Geberit AG (GBERY) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Geberit's 9-month results conference call. We will start with the third quarter figures and then comment on the 9-month development and we'll finish as usual with an outlook. Geberit delivered strong top and bottom line results in Q3. First, net sales grew in local currencies by 5.4% despite the continued challenging market environment. Second, excluding onetime costs for the closure of the ceramics plant in Wesel, we kept operating margins stable. And third, despite these onetime costs, EPS grew currency adjusted by 6.4%. Let me now give you some comments on the sales development in the third quarter in more detail. Net sales increased in Swiss francs by 2.7% and reached CHF 783 million. The currency impact affected the top line negatively by CHF 21 million or minus 2.7%. In local currencies, group net sales increased by 5.4%, supported by a positive price effect of around 1%. Let me turn to the regional developments in the third quarter, again, in local currencies. In Europe, we achieved a sales growth of 6%, driven by significant growth in almost all European markets and the strong development of new products. Italy was the only major European market, which recorded a sales decline last quarter due to the softening new build demand. In Middle East Africa, net sales increased by 16% in Q3, driven by strong growth in Turkey and Greece. America recorded a small sales decline of minus 2% due to wholesaler inventory rebalancing after tariff-related price adjustments in H1. Net sales in Far East Pacific declined by minus 8%, driven by the market contraction in China, partially offset by growth in India. Continuing with the sales development per product area in Q3, again, in local currencies. Installation & Flushing Systems increased by 8%, while Piping Systems and Bathroom Systems both increased by 4%. Installation & Flushing Systems benefited from the second rollout wave of the new Duofix installation system. Let me now turn to the operating and financial results in Q3. We managed to grow our bottom line results from EBITDA down to EPS, both in local currencies and in Swiss francs. EBITDA grew by 5.3% in local currencies, and the EBITDA margin reached 30.6%. This represents a margin decrease of minus 40 basis points, driven by onetime costs of EUR 4 million related to the Wesel plant closure booked in Q3. Excluding the closure costs, the EBITDA margin would have increased slightly by 10 basis points. Net income increased in local currencies by 6.1%. Net income margin reached 19.9%. Earnings per share reached CHF 4.73 and grew in local currencies by 6.4% despite the beforementioned closure costs. Let me now continue with a review of our net sales development in the first 9 months of the year. Net sales grew in Swiss francs by 2% and reached CHF 2.4 billion. The negative currency effect led to a net sales loss of CHF 58 million or minus 2.4%. In local currencies, net sales increased by 4.4%. This growth was substantially driven by the continued strong development of new products such as the supply piping system FlowFit, Mapress Therm and the shower toilet Alba. This brings me to the regional net sales development in the first 9 months. Again, all growth figures refer to growth in local currencies. I'll start with the review in Europe, where we achieved a sales growth of 4%, clearly above the market development. In Austria, net sales increased by 10%, thanks to growth of our new products. In Benelux, net sales increased by 6% with growth in both countries, Belgium and Netherlands. In Eastern Europe, net sales increased by 6%, supported by strong growth in the Adriatic region and Hungary. In Germany, net sales increased also by 6%, significantly better than the market. Net sales in Northern Europe increased by 2% with growth in all Nordic countries. In Italy, net sales increased by 1% in a softening new build market. In Switzerland, net sales were stable year-over-year, negatively affected by selective price adjustments due to the strengthening of the Swiss franc over the last years. In Western Europe, net sales declined by 1%, driven by a market decline in France, which was only partially offset by strong growth in Iberia. Let me now turn to the regions outside Europe. In the Middle East and Africa region, net sales increased in the first 9 months by 22%, driven by Turkey, Greece and South Africa. In America, net sales increased by 6% due to the strong U.S. faucet business. In Far East Pacific, net sales decreased by 6% with strong growth in India, only partially offsetting the market decline in China. Let me now comment on the sales development per product area, again, in local currencies. Installation & Flushing Systems and Bathroom Systems, both increased by 5%, while Piping Systems grew by 3%. The lower relative growth of Piping Systems was driven by the higher exposure to the new build sector. I continue with the operating and financial results in the first 9 months. Currency effects as well as onetime costs related to the closure of the Wesel plant negatively impacted the operating results on all levels. We booked EUR 22 million onetime costs for the site closure in the first 9 months, which split into EUR 16 million as OpEx and EUR 6 million as depreciation. EBITDA in Swiss francs remained stable at CHF 753 million. Excluding negative currency effects, EBITDA increased by 3.1%. The EBITDA margin reached 30.8%, decreasing by 60 basis points, which can entirely be attributed to the previously mentioned extraordinary costs of EUR 60 million related to the closure of the ceramic site in Belgium. Excluding this onetime effect, the EBITDA margin in Swiss francs would have reached 31.4%, identical to previous year's level. The positive operating leverage and slight negative price effect on the EBITDA margin were offset by 3 factors: first, a wage inflation of around 4%; second, 15% higher energy prices; and third, investments in several dedicated growth initiatives in emerging markets and additional expenditures for IT and digitalization. EBIT margin reached 25.9%, a decrease of 90 basis points, also almost entirely driven by the plant closure costs of EUR 22 million. Excluding these onetime charges, the EBIT margin would have reached 26.7%, only 10 basis points below previous year. Net income in local currencies increased by 2.7% and reached CHF 494 million, which results in a net income margin of 20.2%. Earnings per share reached CHF 15.01, an increase of 3.2% in local currencies. If also onetime costs are excluded, EPS would have increased by 6.7% in the first 9 months versus last year. CapEx decreased by CHF 10 million or minus 10% to CHF 93 million due to varying project timings. Free cash flow increased by 8.4% to CHF 462 million due to the timing of tax payments and CapEx. Let me now comment on our market outlook for the full year 2025, which does not significantly differ from our outlook given at our H1 results communication in August this year. In Europe, we expect for the full year 2025, a slight decline in new build activity as building permits continued to decline slightly in the first half of 2025 by minus 3%. This decline is offset by a positive renovation segment this year, which contributes around 60% to Geberit sales as indicated by several indicators, for example, increased real estate transactions. In sum, we continue to expect building construction demand in Europe to have stabilized in 2025. Outside Europe, we expect a mixed picture for the building construction industry. Strong demand is seen in several markets, for example, in India and the Gulf region. In China, on the other hand, we expect a continuation of the market decline due to the challenging residential sector. On the supply side, we expect a sideway development of direct material prices for Q4 compared to Q3. Let me now briefly comment on the Geberit priorities for the rest of the year. We will continue to have a strong focus on new products. For example, the new Duofix installation system, but also important new products introduced over the last years, like the already mentioned FlowFit, Mapress Therm and the shower Alpha. Other important initiatives this year include dedicated sales activities outside Europe, for example, in India and increased OpEx in the area of IT and digitalization, for example, for AI initiatives and digital marketing efforts. Let me continue with our full year guidance. Due to the better-than-expected growth in Q3, we increased our top line guidance. We expect for the full year now a net sales growth in local currencies of around 4.5% Net sales in October were above previous year's level and in line with this full year top line guidance. For the EBITDA margin, we continue to expect a level of around 29%. This guidance includes EUR 18 million site closure costs, thereof EUR 16 million already booked in the first 9 months and another EUR 2 million expected to be booked in Q4. This brings me to the update on the closure of the site in Wesel for end of 2026. We have signed an agreement with the employee representatives on the social plan. The total plant closure costs in the amount of EUR 25 million are unchanged, consisting of EUR 18 million for operating expenses and EUR 7 million for depreciation. Compared to the plant closure cost estimate communicated in August, the timing of the OpEx has changed slightly with the total OpEx amount now booked already this year. As a result, we only expect a minor P&L impact of EUR 1 million depreciation related to the plant closure next year. Let me close our introduction with a short summary. Geberit delivered strong results in the first 9 months, both on the top and bottom line. With a currency adjusted top line growth of 4.4%, we achieved a significant market outperformance in the first 9 months. Operating margins remained stable despite headwinds from a still sticky wage inflation and investments into OpEx for various strategic and operational initiatives. Earnings per share grew by 6.7%, excluding negative currency effects and planned closure costs. We consider this operationally driven EPS growth as a very strong result in this still challenging market environment. For the full year 2025, the overall market demand in Europe should stabilize and the picture overseas remains to be mixed. Geberit is well prepared to continue its market outperformance in this environment as already demonstrated since mid-2022 when the construction markets collapsed in Europe. Our confidence is based on the fundamental need for our products, our resilient strategy and business model and our long-term focus and track record. Thank you for your attention. We are now ready to answer your questions.

