Good morning. I'm the operator for this conference. Welcome to Geberit conference call on the third quarter results 2018. 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 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 call 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, welcome to our nine-month results conference call. I will start with the third quarter key figures, then comment on the nine-month sales development, as well as the financial results. Sales increased in the third quarter by 1.1% to CHF 741 million. Adjusted by currency effect, the sales growth rate reached 0.7%. Sales in Europe grew by 0.8% in local currency. Positive sales growth was achieved on the Iberian Peninsula with 16.9%, in Central Eastern Europe with 5.6%, the U.K. and Ireland with 4.7%, Germany with 3.7%, Italy with 2.1%. A sales decline was recorded in France with -1.7%, Austria with -2.3%, Benelux with -2.4%, Switzerland with -2.9%, the Nordic region with -5.8%. In North America, sales grew by 6.5%, in our specific region by 3.1%.
Sales in the Middle East, Africa declined by 12.2%. Turning now to the product areas, Installation and Flushing Systems sales increased by 2.2%. Piping Systems sales grew by 3.2%, Bathroom Systems sales declined by 3.0%. Overall, sales growth in Q3 was to some extent below our expectations. Let me therefore give you some comments on recent development of the market environment. The building industry fundamentals and underlyings were still positive. However, the local volatility of the building industry has increased due to higher uncertainties in the global economy. Secondly, there are signs of a slowdown of the building industry in selected markets with strong growth rates in the past. Namely in Austria, Netherlands, France, and Sweden. There are no signs of a broad downturn. Generally, we still see a positive environment for the building industry in Europe, supported by several industry indicators.
The European GDP, for example, is expected to grow by 2.6% in 2018 and 2.0% in 2019. The potential building permits in Europe are up by 2.5% in H1 2018, official market forecasts expect a growth of the European building industry of 1.3% in 2019. The renovation sector, as the largest market segment, is resilient and supports the positive outlook. However, this increased volatility will most probably become more common in the next quarters. Combined with a slowdown in selected countries, we therefore expect overall slightly lower growth rates of the building industry in the next quarters. Let me give you two examples how the building industry environment impacted Geberit sales growth rates in the third quarter. Sales in Russia grew in H1 by 28% and were down by -19% in Q3. Sales in the Gulf were up 18% in H1 and down by -27% in Q3.
This increased volatility of these two relatively small markets for Geberit had a negative impact of one percentage point on the sales growth rate of the entire group in Q3 compared to the first half of the year. Second example. The beforementioned weaker market dynamics in Austria, Netherlands, France, and Sweden, combined with the effect of the price increase in Switzerland in H1, had a negative impact of two percentage points on the group sales growth rate in Q3 compared to the growth rate in H1. Despite this new market reality, we will continue to deliver positive top-line growth, also based on our overproportional exposure to the more resilient renovation segment. Let me now comment on the financial results of the third quarter. Geberit's EBITDA reached CHF 213 million, corresponding to a decrease of -2.2% versus the adjusted EBITDA margin of the third quarter 2017.
The EBITDA margin decreased by 90 basis points to 28.8%. This margin development was driven by the following factors. First, a negative currency impact of 30 basis points due to the strong devaluation of several emerging market currencies, like the Turkish lira, the South African rand, or the Russian ruble. Secondly, substantially higher raw material prices, which however have been fully compensated by increased sales prices. Thirdly, substantially higher personnel tariff costs, which have been only partially compensated by efficiency gains due to the lower volume growth in the third quarter. Adjusted net income declined by 8% to CHF 153 million due to a higher tax rate in Q3. Adjusted earnings per share reached CHF 4.20, a decrease of -6.9%. I will now comment on our nine-month performance.
Overall, we achieved good results with a solid sales growth and a high profitability on previous year's level, despite substantial headwinds from various cost inflation. Group sales reached CHF 2.4 billion, an overall increase of 7.7%. This sales growth includes a currency effect of CHF 101 million or 4.6% versus the previous year. The sales growth in local currencies reached 3.1%. Sales in Europe increased by 2.7%. All markets delivered positive growth rates, with the exception of the U.K. and the Nordic region. In Germany, sales were up 3.8%, with growth in all three product areas. In the Central and Eastern European region, sales were up by 8.9%, with growth in all key markets. In the Nordic region, sales declined by 2.9%, with positive sales growth in Finland. In Switzerland, sales grew by 2.4%.
