Good morning. I am the operator for this conference. Welcome to the Geberit conference call on the half year 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 over to Mr. Christian Buhl, CEO, accompanied by Mr. Roland Iff, CFO, and Mr. Roman Sidler, Head of Corporate Communications and Investor Relations. Please go ahead, sir.
Thank you for the introduction. Good morning, ladies and gentlemen, and welcome to Geberit's interim results conference call. Geberit achieved very good results in the first half of the year 2018. In the first six months, sales increased by 11% to CHF 1.63 billion. Adjusted by currency effects, the growth in local currency was 4.3%. The operating cash flow grew by 11.6% to CHF 485 million, corresponding to an EBITDA margin of 29.8%. Adjusted net income increased by 13.1% to CHF 362 million, corresponding to an adjusted net income margin of 22.2%. Finally, adjusted earnings per share reached CHF 9.90, an increase of 13.9%. In the second quarter, sales increased by 10.3% to CHF 807 million. The increase in local currencies in Q2 reached 3.9%. Let me now comment in more details on the sales development of the first half-year.
The group's first half-year net sales amounted to CHF 1.63 billion, an increase of 11% in CHF. This growth was supported by a favorable currency development, which led to a sales increase of CHF 98 million or 6.7% versus previous year. The sales growth rate in local currencies reached 4.3%. Let me now comment on sales growth per region, always in local currencies. All four global regions achieved a positive sales growth. Sales in Europe increased by 3.7% with positive growth rates in almost all markets. In Germany, sales increased by 3.8% with strong sales in Piping Systems. In Switzerland, sales grew by 5.2%, supported by two extraordinary price increases, one in April and another one in July, to compensate for the weaker CHF. Sales decreased in the Nordic region by 1.5%, driven by weaker markets in Sweden and Norway.
In the Central and Eastern European region, sales were up by 10.7% with double-digit growth in Installation and Flushing Systems. In Italy, sales grew by 6.8% with sales growth in all three product areas. Sales in Benelux grew by 5.2% with a very strong growth in the Netherlands. France recorded a sales increase of 0.8% with strong sales growth in Installation and Flushing Systems. In Austria, a sales growth of 2.7% was booked with strong growth in Bathroom Systems. Sales in U.K. decreased by 8.4%, impacted by the uncertainties around Brexit. The Iberian Peninsula grew by 9.5% with double-digit growth rate in Portugal. In North America, sales were up by 3.6% with strong growth of Installation and Flushing Systems for the residential market. In Far East Pacific, sales were up by 20.5% with double-digit growth in all key regions.
Sales in the Middle East and Africa region were up by 9.5% with double-digit growth in the Gulf region. Let me now comment on the sales development per product area, again, in local currencies. Installation and Flushing Systems increased by 5.1%, Piping Systems by 5.2%, and Bathroom Systems by 2.6%. Now let me update you on the financial results. Due to the completion of the major task of the Sanitec integration, we will not report any longer one-off costs corresponding to adjustments on EBITA level. We will only report adjusted figures on EBIT net income level and for earnings per share due to the last year of amortization costs for intangibles in 2018. Geberit EBITA reached CHF 485 million, corresponding to an increase of 11.6% versus the adjusted EBITA of the first half 2017.
The EBITA margin as a percentage of sales reached 29.8%, 20 basis points above H1 2017. The EBITA margin was negatively affected mainly by two factors, substantially higher raw material prices, and higher personnel tariff costs. These negative effects on the EBITA margin have been overcompensated by the following four levers. First, higher sales prices, fully compensating the higher raw material prices, leading to a zero net price effect. Second, the operating leverage from volume growth. Third, the full benefit from the site closure in France. Finally, also continued efficiency improvements. The substantial currency fluctuation did only have a slight negative impact on the operating margins due to our nearly perfect natural currency hedge. The adjusted operating profit increased by 11.5% to CHF 423 million, corresponding to an adjusted EBIT margin of 26%.
