Earnings Call: Q1 2019

May 2, 2019

Good morning. I am the Arkodine operator for this conference. Welcome to the Geberit's conference call on the Q1 results 2019. 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. This call must not be recorded for publication or broadcast. At this time, I would like to turn the conference over to Mr. Christian Bull, CEO, accompanied by Mr. Roland Iff, CFO and Mr. Roman Zittler, Head of Corporate Communication and Investor Relations. Please go ahead, sir. Thank you for the introduction. Good morning, ladies and gentlemen, and welcome to our conference call. February had a successful start into the year 2019 with a good sales growth and a strong improvement of the profitability in the Q1 2019. We generated a sales growth of 0.9 percent to CHF 830,000,000. Sales in local currency grew by 3.6%. The operating cash flow grew by 6.8% to CHF262 1,000,000 corresponding to an EBITDA margin of 31.6% and an increase of 180 basis points. Net income increased adjusted by 4.9% to CHF 192,000,000 corresponding to net income margin of 23.1%, which is 90 basis points higher than in the previous year. Earnings per share increased adjusted by 6.6% and reached CHF5.32. Let me now first comment on the sales development and remind you that it is not our policy to communicate with Q1 results our sales figures by individual markets. I will comment on the sales growth rate in local currency. Group sales increased by 3.6% in the Q1 of 2019 despite a strong previous year quarter. Sales in Europe increased by 3.5 percent with growth in all countries and subregions except for Italy and France. In Paris Pacific, sales were up by 8.6% with a strong double digit growth rate in China. The Middle East and Africa region, sales grew by 4.8% with a mixed picture indication. And in North America, sales grew by 2.8%. I will now comment on the sales development product area again in local currency. The product area of installation flushing systems grew by 5% with strong growth in installation systems and concrete systems. Piping systems grew by 7.5% with strong growth in both product lines, supply piping and drainage piping systems. Bath and Systems sales declined by 1.6% driven by a weak market environment in Nordic, a strong comparison from strong sales for shower toilets in the previous year's quarter and weak sales for Keramak due to the brand phase out in the Q2 this year. Let me now update you on the operating and financial results. Cabrillo's EBITDA increased by 6.8 percent and reached CHF 222,000,000. The EBITDA margin reached 31.6%, an increase of 180 basis points versus the Q1 of the previous year. 50 basis points of this improvement were driven by the new accounting standard IFRS 16. The remaining operational margin improvement of 130 basis points were driven by 3 factors: Firstly, lower raw material prices and increased sales prices Secondly, operational leverage from volume growth and a positive product mix driven by upselling of our product portfolio. And thirdly, efficiency improvements and strong cost control and cost discipline. Tariff related increases in personnel expenses had a negative impact, while currency fluctuations did not have any impact on the operating margin due to our nearly perfect natural currency hedge. The operating profit amounted to CHF 227,000,000, which is an increase of 5.8% compared to the adjusted PVC level. The EBIT margin reached 27.4%, 130 basis points above adjusted Q1 twenty Net income increased by 4.9 percent to CHF 192,000,000 and earnings per share grew slightly disproportionately by 6.6 percent to CHF5.33 versus the adjusted previous year's numbers. Free cash flow increased significantly by 130% due to strong operating performance and the positive net working capital development. We further continued our share buyback program starting in 2017, and we purchased around 50,000 shares in the Q1. In total, we have repurchased as part of the run share buyback program around 697,000 shares per end of Q1 2019. In order to refinance the CHF 150,000,000 bond, which became due in April this year and due to the partially eurobonds tender executed in Q4 last year, we recently issued CHF 2 bonds of CHF 125,000,000 each with maturities in 20242028. Let me now comment on the market outlook. The various market outlooks for the construction sector in 2019 have been presented and commented on with the release of our full year results 2018 in March. Since then, our view has not changed. In Europe, we expect overall a favorable but mixed construction market environment. Meanwhile, individual markets will continue develop differently. We remain confident about the construction demand in Germany, although the limited qualified installation capacity might remain above me. In Switzerland, we expect a slightly declining market, driven by a softer residential segment. In the Nordic region, we expect at best a segmenting market driven by a positive outlook for Denmark, a stagnating environment in Norway and Finland and the decline in Sweden. In Italy, we are more cautious due to the political and economic uncertainties. We foresee a stagnating market in France as we indicated for the construction sector half a week. We expect overall a declining market environment in the UK, driven by the non residential sectors due to the Brexit uncertainty. In Austria, we expect the positive construction market with a slight growth. Are positive for Renault, although the strong construction growth in the Netherlands since 2015 led to shortages of qualified installer capacity. The outlook for the Eastern European markets remains mixed with a positive outlook for a market like Poland. And finally, in Spain, we expect an ongoing recovery of the building construction sector. In North America, we foresee a moderate improvement of the institutional construction market, while both most relevant segments we have read, the healthcare and the education sector should contribute to growth. 