Sales in the Netherlands grew by 2.8%, with growth in the Netherlands and in Belgium. In Italy, sales grew by 5.3% with strong growth rates in Installation Systems and Bathroom Systems. Sales in France remained at previous year's level. In Austria, sales grew by 0.8%. Sales in the U.K. declined by 4.2%, but with positive growth of Installation and Flushing Systems. Sales on the Iberian Peninsula went up by 11.7%, with double-digit growth in Portugal. In America, sales were up by 4.5%, with double-digit growth of Installation and Flushing Systems. Asian-Pacific sales were up by 13.8%, with strong growth in China and in India. Sales in the Middle East and Africa region increased by 2.2%, with double-digit growth in Southern Africa and the Gulf region. Let me now comment on the sales development per product area in the first nine months, again, in local currency.
Installation and Flushing Systems increased by 4.2%, Piping Systems by 4.5%, and Bathroom Systems by 0.7%. Now let me update you on the nine-month financial results. The group's EBITDA reached CHF 699 million, corresponding to an increase of 7% versus the adjusted EBITDA of the previous year. The EBITDA margin reached 29.5% previous year's high level, despite substantial headwinds from higher raw material prices and higher personnel tariffs. The strong increase of raw material prices has been fully compensated by sales price increases due to our strong pricing power. The higher personnel tariffs have been compensated by efficiency gains and benefit from the site closure in France last year. Adjusted operating profit increased by 6.7% to CHF 607 million, corresponding to an adjusted EBIT margin of 25.6%. The adjusted net income increased by 5.9% to CHF 550 million.
Adjusted earnings per share increased in line with the operating profit by 6.8% to CHF 14.10. The only remaining one-off costs related to the target acquisition in 2018 are the amortization for intangibles. These one-off costs amounted to CHF 22 million on net income level. Free cash flow increased strongly at double digits with 17.3%, despite higher CapEx and payments from restructuring provisions. The share buyback program has been continued according to plan. Per end of September, 442,000 shares have been bought back for a total consideration of CHF 193 million. The equity ratio has further strengthened and reached 49.6% through September this year. Let me now give you an update on our view about the individual construction markets. Already mentioned, the fundamentals of the building industry remain to be solid, we expect overall a positive marketing environment.
The volatility of the local building industry has increased, selected markets show signs of a slowdown. Let me now comment on the individual company outlooks. We remain confident about the construction demand in Germany, although limited qualified installation capacity might remain a bottleneck. Switzerland, we expect a stable market running on a high level. The Nordic region, we expect overall a stagnating environment. We are positive for the building construction industry in Denmark, expect stagnation in Norway and Finland and a decline in Sweden. In Italy, we are more cautious due to the political uncertainties. We foresee a lower growth in France, the indicators for the residential construction sector have further weakened. We expect overall a declining market environment in the U.K., driven by the non-residential sector due to the Brexit uncertainty.
Austria, we expect still a growing construction market, although at a substantially lower pace compared to the last two years. We are positive for Benelux, although the strong growth in the Netherlands in 2015 led to shortages of qualified installer capacity, consequently to lower market growth. The outlook for the Eastern European markets remains mixed, with a positive outlook for a market like Poland. Finally, Spain, we expect an ongoing recovery of the building construction sector. North America, we foresee a moderate improvement of the institutional construction market, while both relevant segments for Geberit, the healthcare and the education sector, should contribute to growth. The residential construction sector should also do well and further grow in 2018. Far East 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 overall a stagnating building construction market in Australia. Let me finalize our market outlook 2018 with the Middle East and Africa region. We are more cautious for the Gulf due to liquidity issues, expect a stagnating building construction market environment in South Africa. We remain cautious for the Northern Africa and Near East region with a mixed picture. Now, a few words about the raw material price environment. Overall, we expect average raw material prices in Q4 to stabilize versus average prices paid in Q3. Keep in mind that raw material price level in Q4 will be substantially above Q4 level last year, due to the continued increase of price levels during the last nine months. Let me now comment on the outlook for the Geberit business for the remaining year.