Adjusted net income increased by 13.1% to CHF 362 million. Adjusted earnings per share grew slightly disproportionately by 13.9% to CHF 9.90. One-off costs related to the amortization of intangibles in relation to the Sanitec acquisition amounted to CHF 18 million on EBIT and CHF 15 million on net income level. Driven by the strong results, the group balance sheet has further strengthened. The equity ratio reached 45.9% versus 44.4% per end of H1 2017. We further continued our share buyback program and repurchased in total 380,000 shares for CHF 166 million per end of June 2018. Let me now comment on our market outlook for 2018. Our view has not changed significantly since our publication of Q1 results in May this year. In Europe, we expect overall a favorable but mixed construction market environment. Meanwhile, individual markets will continue to develop differently.
We remain confident about the construction demand in Germany, although the limited qualified installation capacity might remain a bottleneck for growth. In Switzerland, we expect a stable market running on high levels. In the Nordic region, we expect a mixed and overall stagnating environment. While we are positive for the building construction industry in Denmark and Finland, we expect a stagnation in Sweden and Norway. In Italy, we foresee an improving market environment. We are positive for France, although the indicators for the residential construction have weakened. Despite the robust residential market in the UK, we expect overall a declining market environment in the UK due to a weak non-residential sector. In Austria, we expect again a growing construction market, but at a slower pace compared to last year. We are positive for Benelux, although the recovery in the Netherlands leads to shortages of qualified installation capacity.
The outlook for the Eastern European market remains mixed with a positive outlook for markets like Poland and the stabilization of the market in Russia. 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 the educational 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 mixed picture across the region. We expect a moderate increase of the residential construction market in China. In India, we are more cautious for the residential construction sector due to the new regulation and policies introduced last year. In Australia, we expect overall a stagnating building construction market. Let me finalize our market outlook 2018 with the Middle East and Africa region.
We expect an improving construction market in the Gulf and a stagnating building construction environment in South Africa. We remain cautious for the North Africa and Near East region with a mixed picture. Now a few words about the raw material price environment. In general, uncertainties in raw material markets have further increased and make an outlook very challenging. Nevertheless, we expect raw material prices in the third quarter to be above the second quarter this year, also to exceed the prior year level in the second half of the year. Finally, let me briefly update you on the Geberit outlook 2018. We expect for the full year a sales growth in local currency of around 4% and an EBITDA margin on previous year's level. CapEx should reach around CHF 170 million.
Please keep in mind that we face, for the remaining year, cost pressure from higher tariffs and no benefit from the site closure in France anymore in the fourth quarter. This is the end of our introduction. We are now ready to answer your questions.
Thank you. We will now begin our question and answer session. If you have a question for our speakers, please dial zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it's your turn to speak, you can dial zero two to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment please for the first question. First question from Andre Kukhnin, Credit Suisse. Your line is now open, sir.
Yes. Good morning. Thanks very much for taking my questions. Can I start with Switzerland first? Just to double-check, you said you increased prices there twice in April and then in July as well. Did I get that right? If so, could you confirm the size of the July increase? I think April was three from memory.
Is correct. We increased prices in Switzerland twice this year. In April, beginning of April and also in July. We increased prices in July a second time on selected products to compensate for the currency development. All in all, the impact of the price increase in July in Switzerland was around 1%.
Great. Thank you. Just how should we think about this sort of pre-buy, post pre-buy effect? We saw very rapid growth at the end of 2017 as a pre-buy. I guess in H1, you've seen more pre-buy in Q1 than post pre-buy effect. Pre-buy ahead of the next increase. Is there anything we should be aware of for second half from these durations of pre-buy, post pre-buy effects? Do you think second half is more or less kind of clean of those?
No. We have already seen an impact of the second price increase as of July in Switzerland, leading to weak sales in July and also beginning of August in Switzerland. There was a pre-buying effect in June due to the second price increase in Switzerland.
