Earnings Call: Q3 2018

Oct 30, 2018

Good morning. I'm the architect in operator for this conference. Welcome to the Jet Array Conference Call on the 3rd 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. This call must not be recorded for publication of webcast. At this time, I would like to turn the conference call over to Mr. Christian Bull, CEO, accompanied by Mr. Roland Iff, CFO and Mr. Roman Zipla, Corporate Communications and Investor Relations. Please go ahead, sir. Thank you for the introduction. Good morning, ladies and gentlemen, and welcome to our 9 month results conference call. I will start with the Q3 key figures and then comment on the 9 month sales development as well as the financial results. Sales increased in the 3rd quarter by 1.1 percent to CHF741 million. Adjusted by currency effect, the base 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%, and the UK and Ireland with 4.7%, Germany with 3.7% and Italy with 1%. A sales decline was recorded in France with minus 1.7 percent, Austria with minus 2.3 percent, Enelux with minus 2.4 percent, Switzerland with minus 2.9% and the Nordic region with minus 5.8%. In North America, sales grew by 6.5% and the REIT region by 3.1%. Sales in the Middle East Africa declined by 12.2%. Turning now to the product areas, installation and flushing system sales increased by 2.2%. Piping systems sales grew by 3.2% and 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. Building industry fundamentals and underlying are still positive. However, the local volatility of the building industry has increased due to higher uncertainties in the global economy. And 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 2.3% in 2018 and 2.0% in 2019. Residential building permits in Europe are up by 2.5% in H1 2018 and official market forecast expect a growth of the European building industry of 1.3% in 2019. Also, the renovation sector as the largest market segment is resilient and supports the positive outlook. However, the increased volatility will most probably become more common in the next quarters. Combined with the 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 average sales growth rate in the Q3. Sales in Russia grew in H1 by 28% and were down by minus 19% in Q3. Sales in the Gulf were up 18% in H1 and down by minus 27% in Q3. This increased volatility of these 2 relatively small markets for Geberit has a negative impact of 1 percentage point on the sales growth rate of the entire group in Q3 compared to the first half of the year. Second example, the before mentioned 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 2 percentage points on the group's risk 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 over proportional exposure to the more resilient renovation segment. Let me now comment on the financial results of the 3rd quarter. EBITDA reached CHF213 1,000,000 corresponding to a decrease of minus 2.2% versus the adjusted EBITDA margin of the Q3 2017. The EBITDA margin decreased by 90 basis points to 28.8%. This margin development was driven by the following factors: 1st, 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 And thirdly, substantially higher personnel tariff costs, which have been only partially compensated by efficiency gains due to the lower volume growth in the Q3. Adjusted net income declined 8% to CHF153 1,000,000 due to a higher tax rate in Q3. And adjusted earnings per share reached CHF4.20, a decrease of minus 6.9%. I will now comment on our 9 months 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 CHF2.4 billion, an overall increase of 7.7%. This sales growth includes a currency effect of CHF101 1,000,000 or 4.6 percent versus previous year. Sales growth in local currencies reached 3.1%. Sales in Europe increased by 2.7%. All markets delivered positive growth rate with the exception of the UK 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% and positive sales growth in Finland. In Switzerland, sales grew by 2.4%. Sales in Canada grew by 2.8% with growth in the Netherlands and in Belgium. In Italy, sales grew by 5.3% with strong growth rate in installation systems and platform systems. Sales in France remained at previous year's level. In Austria, sales grew by 0.8%. Sales in the UK declined by 4.2%, but with positive growth of installation and flushing systems. Space on the Iberian Peninsula went up by 11.7% with double digit growth in volume. In America, sales were up by 4.5% with double digit growth of installation and flushing systems. Our cosmetic sales were up by 13.8% with strong growth in China and in India. Based in the Middle East, the Africa region increased by 2.2% with a strategic growth in Southern Africa and the Gulf region. Let me now comment on the base development for product area in the 1st 9 months, again in local currency. Installation and flushing systems increased by 4.2%, tightened systems by 4.5% and bathroom systems by 0.7%. And now let me update you on the 9 months financial results. EBITDA reached CHF699 1,000,000 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 price increases due to our strong pricing power. The higher personnel tariffs have been compensated for efficiency gains and benefit from the site closure in France last year. Adjusted operating profit increased by 6.7% to CHF607 1,000,000 corresponding to an adjusted EBIT margin of 35.6%. The adjusted net income increased by 5.9 percent to CHF550 1,000,000. Adjusted earnings per share increased in line with the operating profit of 6.8 percent to CHF14.10. The only remaining one off costs related to the company acquisition in 2018 were the amortization for intangibles. These one off costs amounted to CHF22 1,000,000 on net income level. Free cash flow increased strongly at double digit with 17.3% despite higher CapEx and payments from restructuring provisions. The share buyback program has continued according to plan. For end of September, CHF442,000 shares have been bought back for a total consideration of CHF193 1,000,000. The equity ratio has further strengthened and reached 49.6% for September this year. Let me now give you an update on our view about the individual construction market. As already mentioned, fundamentals of the building industry remain to be solid and we expect overall a positive marketing environment. However, the volatility of