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 declining building construction market in Australia. Let me finalize our market outlook 2019 with the Middle East and Africa region. We are cautious for the Gulf due to the credit issues and expect a stagnating building construction environment in South Africa. And we remain cautious and see a mixed picture for the Northern Africa and the Near East region. And now a few words about the raw material price environment. We expect average raw material prices in Q2 twenty nineteen to be above Q1 2019 due to increased prices for commodity plastics and spot prices for several industrial metals since the beginning of the year. And finally, let me briefly update you on the Geberit outlook. We expect for full year total CapEx of CHF 180,000,000. An important topic this year is the phase out of the Keramag brand and the replacement by the DeBrit brand in the Q2. As already announced, this will lead to additional marketing costs of CHF 10,000,000, which will be entirely spent during the remaining 3 quarters of the year. Furthermore, the negative impact from wage inflation will increase as of the second quarter since several tariff increases will be affected only as of Q2 this year. As usual, we will provide a quantitative sales and EBITDA margin guidance for 2019 with our half year results in August. This is the end with our introduction. We are ready to answer your questions. Thank you. We will now begin our question and answer session. First question, please, is from Andre Kukhnin, Credit Suisse. Your line is now open, sir. Good morning. Thanks so much for taking my questions. I'll just go one at a time. On raw materials first, please. The guidance for Q2, in Q1, you had a 90 basis point improvement in raw materials to sales year on year. Should we think about Q2 as kind of reversing that? And therefore, that 130 basis point component on the bridge becoming kind of smaller or more towards neutral. I'm just trying to get some kind of a quantification of this. And wanted to check if what we discussed at the full year results a couple of months ago about H1 being overall small headwind and H2 being overall potentially a small tailwind on raw materials for the CFO holds? Or has that changed for you? No, as we said in our introduction, we expect raw material prices to go up in Q2 versus Q1 2019. Of course, we do not know how much that increase will be. Therefore, it's difficult to answer your question. But most probably, the raw material price level in Q2 this year will still be below Q2 last year. So overall, most probably, we expect raw material prices in the first half of the year this year below the first half of last year. Regarding the second half of the year, I don't want to speculate because the volatility and geography around volunteer prices is high as we have already seen in the Q1. Therefore, I don't want to speculate about the second half of the year. Okay. That's helpful. And can I just check on this extra cost for term ag rebranding? You said the whole of EUR 10,000,000 will be spent in the rest of the year. But in Q1, we had a couple of trade fairs and one particularly sizable one. So I just wanted to get an idea of this kind of extra costs. Would there be still a step up in Q2 because of the, say, whatever it will be, euros 3, euros 4,000,000 maybe even up to €1,000,000 spend in Q2 on Terminak rebranding? Or this is kind of the run rate you're already running at given Bayern Munich and ISH costs in Q1? We have slightly higher marketing costs in Q1 driven by ISH, it's true. But the CHF 10,000,000 which we plan to spend for the brands, which will only be spent as of the Q2. So the entire DKK10 1,000,000 will be spent in the next three quarters. There was no expense so far in the Q1 for the switch of the brand. Okay. And our stage cost is kind of not comparable to the quarterly run rate of Teramag Rebrand. It's much lower. Is that right? Yes, lower. All right. Great. And then just more interesting stuff. We saw some products at ISH that I think some of your customers are very excited about. So just wanted to get an update on how that 1 month has gone since you launched them and whether the customer take up is in line or ahead of your expectations and whether we can expect an effect from that already in Q2 and onwards? Or is it still kind of more of a gradual ramp up? We have a positive feedback on the new products which we introduced at the very first, especially