is now open. Please go ahead.
Yes, good morning. In fact, most of my questions have already been answered. Just have two follow-ups. The first one I did not understand acoustically in the beginning, the marketing costs of CHF 10 million. Is it correct you spend one third so far in the second quarter? Let's go one at a time.
That is correct.
Okay. The second one, on a more structural trend. The trend to multi-housing where we can assume that prices matter more. Do you see here a trend that is not beneficial to Geberit? What's your view on that?
No, we do not see that. Maybe a good example is Germany in the first half of the year. As you know, multi-family buildings in Germany are growing quite fast, faster than single family, and we have achieved a growth rate of 4.9%. I can't confirm your hypothesis.
Great. Thank you very much.
The next question is from Priyal Woolf, Jefferies. Your line is now open. Please go ahead.
Morning, it's Priyal here from Jefferies. I've got three questions. The first one is just to follow up on the U.K. Obviously, you said Q1 saw restocking, Q2 was weaker. I just wondered as we go into another Brexit deadline, is Q3 likely to be strong in the U.K., again, because there could be potentially restocking occurring again? That's my first question.
Could be. To be honest, I'm very hesitant to make any forecast for the U.K. and stocking effect, quite difficult to say. Could very well be that something similar would happen. So far, I can say we don't see it.
Okay, fine. The second one is just on raw materials. You said that Q3 raw materials will have stabilized versus Q2. I just wondered, if they do stay flat versus Q2, is that still higher year-on-year, i.e. Q3 2019 versus Q3 2018?
No, Q3 2019 will be below Q3 2018, but stable versus Q2 2019.
Okay.
The raw material prices came down quite significantly in the first quarter.
Cool. The final question is just on Keramag. It sounds as though the impact from sales is more to do with the distributors starting to clean up their inventory. Is the phasing out of that brand potentially making you lose sales on a fundamental basis, i.e., people aren't switching over to the new Geberit-branded product? Any signs of that?
No, we do not have any signs and also do not expect that you see a mid, long-term structural change or lower sales due to the brand change. On contrary, I would assume mid, long-term that it should support our sales. That is one of the reasons. What short-term or during that transition phase, we have now seen that we are impacted by, what you said before, a lower inventory level or the cleanup of the inventories of wholesalers. Structurally, mid-term, we do not expect or do not have any signs that there is a structural shift away from the rebranded products.
Okay, thank you.
You're welcome.
The next question is from Christian Arnold, MainFirst. Your line is now open. Please go ahead.
Yes, good morning, gentlemen. Two, three questions from my side. First on France, there you had an organic growth rate of 0.9%. Could you give us information about if we take out this external effect from the phasing out of the low-margin business in the ceramics, what that growth would have been in France? The second question would be on the business day you mentioned you will have one business day more in the second half. Will that be in Q3 or in Q4? The third question on the material prices. There is uncertainty about your Q4 or the Q4 development. If things stay like it is today, with higher nickel prices, but everything else stays the same, what does it mean on a year-over-year basis for Q4 material prices? Thank you.
I start with question number one. Unfortunately, I can't give you a guidance how much the sales growth would have been without exiting that low-margin business, because that would give you then a quantitative indication how big the business was. I can't give you that number, sorry. Question two, the working day effect, one working day more in the second half of the year will come from the third quarter. In the third quarter, we have one working day more. Q4 is equal in terms of working days compared to the previous year.
Question number three, if raw material prices would stay at the level where they are now, and now, for example, the nickel spot price increase, not yet in the prices, of course, but assuming our purchasing prices would stay stable also in the fourth quarter, then we would have all in all, for the full year, lower raw material prices than in 2018. I want to repeat, uncertainty is high. We do not know what happens in the fourth quarter.
Thank you.
You're welcome.
The next question is from Alessandro Foletti, Octavian. Your line is now open. Please go ahead.
Yes, good morning, gentlemen. Thank Thank you for taking my question. I'd like to come back again on this margin guidance. Excuse me for that. When I make the math and I look at Q1 margin of more than 31%, Q2 30%, then I roll forward towards your guidance, if I take the bottom range of your guidance, we come out in Q4 towards 21%, maybe. Maybe even a tick below that. My question is twofold. Is my math wrong? Number 1. Number 2, why is that? We all know that Q4 is weak, normally you end up, I don't know, at 23%, sometimes a tick below that, but often 23.5%. 21 in Q4 seems really very low.