We expect overall a sales growth rate in local currency for the full year 2018 of around 3%, an adjusted EBITDA margin of around 28%. CapEx are expected to be at around CHF 170 million, and the tax rate should reach around 14%. Today, we also announced the launch of a cash tender offer of up to EUR 175 million related to the EUR 500 million bond issued in the context of the Sanitec acquisition. The rationale of this tender offer is to avoid negative interest rate payments and to optimize our debt maturity profile. The tender will be financed using the already existing revolving credit facility. Let me now summarize our introduction. Geberit achieved good results in the first nine months of 2018 with a solid sales growth.
We managed to keep the profitability on the high level of the previous year, despite substantial cost inflation from higher raw material prices and personnel tariffs. Free cash flow increased strongly with a double-digit growth rate. The building industry fundamentals and underlyings remain positive. There are no signs of a broad downturn. The volatility of the building industry has increased, and selected markets show signs of a slowdown. Uncertainties of the global economy have increased and make an outlook for 2019 even more challenging. We expect overall more volatile and slightly lower growth rates of the building industry in the coming quarters. Despite this more challenging market environment, we will continue to deliver positive top-line growth with high operating margins and a strong and resilient cash flow based on our strong market position, our innovative product portfolio and pipeline, and our strong reputation.
This is the end of our introduction. We are now ready to take your questions.
Ladies and gentlemen, if you would like to ask a question, please press 01 on your telephone keypad now. 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 02 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 Andre Kuehne, Credit Suisse. Your line is now open. Mr. Kuehne, your line is now open. You can ask your question.
Good morning all. Thanks for taking the question. This is actually Andre's colleague, Iris speaking, and I've actually got some questions on behalf of him. Shall we go one by one? Firstly, it's on price increase. There were 30 basis points of margin increase in the quarter from currency depreciation in Turkey, Russia, and South Africa. I wonder if you plan further price increases in those regions to offset that.
Yes, we already implemented and also plan further price increases in these countries where the currency strongly devaluated to protect our margin in these markets.
Do you expect neutral net pricing effects in those regions in Q4 and 2019 if the FX rates stay at current level?
We expect to compensate devaluation of the currency by price increases.
Very clear. Thank you. Secondly, is on the market outlook. I appreciate the comments. Can you maybe give a bit more color on the market outlook versus Geberit's performance, because, for example, the outlook statements points to positive market environments in countries like Austria, France, and Benelux. It seems that in the quarter, Geberit actually saw negative growth rates in those regions. It would be great if you could elaborate on this a bit.
I didn't really understand your question. We have given you a guidance in terms of sales development, margin development for the full year, we provided you a market outlook in general, across the countries. What is exactly your question?
We were more comparing the market outlook versus Geberit's performance in terms of organic sales in those regions. In the outlook statement, it was said that in countries like Austria and France and Benelux, the market outlook is still positive despite slow momentum. In Q3, the organic growth in those regions were negative, we were just trying to reconcile the differences here.
I understand. I'm sorry. We do not never give any outlook on a country level. We only give an outlook for Geberit development on a group level, and we don't give you individual country level sales outlooks. I can't answer to that question. Another question?
Yeah. If we could just have one, just quickly on Germany. Just on the transportation cost, because we're hearing some companies talking about a potential increase in transportation costs because of the lower water levels. I wonder if you see any input from that in Germany, in particular.
Yes, we expect also increase in transportation costs, that will hit us most probably as of 2019 only.
That's very clear. Thank you.
You're welcome.
The next question is from Denise Molina, Morningstar. Your line is now open.
Hi. Thanks for taking the question. I just wanted to ask on pricing. It sounds like you've been able to successfully pass through pricing, I was wondering if you could give us some color on whether or not you've done that across all markets. If you're looking at markets where you take that as an effective if you're trying to selectively increase prices to make the product more attractive. Also thinking about some of the emerging markets, it sounds like you've been able to increase prices enough to offset the currency, I just wanted to confirm that.