Okay. That's clear. Thank you. On the German plumbers, you indicated with Q1 results that maybe potentially things get less tight, then you've delivered 3.8% growth in H1. In your statement, the language is kind of, I think if we try to really dissect, it turns a little bit more negative again, on the call, you use the same sort of might. Are you indicating anything for the second half in terms of change of a run rate for your German business? Was there anything in that 3.8% in H1 that is abnormal?
If you look at the statistics of the bottleneck issue in Germany, nothing has changed. We still have the same statistics as we have also talked about in the Q1 call. The order backlog level is still at a high level. We don't have any new statistics. As we already said with Q1, it might be that we see an improvement at the horizon. Coming to our sales development of 3.8% in the first half year, we are very satisfied with that growth rate, which is very much driven on our value strategy by upselling our product portfolio, very much driven also by new product introductions. For example, the new drainage Piping Systems which we introduced over the last years, in the shower drainage area, where we introduced new solutions where we are doing very well.
Thirdly, also in our shower toilet business, we have performed very well in the first half of the year in Germany, also supporting that growth rate of 3.8%.
Very helpful. Thank you. Can I just move on raw materials? We've seen the obviously improvement in trend, in the first half to neutral, versus 90 basis points negative in H2 2018, so 2017. In terms of the combination of price increases taking place during H1 and obviously the additional price increase in Switzerland versus, as you indicated, raw materials continuing to grind higher sequentially, what is your view on the likely outcome for second half? Another neutral effect, or do you think it can be different?
I'm very cautious to make a statement about our expectation for the second half in terms of raw material price development, because the uncertainties have further increased due to the various protection measures and countermeasures around the globe. Therefore, the only outlook we have, and we believe we are relatively sound, is that we believe in the third quarter we will see still increasing raw material prices compared to the second quarter. I don't think I can make an outlook for the second half of the year.
That's fair. Do you think, in terms of the pace of increase year-on-year in H2 versus what you've seen in H1, do you think that pace can be higher or about the same?
I referred to that what I said before. I can't make a statement for the entire second half of the year, just for Q3.
All right. Thank you for that. I thought I'd try. Can I just check last thing? We're thinking ahead on the rebranding exercise in Germany and other European countries. Obviously Keramag is the key one. Is there any further detail you could give us on this in terms of maybe the timeline? Is this going to be on the turn of the year or tuned more towards March trade fairs, in 2019? Also, have you got any maybe preliminary estimate on what this exercise will actually cost and how you will treat that in your financials?
There's nothing new to report on. We are preparing now this brand switch, which starts next year in Germany. The planning activities are running according to plan. We are preparing now that brand switch. Part of the preparation is also to estimate the potential additional marketing costs next year. I can't provide you yet already now any quantitative figures, but we expect that we will have somewhat higher marketing costs next year. We will give you a quantitative indication once we have it on our table.
Got it. Thanks very much, Christian. Appreciate it.
You're welcome.
Next question is from Tommy Feidenbach, AWP. Your line is now open, sir.
Maybe Charlie Fehrenbach, AWP.
Good morning.
Good morning. How was your start in Q3? You mentioned Switzerland already, July and August, you may can say something to the start of Q3 in general. Second question is the guidance for the EBITDA margin. Previous year's level is meant, I guess, 28.2% and not the 26.5% of the non-adjusted figures from year before. Third question, very short. Trade dispute ongoing from U.S.A. still doesn't bother you. You don't see any negative effects still, I guess. Thanks.
Question number one, July was negatively affected by the pre-buying in Switzerland in June, as I explained before, that was a negative effect in July. Secondly, for clarification, the EBITDA margin level previous year was the 28.2% you mentioned. You are correct. The adjusted EBITDA margin last year, 28.2%, and we guide for the EBITDA margin on that level, around that level this year. The third question, the trade disputes do not have any negative direct impact on us. The most important impact, I think, is the increased uncertainty about the outlook of raw material markets and also raw material prices, which makes it very challenging to forecast any raw material price development.