on our main fare at the ISH. So the feedback of customers was very positive. But of course, we do not see yet any impact in the figures. As you know, that takes time. So there's no quantitative impact so far. Thank you. And last one, on IFRS 16 impact, could you give us an idea of it for full year? Is that going to run at that sort of 50 bps as in Q1 or will change? Yes. We expect that it will remain at that run rate and charge 4.5 on the investments and on the liabilities which we added. Great. Thank you very much. You're welcome. The next question we received is from Matthew Spurr from Exane BNP Paribas. It's Matthew Spur from Exane BNP Paribas. Can I ask about the personnel expenses and tariffs? So your comment in the presentation in the bridge points to tariff as a headwind year on year. I don't square that with the key figures release where it looks like personnel expenses are basically flat despite higher sales. Can you just run us through that? And then what am I missing, please? There is a currency effect on the personal cost as well, which you have to take into account. That is the main reason. Okay. And then on the mix and well, volume and mix, which you put together, the so what was the main mix effect, was that due to upselling? Or was there an can you quantify the mix on the margin from the different segments have had quite a divergence? You've got piping, we saw your middle margin business growing the most, then installation and bathroom systems declining. So can you product positive the positive effect from product mix is mainly coming from upselling and not the different growth rate of the segment. It's upselling within the segment. All right. And then last one was on the marketing costs. So excluding the Geberit ONE and the ISH, just marketing costs were down year on year. Can you just give us a bit of color around why that was? Thanks. Sorry, can you repeat the question? So you talked about marketing costs and there's a couple of sort of one offish things, aren't there? Well, ISH, which comes every 2 years and then you had to get well, you didn't have any giver at 1 launch cost this quarter, even though perhaps we thought you would. So underlying marketing spend, I think you said it was down year on year or at least in terms of percentage of sales. Can just give us some more color around why your marketing spend was perhaps reduced? No, marketing spend was not reduced in Q1. We had some additional costs for these fares. But even if we exclude that, there was no significant change compared to the previous year. And then in the next three quarters, marketing costs will be higher due to these cost we need for the switch or brand switch project. And the missing trade show costs from Q1, we're not confident for that. All right. Thanks. You're welcome. Next question we received is from Daniela Costa, Goldman Sachs. Your line is now open, madam. Hi, good morning. Thanks for taking my question. Just two quick things. Can you comment about in terms of pricing actions going forward? I guess if you're going if you did your normal April 1 and if there's anything else sort of planned? And then just a little bit more color, if you can, regarding the shortages in terms of plumber labor, if you have seen any signs of easing there and particularly Germany, but I guess geographically across Europe, how's that situation developing? Thank you very much. Question number 1, about pricing this year. We did a normal price increase around 1% as of the Q2, and we do not foresee any specific extraordinary pricing actions. Question number 2 about shortages of ploppers, mainly in Germany. Nothing has changed since our full year publication 6 weeks ago. It's still the same situation. Also, the latest statistics is still an order backlog, I think, dollars of 12.0 weeks. So no structural fundamental changes since the full year presentation mid March. Next question we received is from Martin Schleppinger, Kepler Cheuvreux. Your line is now open, sir. Good morning, gentlemen. Thanks for taking my question. I'll go one at a time as well. I've heard your elaborations on the organic decline for Bathroom Systems. Could you just remind us what the comps look like for the shower toilets going forward, I. E. Q2 up to Q4? That will be helpful. We have a strong first half of the year last year for shower toilets. Of course, we had dedicated marketing initiatives. So we had strong growth in the first half of the year twenty eighteen for shower toilets and the lower growth rate in the second half of the year last year. Okay. That's helpful. Then on the EBITDA margin bridge, could you talk a little bit or quantify preferably the impact from the efficiency gains that you had cited in your press release? No, I can't quantify the total effective decisions we gave. As you know, we are running a top down program that is a bottom up driven approach. Therefore, I can't quantify. But we've had a substantial impact, of course, on our cost structure. Besides the efficiency improvement program and projects, which are running in many plants, it's also very much driven by our cost control and cost discipline, which is also having a positive impact on the margin and the bridge