the local building industry has increased and selected markets show signs of a slowdown. Let me now comment on the individual company outlook. We remain confident about the construction demand in Germany, although limited qualified installation capacity might remain above. In Switzerland, we expect a stable market running on a high level. In the Nordic region, we expect overall a stagnating environment. We are positive for the building construction in Sweden Denmark, but expect the combination in Norway and Finland and the decline in Sweden. In Italy, we are more cautious due to the political uncertainty. We foresee a lower growth in France as the indicators for the residential construction sector has further weakened. We expect overall declining market environment in the UK driven by non residential sector due to the Brexit uncertainty. In Austria, we expect still a growing construction market, although at a substantial lower pace compared to the last 2 years. And a positive for Werner, although the strong growth in Netherlands in 2015 led to shortages of qualified installer capacity and consequently to lower market growth. The outlook for the Eastern European market 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 relevant segments for Geberit, the healthcare and education sector should contribute to growth. The residential construction sector should also do well and further grow in 2018. In Far East Pacific, we see a mix across the region. We expect the moderate increase of the residential construction market in China. We are positive for India and expect overall stagnating building construction markets in Australia. Let me finalize our market outlook for 2018 with the Middle East and Africa region. We are more cautious for the Gulf due to liquidity issues and expect a stagnating building construction market environment in South Africa. And we remain cautious for the Northern Africa and Near East region with mixed picture. And 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. But keep in mind, at raw material price level in Q4, it will be substantially above Q4 level last year due to the continued increase of price levels during the last 9 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% and an adjusted EBITDA margin of around 28%. CapEx are expected to be at around CHF170 1,000,000 and the tax rate should reach around 14%. Today, we also announced the launch of a cash tender offer of up to €175,000,000 related to the €500,000,000 bond issued in the context of the Sandvik acquisition. The rationale of this tender offer is to avoid negative interest rate payments and to optimize our debt maturity profile. The tender can be financed using already existing revolving credit facility. Finally, let me now summarize our introduction. Geberit achieved good results in the 1st 9 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 and higher raw material prices and personnel tariffs. And free cash flow increased strongly with a double digit growth rate. The building industry fundamentals and underlying remains to be positive. There are no signs of a broad downturn. However, 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. Therefore, we expect overall more volatile and slightly lower growth rates of the building industry in the coming quarters. Besides 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. The first question is from Andre Kuehnlein, Credit Suisse. Your line is now open. Mr. Kukhnin, your line is now open. You can ask your question. Hi, good morning all. Thanks for taking the question. This is actually Andres calling Ara speaking and I've actually got questions on behalf of him. So shall we go one for 1? And firstly, it's on price increase. There were 30 bps negative margin increase in the quarter from currency depreciation in Turkey, Russia and South Africa. I wonder if you plan further on price increases in those regions to offset that? Yes, we already implemented and also plan for the price increases in these companies where the currency is strongly evaluated to protect our margin in these markets. So do you net neutral net pricing, you can see FX in those regions into Q4 2019 as the FX rate stays at current level? We expect to compensate devaluation of the currency by price increases. Very clear. And secondly, just on the market outlook, I appreciate the comments. And can you maybe give a bit more color on the market outlook versus Geberit's performance? Because for example, the outlook statements may point to positive market environment in countries like Austria, France and Benelux. But since that in the quarter, Gabriela actually saw negative growth rates in both regions. So it would be great if you could elaborate on this a bit. I didn't really understand your question. We have given you guidance in terms of sales development, margin development for the full year, and we provided you a market outlook in general across the countries. What is exactly your question? Because we were more comparing the market outlook versus corporate performance in those regions. And in the outlook statement, it was said that in countries like Austria and France and Europe, the market outlook is still positive despite some slow momentum. But in Q3, the organic growth in those regions were negative. So we were just trying to sell 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 separate development on a group level, and we don't give you individual country level case outlook. So I can't answer the question. Your question? Yes, yes. If we could just have one just quickly on country Germany. So just on the transportation cost because we're hearing some companies talking about an increase in transportation cost because of the lower water levels. I wonder if you see any impact from that income in particular? Yes, we expect also increasing transportation costs, but that will hit us most probably as of 2019. The next question is from Denise Molina, Morgan Stanley. Your line is now open. Hi, thanks for taking the question. I just wanted to ask on pricing. So it sounds like you've been able to successfully pass through pricing, but I was wondering if you could give us some color on whether or not you've done that across all markets. So if you're looking at markets where you take up the business, you're trying to maybe selectively increase prices