Thank you very much.
You're welcome.
Next question is from Martin Flückiger, Kepler Cheuvreux. Your line is now open, sir.
Good morning. Thanks for taking my questions. Starting off with the shower toilet business. Can you talk a little bit about how that business, AquaClean, performed in Q2? Looking at Bathroom Systems, it was up 2.6%, if I remember correctly. Assuming that you had, again, double-digit growth, does that mean that the rest of that Bathroom Systems business was negative in H1, and were there any differences in Q2? That would be my first question. The second question is on raw material prices. Now looking at your EBITDA margin bridge, it looks like selling price increases exactly offset the negative impact from higher raw material prices. Can you elaborate a little bit how much selling prices were up in H1 and Q2? Also, talking about raw material prices again, how much raw material prices were up on average in Q2? That's my second question.
You've already answered that about order backlog in Germany, the third question finally is, do you have an update on the development of those products combining behind and in front of the wall capabilities? I remember at the Q1 conference call, you declined to comment on that. Has anything changed there, or are you still waiting for further tangible news?
Question number one, development of the Bathroom Systems and the shower toilets. The shower toilet business has developed very nicely in the first half of the year, also in the second quarter, according to our expectations. The other product lines have had a lower growth rate, especially the ceramic business was growing, but not as strong as, for example, the shower toilets. That was also the case in the second quarter. Question number two, raw materials and selling prices. You're right. It's now the third quarter in a row where we have been able to completely compensate the increased raw material prices with our sales price increases. Also in the second quarter or the first half of the year, we have been able to increase sales prices of around 1%, and the raw material prices in the first half of the year went up by 2.7%.
The combination of these two figures bring you to the result that we had a zero net price effect in the first half of the year. Question number three about the combined products. There is no update. We are on track with the development of these combined innovations, which we will bring to the market as of next year. As I said already with Q1, we will only talk about these new products as of next year. I can't give you a further or more update on that topic here.
Okay, thanks.
You're welcome.
Question is from Dennis Dinkelmeyer, Goldman Sachs. Line is now open, sir.
Hi. Good morning. It's actually Daniela here. Thanks for taking the question. I wanted to ask about three questions, basically. The first one just in terms of your capital allocation strategy. Now that you've very successfully integrated Sanitec, what is the next stage 4, and you've done also quite a lot of increases in capacity in Europe in terms of CapEx. How do you plan to allocate your capital going forward? What are the priorities? A second question tied to this is how shall we think about your emerging market exposure? You're still very concentrated in Europe. How attractive do you see the opportunity in emerging markets, and how do you want to play that over the next few years? The third question I wanted to follow up on shower toilets. How relevant is that in your business at the moment? Just a rough guide.
Are we talking single-digit percentage of sales? Is it more than that now? What trends have you seen there in terms of pricing, given several of your competitors have launched products there? That would be very helpful. Thank you.
Question number one, the priority of capital allocation. Priority number one is to support our organic growth with our capital expenditures, is priority number one. Priority number two is to pay out more or less the remaining part of the money to the shareholders via dividends, 50%-70%. We still stick to that payout policy, also combined with our now running share buyback program. We do not have any aspiration for inorganic growth, which would require substantial capital. Question two, around emerging markets. We still stick to our strategy of organic growth in these markets.
We want to grow organically to build up selectively in selective regions with a selective part of our product portfolio acquisition, have the aspiration to grow in the emerging markets by double digits, which we are also able to achieve over the last couple of quarters, if you look at our recent figures. Question number three, relevance of shower toilets. I'm sorry, we still can't disclose the figures. As you know, we do not talk about the share of sales of shower toilets due to competitive reasons. Your question around price points, it is true that competitors, also we have introduced new products on lower price levels. The latest product which we introduced this year, so-called Geberit AquaClean Tuma Classic, is at an entry price level for an end user of CHF 1,500.