you're referring to. Okay. Thanks. Then just a clarification question on the order in store order books that you just mentioned, the number of 12.0 weeks in Germany. Is that the spring survey? Or is that still the winter survey? Still the winter survey. We do not have the actual figures. Okay. Thanks. And then my final question, given the high EBITDA margin level in Q1 and also the IFRS 16 impact the 50 bps, Is Geberit thinking of adjusting its target EBITDA margin range? Because 31.6 is quite a different league compared to 28%, 20%, 29%? First of all, keep in mind that it's a seasonal effect as well. Q4 EBITDA margin is always lower. So it's also a seasonal effect for the full year. And we are not considering to adjust our EBITDA margin guidance 28% to 30% due to the Q1 result against this note. Next Next question we received is from Martin Isler, Zurcher Kantonalbank. I have two questions. First of all, several construction companies pointed to a positive weather effect in the Q1. And I was just thinking what's your thoughts on that? Did Geberit also profit from positive weather? That is always very difficult to adjust, to be honest. We haven't seen, if I drop to the market to customer, a fundamental systematic positive effect of the weather, to be honest. Difficult. And working days is also more or less no impact, right? No. There was no working day impact in the Q1. In the Q2, we expect one working day less in the Q2, but no working day effect in the Q1. Okay. And then just maybe one question to U. K, where you said because of Brexit, you expect a slight decline in the Q1. It seems like there was still some growth there. Do you think Brexit even had a positive impact because of inventory buildup? Yes. We have seen strong sales in February, especially March in the UK, Brexit orders because wholesaler wanted to build off their inventory. As well as that, we have now seen very weak rate in April in the UK, but that is kind of compensating now in April, but we have seen as a positive effect in the Q1. The next question is from Charlie Ferenbach, HWP Finance Magazine. Your line is now open, sir. Good morning, gentlemen. We've seen this negative growth in bathroom systems. And if I remember correctly, also last year, this division was a bit unproportional, the development. Do you see that it can come out of this trend soon? As I said, the development in the Q1 this year was relatively specific and not comparable to the second half of last year. The Q1 was driven in the U. S. First by the market environment in Nordics, which was difficult, especially Sweden, where we have seen a decline in markets. Secondly, we have tough comps due to the shower toilet business. As I mentioned before, we had a strong growth of shower toilet in the first half of last year due to dedicated marketing activities. And thirdly, the phase out of the Keramag brand in the second quarter had an impact on the sales, especially in March, which were weak because wholesalers didn't order any more Keramak branded products because which was ahead. Okay. Thank you very much. You're welcome. The next question received is from Bernd Pommer from Bank of Vontobel. Two questions left, please. You mentioned some phase out effects for Caramax, some prebuying effects in the U. K. Were there any further prebuying or phasing effects? No. These were the main, the 2 most important phasing effects in the Q1. Okay. Excellent. And then one question regarding your tax rate, please. As you know, the vote on the corporate tax reform in Switzerland will be held this month. Currently, support is rising. So I would like to know whether you ran a simulation on the impact on your Swiss tax reform. Should the vote be positive? And if so, what would be the impact on your corporate tax rate in the mid- and long term versus an unchanged tax regime? Yes. What we are working on now in 'nineteen, maybe only the first step of this implementation of the new tax level for us. There will be a second step then on Canton level later in the year. So if the law as it is proposed now by the Cantonese and Gallen where we are paying the taxes, which is the implementation of what we will vote for now in the 19th May. This is excess because this is adopted. Our tax rate probably will go up to around 16%. But that's not sure yet because there could also be a positive ROE then on the implementation strategy of the cancer we are paying taxes in later in the year. So really, what's coming out here, only we'll know by the end of the year, but it's sure we will pay more taxes in either scenario. Okay. Thank you, Roland. The next question we received is from Manesh Biryani from SocGen. Your line is now open. Yes. So good morning. I have three questions. The first is on the growth rate. I mean, so Gabriq has been doing something like 3% to 4% organic revenue growth for last many years. So I wanted to know is there anything that we can do to significantly take the growth trajectory to the higher level? So will it need like a favorable market environment or your recent innovation probably will provide the necessary base Or should you focus on more underpenetrated market like emerging market to drive the growth? Or should we look at maybe