First of all, the price increases are driven by two factors. Number 1 is the raw material price environment. The increased raw material prices we have been compensated in all the geographies and in all the markets. The second driver for price increases this year is the devaluation of currencies. As I said before, we increased in respective countries the prices to make sure that we save our local margins.
That's great. It's just one question on ceramics. If you could just talk about how that's going in terms of the take-up of cross-selling the cistern installations in showrooms where you have a strong presence in ceramics.
That is going on as we have seen it in the last couple of quarters. We are able to cross-sell in both directions, ceramics with concealed cisterns and an accelerated growth of concealed cisterns into the ceramics portfolio. There's nothing new.
Great. Thank you.
You're welcome.
The next question is from Fabian Heck, UBS. Your line is now open.
Yes. Thank you. A few questions. Firstly, on the potential rebranding costs. This exercise you start next year. Is there any guidance you can give us or any flavor on that?
We will have rebranding costs as of next year, we can't give you yet a quantitative figure because we are still in the planning and finalization process. As soon as we have the figures, we will provide you the figure, most probably with the first info 2018.
Thank you. On the market, on Switzerland specifically, was there any major pre-buying effect we had ahead of the price increases which reversed now in Q3? Secondly, looking a bit ahead and also the change in tax regime, no longer being able to deduct the mortgage interest and also renovation works or part of that, particularly on the renovation side. Do you think this could negatively impact your business in Switzerland in term?
Question one about the development of Switzerland in the third quarter, that sales decrease was driven by the price increase of the first half of the year where distributors pulled forward some sales. That sales decrease in Q3 was as expected. We do not expect a special impact of the new mortgage rules you mentioned in Switzerland. Overall, we foresee a stable market environment in Switzerland.
Okay, thank you. Do you think that this kind of reversal of the pre-buying effect from distributors, that this will be over in Q4? Do you think it was a bit of head of negative impact in Q3, or could it be-
It will not have a direct impact, it will have an indirect impact because we will have negative base effect in Q4 in Switzerland. Last year, Q4 was very strong in Switzerland. It was up 16%, driven by pulling forward sales from distributors due to price increase. We have a negative base effect in Q4 due to price increases implemented at the beginning of the year.
Okay, thank you. Then the last one on the ceramics business. Sorry, the Bathroom Systems which was down 3% in Q3. Was this mainly because of ceramics exposure to the Nordics or more of a regional topic, or was it that the ceramics market as such was softening?
It was a regional topic. In Nordics, we have had a weak market environment, as you know, ceramics in Nordics is the most important market for ceramic. Of course, it affected also the sales development of Bathroom Systems in the third quarter. Secondly, we have not seen very strong growth of AquaClean in the third quarter that was driven by specific marketing campaigns in the first half of the year, where we had a strong growth in AquaClean, and that pulled forward some demands from Q3. That is the reason why we overall have seen a negative sales growth in the third quarter of Bathroom Systems.
Okay. Thank you very much.
You're welcome.
The next question is from Martin Flueckiger, Kepler Cheuvreux. Your line is now open.
Hey, good morning, everyone. Martin Flueckiger from Kepler Cheuvreux. Thanks for taking my question. Just coming back to your Q3 organic growth rate. It looks like Benelux, Austria, and France were the, I would say, at least from my point of view, the surprises. Could you talk a little bit about the weakness that you have seen in these three markets, Benelux, Austria, and France? Just coming back to Switzerland in respect to the organic growth rate, considering the very strong pre-buying effects you've seen, I would say Switzerland actually, it wasn't as bad, the decline that you saw there. Were you not a little bit surprised, or what offset this pre-buying effect in Switzerland in Q3? That would be my first question. I'll go one at a time.
We are happy with the sales development in Switzerland. If you look now for the nearest nine months, we have a sales growth of 2.8%, and that is according to our expectations, so we were not surprised by Q3 in Switzerland. Talking about the three markets, Netherlands, Austria, and France, where we have seen signs of certain slowdown. These markets have been growing quite substantially in the last past years. For example, Netherlands had a strong growth since 2015, the market was recovering with growth rates above 5% every year. This market is now running on a high level, and it seems that the market growth rates have started to normalize. You see that also with the shortage of installers. Also, the demand has come down.