I can't talk already about this latest introduction because it's just in the market since April, I can give you a flavor about the product which we introduced last year in the medium price point, that it's called the AquaClean Tuma Comfort. Price point about CHF 2,400-CHF 2,500. That is doing very well, we do not see cannibalization of our premium product at the top price point.
Thank you.
You're welcome.
Next question is from Alessandro Foletti, Octavian AG. Your line is now open, sir.
Yes, good morning. Just a few questions, maybe for the CFO. I noticed that in the report you didn't mention IFRS 16. I was wondering if you are going to introduce that and if there are any impacts to be expected. On the working capital seasonality, second question, how do you expect the movements in the second half-year? I was wondering if there are differences now with Sanitec as compared to Geberit before. If you can mention that. Maybe last question from my side also for the CFO, can you give a guidance in number for the amortization starting in 2019, considering the additional expenses for the brands that you're phasing out and the fact that what you've mentioned, Mr. Buhl, that you're stopping the amortization of intangibles for Sanitec. Thank you.
You're welcome. Starting with the IFRS 16 impact, as we have disclosed in the annual report, we will add around CHF 100 million to our balance sheet as the so-called right to use. It will have an impact then also on the EBITDA margin as part of the cost we move below the EBITDA will have a not significant impact, positive impact then on the EBITDA margin. Working capital seasonality, no special impact this year. We will have the same seasonality as we have it in the previous year. That means working capital will go down towards the end of the year. At the year-end, we usually have the lowest level of working capital due to our seasonality which we have in the business.
This did also not change with the acquisition of Sanitec, we will have also in 2019, probably also 2018, 2019, and probably a little bit also 2020, payouts out of the restructuring reserves which we made. Also that should not be material anymore in 2019 and 2020. At the end, last question is guidance regarding amortization. Before we started this amortization related to the branding project, we had about CHF 10 million after taking out the purchase accounting linked amortization, the Sanitec purchase accounting linked amortization. CHF 10 million out of, let's say, the normal business, and you have to add the CHF 8 million related to the brand amortization to that. Around CHF 18 million going forward.
Thank you very much.
Next question is from Bernd Pomrehn, Bank Vontobel AG. Your line is now open, sir.
Yes. Good morning, gentlemen. Three questions, if I may. Firstly, it seems that in the second quarter, the negative margin effect from cost increases was less pronounced than in the first quarter. In the EBITDA margin, which you disclosed for the first quarter, a negative other cost effect of 60 basis points. Now for the first half, just 40 basis points. It seems actually that the margin pressure here has eased. Could you elaborate on this positive development? What were the drivers here? Secondly, cash flow development was very strong due to an improved inventory management. Was this only due to the restructuring in France, or do you see any further drivers to improve your inventory management? Finally, the usual housekeeping question. Tax rate in the first half was again below your guidance for the full year.
Do you stick to your full-year tax rate guidance, or would you like to adjust it? Thank you.
Question number one, the other cost effect in Q2 versus Q1, that's just regular seasonal volatility. Nothing special to consider there. Question number two and three, I ask Roland Iff to answer.
The tax rate, we stick to our guidance around 14%. We had some positive one-offs in the first half, which will not repeat in the second half. In terms of cash flow and working capital development, this is also just normal business volatility, so nothing special there. Also nothing changed specifically related to the Sanitec acquisition.
Okay. Excellent. Thank you.
Thank you. Next question is from John Revell. Line is now open, sir.
Oh, hi. John Revell, Reuters here. Just a couple of questions, please. I didn't quite catch the payout ratio. Was it 50%-70%? Just wanted to clarify that, of net profit, first of all. My second question is, with your outlook for Europe, you say the recovery should continue, which is the same as the first quarter. I was wondering, are you more positive now than you were at the first quarter or less or exactly the same, basically? That's my second question. Thirdly, Italy. You mentioned about easing in the market environment in Italy, and there's quite a lot of macroeconomic concern about Italy at the moment. Could you give us a bit more of a commentary on what you're seeing there? Do you expect any much more of a downturn there, and in what kind of aspects?