the inorganic go through to take to the higher level of revenues? So this is the first question. The second one is basically like if I see, I mean, the raw material cost inclusion, you already talking about the first half twenty nineteen to be lower than the first half twenty eighteen. Since I look at the full year 2018, raw material price was something like 2.7%. So should we think, I mean, in the full year 2019, probably the raw material inflation would be lower than last year. At least the inflation rate will be lower than the last year. The third one is on like you're already disclosing that the base of sour toilet is impacting the performance of bathroom system. So can you tell us what is the sour toilet contribution to these divisions? The first question about the overall growth aspiration, the growth aspiration, as you know, is between 4% to 6%. Our midterm is our target. And that is basically driven by organic growth, of course, based on normal market environment with solid growth of the market. And secondly, with our 2 main leaders, 1, penetrate further technologies in the market, also in European expansion markets. And secondly, penetrate all the markets with We do not consider any substantial part from inorganic growth in that retail growth target. Question number 2 about raw material environment for the full year. As I said before, I don't want to speculate about the raw material prices in the second half of the year. There is a high uncertainty and volatility in the raw material market. The only thing I can say is that we expect high raw material prices in the Q2 this year, but still below the Q2 of last year. You will see what the second half of the year will bring. And question number 3, I'm sorry, I can't disclose the share of shower toilet businesses in Basel Systems because we are not disclosing these figures. Okay. Yes. Thanks. You're welcome. And the next question we received is from Christian Arnold from MainFirst. Your line is now open, sir. Yes. Good morning, gentlemen. Two questions from my side. On the one side, a large real estate consultant recently stated that building applications for rental flats in the Swiss urban centers increased by 59% beginning of the year. You, on the other hand, are still quite cautious on Switzerland. Maybe you could elaborate a little bit on that. And the second question would be on the strong development in piping. Assuming that piping is more exposed to new construction, where we see a kind of a normalization, This came quite as a surprise. Could you give us here a little bit more color, any particular strong performance in market or products? Question number 1, about the residential market in Switzerland. We are cautious for the residential market, mainly driven by the fundamental sectors, which is immigration, which was driving the market heavily over the last couple of years, which came more or less to a halt in a higher still a high level, but it's not growing anymore. And secondly, the vacancy rate of empty apartments in Switzerland has constantly increased is and we did on a historically high level. That is the reason why we are a little bit more cautious for the residential sector in Switzerland. About the strong performance in pricing, it is very much driven by new product introductions, especially drainage pipes. We introduced a new noise ventilator drainage piping system 3, 4 years ago in Europe, and that is doing very well across the markets. So it's more a product related growth and not that much a geographical related growth. But we also introduced new products in the device hybrid system, which I believe also very well. Thank you. Welcome. The next question we received is from Fabian Heikki from UBS. Your line is now open, sir. Yes. Thank you for taking my questions. Still got a question on the raw material price impact. Could you say share a bit with us what was the biggest positive factor in the raw materials, raw or metals or raw or plastics? And when I look at the polyethylene price index, actually, that was down in September but has not really recovered recently. So can you share a bit your view on metals and plastics and the block? So the lower operating price environment in the Q1 was driven by both by plastics and also metals. We have seen both type areas coming down. And regarding the plastics, we expect basic mainly the commodity prices to rise again in the Q2, also, for example, for €48,000,000 For the more technical plastics, we do not expect the same effect, mainly the commodity plastics, which are falling up currently. And just to clarify, when you say you expect this raw material price to increase, is this the impact you feel on your P and L? Or is there also a delay then when you expect them to increase? That is what I expect and what we are paying on our invoices for all the deals. That's what I'm talking about. Our sales team is paying. Okay. Okay. That's clear. And then just a question on wage inflation. Is there any remaining kind of upward risk to tariffs or negotiations on the wages? Or is this kind of done now with the level we spoke in Q1? No, it's not a risk in the sense that there is uncertainty. It's just the fact that some of the countries, the