First of all, important to note that we have a seasonality in the margin. As you know, Q4 margins are typically lower. The simple math, if you look at the margin improvement of EBITDA level in the second quarter, around 30 basis points. If you extrapolate that margin improvement for the second half of the year and you make the simple math, you are within our margin guidance. Secondly, as I said before, we have also more headwind from raw materials in the fourth quarter of this year because raw material prices started to decrease last year in Q4.
All right, good. There is basically really nothing else than raw material prices.
I'm sorry. Didn't understand the question.
In terms of uncertainty, there is really nothing else than raw material prices.
On top, there is an uncertainty around raw material prices in Q4.
Okay. Good.
You're welcome.
We have a follow-up question from Andrej Kukhnin, Credit Suisse. Your line is now open. Please go ahead.
Yes. Hello again. Thanks very much for taking the follow-up. Just slightly kind of technical stuff, but I hope you bear with me here. I was just trying to run the math on the bridge component for volume and product mix effects on the margin and trying to, from that and your pricing comments, figure out what sort of drop-through rates you're seeing on your volume and mix growth specifically. It seemed to suggest that it's around 60%-70%, which is very high. Could you comment on that and where you see it, or is it really that high because you're mixing up, as you mentioned a couple of times?
Sorry about that. I can't comment these details and then how detailed math within the volume product mix effect. I can't comment on that, sorry.
Just conceptually, if we're thinking about you generating CHF 10 million extra of revenue from purely volume and mix, what would you expect that to result in kind of EBITDA increase?
I never made that example. I have to think through it, sorry.
Okay, fair enough. Sorry. Secondly, you've effectively confirmed that there was Keramag destock in Germany in Q2, right?
Yes.
Any kind of degree of magnitude? I mean, we're talking about tens of millions there or higher?
Actually, we don't even know, of course. We don't even know that it's more or less a figure customer by customer. We heard from our customers, it has an impact, but if I would, I can't quantify. We do not have a figure.
They normally hold, what, around 30 days of inventory? Is that fair or is it much kind of faster moving?
That varies very much customer by customer, but I would say that's more the lower end.
That's the lower end. Okay, great. Finally, sorry, another one on raw materials. I know it's kind of probably the seventh one now. In terms of your outlook for Q3, when you talk about stable versus Q2, can I interpret that as a kind of similar ratio of cost of materials to sales that we should expect, for Q3 as you saw in Q2, which I think was 28.2%?
No. If we talk about raw material prices, as you know, we talk about the prices which we are paying. That is not directly linked correlated to the raw material cost in percentage of sales because you have other inventory effects in there. That is not a one-to-one correlation.
Okay. Is there any way you could give us an indication for that cost of materials to sales ratio, evolution? I mean, do you expect that to be up or down in Q3 versus Q2?
No. We do note that the only area where we are guiding is on the raw material prices, but not on the cost of materials in terms of % of net sales.
Got it. Apart from nickel, was there anything else that's gone up? Because we were quite surprised to see it up. I mean, obviously it looks like most of commodity plastics have all kind of gone down during the quarter.
That's correct. As I said in the introduction, we expect more or less a mixed picture. Nickel is certainly one of the example on the upside side, but also on the technical plastic side, we see a slightly increasing environment, but you're right, for example, for commodity plastics, we expect slightly lower prices in Q3.
Got it.
All in all, we expect a stable picture.
Very clear. Thank you very much for taking the slightly unusual follow-ups. I appreciate it.
You're welcome.
The next question is from Martin Hüsler, Zürcher Kantonalbank. Your line is now open. Please go ahead.
I have two follow-ups. First of all, we heard from a different building supplier that there was a very weak June due to working day effects, but then a very strong July, so very strong start of the H2. Can you confirm this for Geberit as well?
I can confirm that June, it was a weak June that was very much driven by substantially less working days. That is correct.
Then a pickup in July?
Nothing special in July. We have nothing special in July.
Okay. The other question is about Italy. Did I read it correctly that you are a bit more positive on Italy, in your outlook? Before you said environment's somehow cautious. Now you see a stagnating environment.
No, I would not say. Maybe the difference is we have a little bit more confirmation that we have more clarity that we expect stagnating market this year. That was not that clear, maybe a quarter ago. That's the reason why we were more cautious. From a qualitative way, no different view. We expect a stagnating market in Italy.
Okay. Thank you.
You're welcome.
There are currently no further questions. As a reminder, if you would like to ask a question, please press zero one on your telephone keypad.
Okay. Seems there are no more further questions. Thank you for your participation. We wish you all a great day, and thank you. Goodbye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.