The final thing is Turkey. Do you have much of a business in Turkey, and do you expect to see much of a downturn there from sort of the macro problems? Thank you.
Question number 1, it's correct.
50%-70%
payout is 50%-70% of net income. That is correct.
Brilliant. Thank you.
Question number two, Europe. The overall picture did not change since Q1. You're right there as well. Question number three, in Italy, we are doing extraordinarily well in Italy with our sales last year and this year. I would say that is not really reflecting the construction market and definitely not reflecting the macroeconomic environment. That is very much driven by an internal initiative which we launched two years ago in parts of Italy to better address potential or customers with higher potential, and we are delivering on that initiative very nicely. That's very much Geberit-driven and not macro or market-driven, but you see in the figures of Geberit here. Turkey, we have sales in Turkey, but they are very low. They are not material from a group perspective.
Whatever happens in the Turkish construction market, that will not have an impact on group sales. Of course, from a local perspective, we are now facing pricing issues because of the devaluation of the local currency. Of course, we will think about price increases locally to save our margins. That all in all will not have a material impact on the group because it's too small.
Okay. In sort of the general Italian market, do you expect a further deterioration in the general market there? Not so much affecting you guys, but for the market overall in Italy as a result of some sort of government concerns about the economy there?
For the construction market this year, we are not that negative. We expect still a slight improvement for this year, but I don't know what will happen next year.
No, that's for Italy, yeah.
Yeah. Only Italy, talking about Italy.
Brilliant. Thank you.
You're welcome.
Next question is from Martin Hüsler, Zürcher Kantonalbank. Your line is open, sir.
Yes. Thank you. It's Zürcher Kantonalbank. I have three add-on questions. First of all, to Germany. Did you say that the growth of the 3.8% was also due to kind of relief in the installer capacity situation or not? If yes, does this mean that Germany could accelerate further in the course of the year? That's the first question. The second question, you said shower toilet is running according to your plans. I'm just double-checking if this means double-digit increase in volume and/or value. The last question about your price increase in Switzerland, linked to the euro-Swiss franc. Of course, I'd say since May, the euro-Swiss franc changed a bit, we have rather for the rest of the year, a similar rate as the year before. I was just wondering, what is the impact of that?
Would you probably need to decrease prices when the Swiss franc strengthens further again.
Question number one, how much of the growth of 3.8% in Germany was driven to a potential relief of the bottleneck? That's extremely difficult to answer. Actually, do not know. That's what I said already with Q1. We feel a bit on the soft factors that it's releasing a bit, and I would assume that part of the growth, a small part, was also driven now by a certain relief. The major part of that growth, nevertheless, was coming from our initiatives and our strategy, as I outlined before, by upselling our product portfolio, by new product introductions. I can't quantify it. Question number two, you're right, our plan in shower toilet is still double-digit growth in value and in volume, and we achieved the target also the first half of the year.
Question number three, indeed, the currency changed substantially again over the last couple of weeks after we introduced, or even shortly before we even introduced that second price increase. For the moment, we do not plan any countermeasures, for example, decreasing prices because the volatility is just too high. We will now observe, of course, the currency development, and we will see where it goes, and depending on the further development of the euro to the Swiss francs, we will then maybe reconsider some pricing decisions. For the moment, we stick to these two extraordinary price increases this year, and we need a little more time to consider what happens with the currency development. Does that answer your question?
Thank you. Yes.
Okay.
Thank you. We got a follow-up question from John Revill, Reuters. Your line is now open, sir.
Yeah, just a follow-up, if I may. Just in your outlook, you mentioned that you're looking at sort of 4% currency-adjusted growth for the full year, and that's compared with 3.5% last year. I wonder, how much of that is actually volume, or is it largely down to pricing as well? Basically, I just wonder what's the volume breakdown there. Basically, does that mean you're slightly more optimistic? Thank you.