tariffs are increased not at the beginning of the year, but as a second quarter of the year. For example, in Switzerland, the increased salaries as of April 1. So it's clear that it will go up the tariffs a little bit more. Overall, we still expect for the entire year around 3% wage inflation. Okay. Okay. Thank you. And then maybe just also on the Swiss market. Did you feel any negative base effect from the pre buying impact you had last year? Can you elaborate a bit on the market how it stayed in Q1? Yes, it's true. We had a little lower growth rate in Q1 in the first quarter. Still positive, but lower growth rate compared to the Q1 last year because of the strong base effect from the pre buying in Switzerland. You're right. Cost per sale growth? Okay. Yes, still growing. Okay. Thank you. Welcome. The next question we received is from Andre Kukhnin. Your line is now open, sir. Thanks so much for taking follow ups. Just wanted to check on the Keramag impact in Germany in Q1. Can you give us an idea of kind of significance of that in size and whether that whether you see that now coming back now that you've launched it under a new brand? I can't quantify the impact, but we have seen now at the beginning of the April some signs that it's going up again. We have seen the signs, but it's a little bit too early to quantify the impact because that brand phase out is not a phase out or a switch at one day. It will be during the entire Q2. So it will last a couple of weeks or more or less, another 2 months until the complete switch is implemented. Therefore, I can't yet quantify the full effect. Okay. But would you say it's bigger than the UK pre no Brexit pre buy? I think that can't exactly quantify Brexit is very close to compared to figures which I can't quantify. In the answer, it's no. Okay. Got it. Thank you. Just on labor increases, I think you've given the full year number already in the previous question, but the timing of tariffs going up 1st of April, I presume, is annual. So in terms of step up in Q1 versus Q2 as a percent of sales, should it be material? Or is there actually kind of an increase in the tariff step up this year compared to how much you were going up last year or not? Yes. In Switzerland, we have a stronger wage inflation this year compared to last year. All right. Got it. And any more of magnitude? We increased salaries in Switzerland around 1.5%. We have increased definitely to 1st this year, around 1.5%. Great. And last one, just a much broader question. Just thinking back on kind of the to those 2 trade fairs and seeing a lot of traditional ceramics players launching or having launched now launching kind of second derivatives of some kind of installation systems offerings and often in response to you buying Sanitec a few years back. Does that concern you? Or maybe asking it another way, kind of in terms of lift of concerns or worries that you have on your strategic list, where is that development in terms of that order priority? I would not agree that we have seen a structural change in competition, and then the ceramic players have started to launch products behind the wall. That has happened already a couple of years ago. So we haven't milestone is not a structural new observation. It hasn't changed. Yes, I agree. That was 2 years ago when some of them came out. But I guess they're now kind of launching reiterations of it or becoming a bit more mature in it. I guess, am I right to read your answers that this is something that started happening already 2 years ago? And at the moment, you're not seeing any intensification on that stress suppression? You're right. It's even more than 2 years that we have seen SunTrust players provide most of continued system that it's even more than 2 years. Even before we acquired SunTrust, we have seen 1st players. So that has not a new quality, also not a new quantitative dimension or new quality of competition. We don't see that structure change. Got it. Thank you, Christian. We received a follow-up question from Anhul from MainFirst. Yes. A follow-up on wage inflation. You were saying that in Switzerland, wage inflation only took place in Q2. What about Germany? Have you already increased here the salaries at the beginning of the year? And as a whole, how much has already been done in Q1? How much will it fall in Q2? Thank you. I can't give you an exact answer. The reason is we are not in 1 tariff association in Germany. We are in several different tariff organizations or associations. So most of them have been increased as of January 1, but not all of them. And therefore, I also kind of quantify exactly how much we have already seen in Germany in the Q1, but I would assume it's the majority. Okay. And on group level, maybe I mean for all countries, then assuming I mean having the largest headcount in Germany, so that means that more than half has already been done in Q1, right? The tariff increase, which we expect the wage inflation overall percent. This entire year has been below 3% in the Q1 on group level. Okay. It seems there are no further questions. Thank you for your interest, participation. We wish you all a great day. Goodbye. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.