For example, the residential building permits, which did grow double digits for many years, did not grow anymore in the first half of the year in Holland. Also the sales of new build houses has started to decline. It's not a crisis, it's not a decline, but it is lower growth in Netherlands after the strong growth of three years. A similar picture is in Austria. As you know, the market in Austria developed very strongly over the last two years. The market was growing between 5%-7% in 2015, 2016, and 2017 year by year. That was very much driven by the realization of many formerly delayed projects. With most of these projects now completed, the market is also now normalizing and returning to more normal growth levels. The third country you mentioned was France.
Also in France, the construction market did very well and started to grow and recover in 2016 and 2017 with solid growth rates. As of the second quarter of this year, the residential building indicators started to weaken again. For example, the residential building permits still grew by 8% by Q1 this year in France, but this growth rate turned into a decline of -5% at end of Q3 this year. All the residential building starts in France also decelerated from a growth rate of 12% from Q1 to only +3% per end of Q3 this year. Also there you see a slower growth dynamic of the market.
Very helpful. Thank you very much. My second question on your EBITDA margin bridge. It looks like, when I compare the nine-month bridge versus the H1, it looks like mix was more of a negative impact. Was that just related to the different growth dynamics between Piping Systems and Installation and Flushing Systems, or what was the key impact here? Why was mix apparently negative in Q3?
We didn't see a significant change in the mix between Q3 and H1. Maybe a little bit less positive, that has to do with more accelerated growth rate in Piping Systems, you're correct. It's not a significant impact.
Okay, perfect. Thanks. My final question is, can you provide us with an update on the bottlenecks in the German sanitary installer industry? Do you have the latest number on the order book in terms of weeks?
Yes. The bottleneck of installers in Germany is not resolved. The latest statistics now from summer 2018 report an order backlog of 11.8 weeks, which is still a record level. This bottleneck seems to have stabilized since the order backlog did not increase any more this year, unlike last year, you remember, the order backlog grew double digits. It remains on a high level, but it seems that it's not growing anymore.
Thank you very much.
You're welcome.
The next question is from Charlie Fehrenbach from WP. Your line is now open.
Good morning, gentlemen. Can you tell us which markets finally did develop worse than you expected? What was finally the main reason to reduce the sales guidance for the full year? Thank you.
As I said in my introduction, we have observed two things in the third quarter. First of all, a generally higher volatility of the local building industry markets. Secondly, a slowdown of a handful of markets, that is Netherlands, Austria, France, and Sweden, where we have seen that the growth has come down. That is the main reason why we expect also for the entire year, a slightly lower growth rate compared to our H1 publication. Hello? Fierenbach?
Now I have you again. Yeah, I'm sorry. Yeah. Can you hear me now?
Sorry, can't hear you. Maybe we go on to the next question and come back to Mr. Fierenbach later.
The next question is from Jan Pondrom, Bank Vontobel. Your line is now open.
Yes, good morning, gentlemen. One question left. The other operating expenses increased at an over proportional rate in the third quarter. What was the driver for this increase? Was it freight cost, energy cost, marketing cost? Thank you.
The other operating expenses compared to last year, you mean?
Year-over-year compared to Q3 2017, yeah. It grew at 3.5%. Sales just increased by 1.1%.
Well, we had some negative one-offs in Q3, which were the main reason for that. The underlying increase was not that long.
Okay, excellent. Thank you.
Next question is from Manish Beria, Societe Generale . Your line is now open.
You said about some selected market showing negative growth rate, but the overall construction market is still doing good. I wanted to ask, is it still good enough to maintain your 4%-6% revenue guidance for the mid-term and also the operating margin guidance?
First of all, mid-term guidance is a mid-term guidance. It doesn't mean that we want to reach that mid-term guidance every year. Secondly, the mid-term growth target, mid-term growth guidance assumes a normalized market growth. Obviously this year, we do not expect to reach 4%-6% due to the before mentioned reasons, a high volatility in the market, higher uncertainty, and the slowdown of selected construction markets in Europe.