The 4% full-year growth expectation is, of course, volume and pricing both together.
Yeah. Is the increase from 3.5% last year, that rate, though, is that a larger proportion that is going to be pricing this time around, or is it still the same ratio?
In general, we have more or less the same price increase implemented this year as last year.
The only thing we did on top is the 2 price increases in Switzerland. Since Switzerland is only 10% of our sales-
that additional impact is also relatively limited on a group level. We have a slightly higher price increase this year due to the extraordinary price increase in Switzerland versus last year, but it's not material compared to last year.
Okay, some of it is volume and some of it is pricing then this time around. Brilliant. Thanks.
Yeah.
Next question is from Andre Kukhnin, Credit Suisse. Your line is open, sir.
Yes, hello again. Thanks very much for taking the follow-up questions. Can I just run through a couple of geographies just to make sure we're not missing any underlying trends? Firstly, on France, you had quite a meaningful slowdown there in H1. Could you give us some color on what drove that? Was that all residential, as you mentioned, and as some of your construction-related peers have mentioned? Or was there anything else in there that is unusual or non-recurring?
I would say things from the first half year have been impacted still by the effect of the site closures last year, because we lost during that very complex closure process, some projects last year, due to the uncertainty about delivery capabilities, and that led now to also a weaker sales development this year.
Is there any way you could quantify that? Is it sort of half of that drop?
I can't quantify it. That's just not possible. It had an impact.
Okay. That's clear. U.K., I guess, a similar question. We did anticipate a slowdown, but the pace is probably a little bit on the high side than we expected. Is this the run rate of the markets, of the segments that you're seeing there? Is there anything kind of Geberit specific happening in there?
Yeah, the Geberit specific part is that we have a disproportional exposure to the non-residential sector, which is weaker than the residential sector. That I think you should take into consideration. Typically, the majority of our sales are exposed to residential, and in the U.K., it's the other way around. It's especially the non-residential sector, which is suffering most in the U.K. due to the uncertainties around Brexit.
Yes, that's fair. You have mentioned that before. Just on last region, on Nordics, the downturn seemed to be moderating compared to where you were, I think, implied in Q4. Are we at the run rate now, consistent with what the lead indicators for new construction were telling us a while ago? Or do you think we have more of the slowdown in front of us?
Difficult to answer. What we have seen, what we already communicated with Q1 and also confirmed now with H1, is that the two markets in Sweden and Norway have become weaker. If you look, for example, at the residential building permits
In Norway, they started to climb as of Q4 last year by -10%, continued by -17% in the first quarter this year. In Sweden, it was even worse. Residential building permits in the fourth quarter last year were down 22% and another 38% in the first quarter this year. That is a clear weakening of the market.
Right. Realistically, we should expect that run rate to get worse before stabilization unless there is anything company specific that you undertake there.
As usual, I don't give a guidance on a country or regional level. I just make my comments on the market development expectation.
That's fair. Thank you. Just a very last one on the other cost effect segment on the profit bridge of -40 basis points. Could you run us through what is in there? Again, the usual question of, is this recurring, non-recurring? What we should be aware of there from H1?
What you have in there is mainly the negative impact is coming mainly from the higher tariffs. That is explaining that most of the negative impact. There's always some seasonality between the quarters. We had some, let's say, negative one-offs in Q1 and a positive one-off in Q2. That's why the numbers differ between the quarter. In there is everything you have in the P&L above the EBITA except raw material, sorry. If I may add one comment, the other cost effect is not that negative as usual, because in there is also the positive effect of the site closure in France.
Right. Yes. Okay. Those, the two positive versus negative one-offs, they broadly offset each other, or are they on balance one way or the other?
Yeah, broadly, yes.
Offsetting, okay. Got it. Thank you very much to both of you.