to make the price more attractive? And also thinking about some of the emerging markets, it sounds like you've been able to increase prices enough to offset the currency, but I just wanted to confirm that. First of all, the price increases are driven by 2 factors. Number 1 is raw material price environment and increased raw material prices we have been compensated in all the geographies and in all the markets. And the second driver for price increases this year is the devaluation of currencies. And as I said before, we increased in respective countries the prices to make sure that we save our local margins. Okay. That's great. And 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 system installations in showrooms with 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 Systems and an accelerated growth of Concealed Systems into the ceramics portfolio. There is nothing new. Great. Thank you. Welcome. The next question The next question is from Fabian Hecke, UBS. Your line is now open. Yes, thank you. A few questions. Firstly, on the potential rebranding costs, so 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, but we can't give you yet a qualitative figure because you're still in the planning and finalization process. As soon as we have the figures, we will provide you figure most probably with the first info 2018. Thank you. Then on the market on Switzerland specifically, was there any major like pre buying effect we had ahead of the price increases which reversed now in Q3? And then secondly, looking at it ahead and also the change in tax regime, no longer being able to deduct the mortgage interest and also renovation work. So part of that, particularly on the renovation side, do you think this could negatively impact the business in Switzerland mid term? Question number 1 about the development of Switzerland in the 3rd quarter. That this decrease was driven by the price increase of the first half of the year or in the first half of the year where distributors pulled forward some sales. So that sales decrease in Q3 was as expected. And 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. And you think that this kind of reversal of the pre buying effect from distributors that this will be over in Q4? Do you think there was a pit off had a negative impact in Q3? Or We will not have a direct impact, but we 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 distribution to the price increase. So we have a negative base effect in Q3 for due to price increases implemented at the beginning of the year. Okay. And then the last one on the Pyramics business. Sorry, the Classroom Systems, which was announced representing in Q3. Was this mainly because of ceramics exposure to the Nordics or more of a regional topic? Or was it that ceramics market as such softening? It was a regional topic because in Nordics, we have had a weak market environment. And ceramics is Nordic is the most important part for ceramics. So of course, it affected also the development of BaFin Systems in the Q3. Secondly, we have not seen very strong growth of aquacaine in the Q3. That was driven by specific market campaigns in the first half of the year where we had a strong growth in aquacarine and that pulled forward some demand from Q3. That is the reason why we overall have seen a negative sales growth in the Q3 of Basel Systems. Okay. Thank you very much. You're welcome. The next question is from Martin Flickinger, Thanks for taking my question. Just coming back to your Q3 organic growth rate, it looks like Benelux, Austria and France was it I'd 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? And just coming back to Switzerland in respect to the organic growth rate, I mean, considering the very strong pre buying effects you've seen, I would say Switzerland actually it wasn't that the decline that you saw there. We're not a little bit surprised or what offset this pre buying effect in Switzerland and 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 9 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 3 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 and the market was recovering with growth rates above 5% every year. And 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. But also the demand has come down. For example, the residential duty permits, which did grow double digit for many years, did not grow anymore in the first half of the year in Holland. And also the sales of newbuild houses has started to decline. It's not a crisis, it's not a decline, but it is lower growth in Netherlands after a strong growth of 3 years. A similar picture is in Austria. As you know, the market in Austria developed very strongly over the last 2 years. The market was growing between 5% to 7% in 2015 2017 year by year. And that was very much driven by the realization of many formally delayed projects. With most of these projects now completed, the market is also now normalizing and returning to more normal growth levels. The 3rd company you mentioned was France. Also in France, the construction market did very well and started to grow and recover in 2016 'seventeen with solid growth rates. But as of the Q2 of this year, the residential building indicators started to weaken again. For example, the residential building permits still grew by 8% per Q1 this year in France, but this growth rate turned into a decline of minus 5% at the end of Q3 this year. Already pension building starts in France also decelerated from a growth rate of 12% in Q1 to only plus 3% per end of Q3 this year. So also there you see a slower growth dynamic of the market. Okay, very helpful. Thank you very much. Then my second question on your EBITDA margin bridge. It looks like when I compare the 9 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 Insulation and Flushing Systems? Or what was the key impact here? Why was mix apparently negative in Q3? We don't see we didn't see a significant change in the mix between Q3 and H1, maybe a little bit less positive and it has to do with more accelerated growth rate in the piping system, you're correct. But it's not a significant impact. Okay, perfect. And then my final question is, could you provide us with an update on the bottlenecks in the German sanitary installer industry? And 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. But if Golden