Okay, I also have the second one. I also wanted to check with you, what was the price increase in Q3 and the nine months, and also the raw material price increase in Q3 and the nine months?
Raw material prices increased in the first nine months by 3.3%. The first half of the year, it was 2.7%. We have seen a further increase in the third quarter. The sales price increases were around 1%, slightly above 1% for the first nine months.
Okay, thank you.
You're welcome.
There's a follow-up question of Andre Kuehne. Your line is now open.
Hi. Thanks for taking the follow-up. It's a very quick housekeeping one, really. Just on the base effect into Q4, is there anything we should be aware of? We remember two years ago, I think there was a positive effect of Christmas falling on a weekend, which resulted in a very productive week. Last year, the base effect was negative. I wonder, how should we think this year of the holiday constellation, because Christmas seems to be on a Tuesday this year.
Technically, we will have one working day more in the fourth quarter, but it's always difficult to assess the impact of the working day effect in the fourth quarter because of the circumstances of the working days around Christmas. We have technically one working day more, but it's difficult to assess the effect. The most important base effect you should take into account is the one I mentioned before, is Switzerland, where we had a strong growth rate last year of 16% in the fourth quarter.
That's fine. Thank you.
You're welcome.
We have a next follow-up question from Martin Flueckiger. Your line is now open.
Yeah, many thanks. Just coming back to that remark by Mr. Chris on the negative one-offs in Q3. Could you elaborate a little bit on that? What kind of one-offs they were and maybe also provide some magnitude? That would be very helpful.
The underlying development of the other operations was more or less flat. One-off also had to do with our recall, or our Nozzle Cleaner topic related to the shower toilet business.
Sorry, there was a recall in the shower toilet business?
No, not the recall. Nozzle Cleaner topic, which we have related to the shower toilet business.
Okay, thanks.
We have a next question from John Revill, Thomson Reuters. Your line is now open.
Yes. Good morning, gentlemen. Just one clarification, if you will. Mr. Buhl, when you were talking about the countries rundown early on in your presentation, was that for this year or was that for next year when you went through Austria, Spain, North America and everywhere? That's my first question. The second question is, you say you're seeing more volatility and caution out there in the building market. What sort of risk do you see actually turning negative? I mean, is that a possibility at all? Aside from the actual, obviously, volatility and caution out there, what's kind of driving that then, do you think? Is it sort of trade concerns with people holding back on building projects or, obviously the global mounting trade tensions, that kind of thing? What do you think is beneath the actual volatility, as it were? Thank you.
Question number 1, the outlook refers basically to the end of the year and the start of 2019.
Okay.
It's difficult to really have already now an outlook, especially driven by the higher uncertainties of the global economy in the full year of 2019. It's the end of the year and beginning of 2019.
Okay.
Higher volatility means that there is a higher probability that selective local markets will show more negative, but maybe also more positive growth rates, and that we see higher fluctuations or higher impact on the group base growth rate.
Right.
The third reason why, or third question why we see more volatility in the local building industry, it is very much driven by the uncertainties around the development of the global economy on the back of the trade war related uncertainties, tighter monetary policy, but also the economic instability of selected emerging markets like, for example, Turkey, Russia, or South Africa.
Right. What sort of risk do you see actually turning negative? Do you think that's a possibility?
Sorry, say again?
What sort of risk do you see turning negative? I mean, you think slower growth. Do you think it could turn negative?
As a group? No.
But for the building industry overall.
What do you mean? No. That's what I said. We are generally positive still for the building industry outlook overall. The fundamentals are still intact. Don't forget that the renovation sector is the largest part of the market, and the renovation sector is much more resilient, and we do not expect a decline in the renovation sector. Even the new build sector in Europe is still predicted to be positive. Building permits are still growing in the first half of the year, 2.5%, as I mentioned in my remarks. We do not expect overall a negative building industry. It's a more volatile building industry with selected markets at a lower growth rate in selected markets.
Okay. Thank you.
You're welcome.
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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.