Thank you. We got a follow-up question from Alessandro Foletti. Your line is now open, sir.
Yes, thank you for taking my follow-up. Just on your adjusted EBITDA margin guidance. Now, the first half, you were up about 40 basis points over last year on that number. Now you're guiding at the same level as last year. It means obviously pure arithmetics, the second part of the year has to be lower. I hear the conference call, overall, you look to me relatively optimistic, price increases and so on. I was wondering if you can tell me which costs do you expect to be over proportionally higher in the second half of the year? Is it on the gross margin that you see a weakening, or is it other costs, or is simply your guidance too conservative?
Thank you for the question. First, I have to correct you. In the first half of the year, the EBITA margin was only up 20 basis points, not the 40 basis points. From 29.6%, that was the adjusted EBITA margin in the first half of 2017, to 29.8% this year, the first half of the year. Only 20 basis points up. Why is the full year guidance?
Okay.
Sorry?
Okay, thank you. I'm going to revise my model or check.
It's only 20 basis points. Why is it still a bit more conservative than in the first half of the year? Two reasons. First, we are facing higher tariff increases in the second half of the year, more cost pressure from personnel costs. Secondly, as I already mentioned, the benefit from the site closure in France, which we have full in our books in the first half of the year, will only have half an impact in the second half of the year because we started to capture that benefit already as of Q4 last year. We do not have an additional benefit from the site closure in the fourth quarter this year. That is the reason, the second reason why overall, we expect an EBITA margin on previous year's level.
Okay, thank you.
You're welcome.
Next question we received is from Manish from Societe Generale. Your line is now open, sir.
Hi. Good morning there. I have two questions. The first is on, you said about the raw material cost volatility in the second half. I was just wondering if there is an adverse raw material price movement versus the expectation. Will you be open for more price hike in the second half? Just to ask in an indirect way, maybe if you want to keep your gross margin flat in the second half. The second question is on your margin bridge. You have talked about a negative margin impact of 10 basis points in the first half from the currency. Can you just quantify what was this number for the second quarter? And also wanted to understand, generally, you always benefited when Euro was appreciating in terms of forex margin impact.
Now, in that last quarter, you said about natural hedge and things like that. Here we are seeing, negative impact. What's driving that?
First question about raw material prices and potential reactions on the price side. We do not plan any special price increases in the second half of the year. Nothing is planned there, also not driven by the high raw material price volatility. The currency impact I referred to. We had a slight negative currency impact in the second quarter on our margin, around 20 basis points, because this natural hedge is very effective, but only under the assumption that the Swiss franc moves in the same way against all currencies, and that's never really the case. Also, if we have a very effective natural hedge, you always have some movement in the EBITDA margin, but they are not really relevant.
Okay. Maybe if I add one more question. This is on the personnel cost as a percentage of revenue. If I look at the first half, the personnel cost declined by 90 basis points. This is after taking out all the exceptional that was there in the last quarter or the last half. Can you expect the similar level of personnel cost decline as a percentage of revenue in the second half, or it will be slightly less because you are talking about in the Q4, there will not be benefit from the plant closure?
If you take out the one-time effect, the major effects, the one-time effect last year in the personnel cost due to site closure in France is of CHF 39 million on the personnel cost line. If you take that out, we had an increase of personnel cost, which was mainly driven by the exchange rate, that's one driver. Secondly, driven by capacity or personnel headcount increase and a tariff increase of around 2.5%.
Now, if you take out the exceptional cost in the personnel cost in the last year, if you do the personnel cost as a percentage of revenue, it still declined 90 basis point in this first half. My question is, will you see the similar impact in the second half, like 90 basis point declining in the second half?
Not really, because we have, as I said before, we expect higher or more pressure from tariff increases in the second half of the year. The reason is that some of the tariff increases have been only implemented as of the second quarter, for example, in Switzerland, which are stronger than last year. We do not expect the same effect for the full year. You're welcome.
Okay. Thank you.
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