Neck seems to have stabilized, since the order backlog did not increase anymore this year, unlike last year, you remember, the order backlog grew double digit. So 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 Fierngaard, AWP. Your line is now open. Good morning, gentlemen. If you may tell us which markets finally did develop worse than you expected? And what was finally the main reason to reduce the sales guidance for the full year? Thank you. As I said to my introduction, we have observed 2 things in the Q3. First of all, a generally higher volatility of the local building industry markets and secondly, the slowdown of a handful of markets at least Netherlands, Austria, France and Sweden, where we have seen that the growth has come down. And that is the main reason why we expect also for the entire year a slightly lower growth rate compared to our H1 publication. Hello? Maybe we go on to the next question and come back to Mr. Kiran Baerbach later. The next question The next question is from Bjorn Pondrem, Bankfrontalbe. One question left. The other operating expenses increased at an over proportional rate in the 3rd quarter. What was the driver for this increase? Was it freight cost, synergy cost, marketing cost? The other operating expenses compared to last year you mean or so? Year over year compared to Q3 2017, yes. It grew at 3.5%, but sales just increased by 0.1%. Well, we had some negative one offs in Q3, which were the main reason for that. The underlying increase was not postponed. Okay, excellent. Thank you. Next question is from Manish Burya, SocGen. Your line is now open. You said about some selected market assuming GDP growth rate, but the overall construction market is still doing good. So I wanted to ask, is it still good enough to maintain your 4% to 6% revenue guidance for the lithium and also the operating margin guidance? First of all, midterm guidance is a midterm guidance. It doesn't mean that we want to reach that midterm guidance every year. And secondly, the midterm growth target mid term growth guidance assumes a normalized market growth. And obviously, this year, we do not expect to reach 4% to 6% due to the aforementioned reasons, a high volatility in the market, higher uncertainty and the slowdown of selective construction markets in Europe. Okay. So I also have the second one. I also wanted to check with you what was the price increase in Q3 and the 9 months and also the raw material price increase in Q3 and the 9 months? Raw material prices increased in the 1st 9 months by 3.3%. In the first half of the year, it was 2.7%, so we have seen a further increase in the Q1. And the sales price increases were around 1%, slightly above 1% for the 1st 9 months. There's a follow-up question of Andre Kukhnin. Your line is now open. Hi, thanks for taking the follow-up. It's a very quick housekeeping one really. Just on the data that came to Q4, is there anything we should be aware of? Because we remember 2 years ago, I think there was a positive effect of Christmas falling on a weekend, which resulted in a very productive week. But then last year, the base effect was negative. And so I wonder how should we think about this year of the holiday cancellation because customers seems to be on a Tuesday this year? Technically, we will have one working day more in the 4th quarter, and it's always difficult to assess the impact of the working day effect in the Q4 because of the circumstances of the working days around business. So we have technically one working day more, but it's difficult to set the target. The most important case effect you should take into account is the one I mentioned before in Switzerland where we had a strong growth rate last year of 16% in the Q4. We have a next follow-up question from Vasyl Flukiger. Your line is now open. Yes, many thanks. Just coming back to that remark by Mr. Kiff 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 OpEx was more or less flat. And one off also had to do with our recall or our nozzle climber 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 Rivell, Thomson Reuters. Just one clarification, if you will. Mr. Gould, when you were talking about the country's rundown early on in your presentation, was that about this year or was that for next year when you went to Austria, Spain, North America and everywhere? That's my first question. And then the second question is, what sort of you say you're seeing more volatility and caution out there in the British market. What sort of risk do you see that you're feeling negative? I mean, is that a possibility at all? And 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, people holding back on building projects or any kind of global sort of amounting trade and that kind of thing? Or what do you think has been beneath the actual volatility as it were? Question number 1, how to the outlook refers basically to the end of the year and the start of 2019. But 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, so at the end of the year and beginning 2019. 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 based growth rate. And the third reason why or third question why we see more volatility in the local building industry and is very much driven by the uncertainties around 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. And what sort of risk do you see of it actually turning negative? Do you think that's a possibility or Sorry, say again? What sort of risk do you see turning negative? I mean, you think slower growth, particularly if you could turn negative? As a group, no. No. But for the fuel industry overall? No. That's what I said. We are generally positive still for the building industry outlook. Overall, 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 declining renovation sector. Even the newbuild sector in Europe is still predicted to be positive. Building permits are growing in the first half of about 2.5%, as I mentioned in my prepared remarks. We do not expect overall a negative building industry into more volatile building industry with selected markets and a lower growth rate in selected markets. Okay. Thank you. You're welcome. Seems that there are no further questions. Thank you very much for your attendance. We wish you all a great day. Thank you. Bye. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.