[Operator Instructions] Our first question comes from Elodie Rall from JPMorgan.

So my first question is around the estimated market share that you've delivered versus the underlying market. So I think it's around 3%, 3.5% outperformance. So can you come back on that, give us color by geography, what are the main drivers? How much of that is coming from new products? Second, you had delivered 1% price increase more or less this year. So can you give us a hint about how you're thinking about price increases next year? And then lastly, on Eastern Europe, growth accelerated a lot. It seems in Q3 at around 15% and it was 2% in H1. So I was wondering what's driving that and how sustainable this is?

Thank you for your question. Question number one, about market outperformance. We believe we are outperforming the market across the countries, not specifically in specific regions, especially in Europe. And the main drivers are two. One is what we call strategic stability 2 or 3 years ago that we remain present in the market that we remain present with our customers. We continue to invest into our customer relations. That's one of the reasons. And number two is the mentioned new products, which are a significant contributor to the growth and market outperformance this year, as mentioned in the introduction. Question number two, price increases 2026. We are, at the moment, finalizing the price increases, and we will communicate what we will do with the prices as usual with our first info mid-January. And question number three, the strong performance of Eastern Europe in Q3. The accelerated growth performance versus H1 where Eastern Europe was a little bit smaller in terms of growth. There are 2 drivers. One is in the first half of the year, we had a bit more tougher comps because the first half of 2024 was quite strong in Eastern Europe. That's one of the answers. And the second part is that we have had in some of the smaller countries like Hungary or Adriatics a very strong project business. And the smaller countries are more volatile because of the project business, so the volatility plays also a role. But nevertheless, over the 9 months in Eastern Europe, we are growing 6%, which is pretty much in line with the rest of Europe, and we are very satisfied.

The next question comes from Martin Husler from ZKB.

Two at the moment. First of all, to Germany, can you maybe elaborate a bit more what you see kind of underlying trends, what you observe in the market as, I guess, building permits are likely to be a bit more positive than what you see generally in Europe. So basically, my question is, do you already see some end market demand coming from new construction? Maybe I take it one by one.

The situation in Germany is that we believe the market has stabilized in the first 9 months. Also, if we listen to our customers, that's what we hear, not a recovery, but a stabilization of the business. If you look into the building indicators, as you mentioned correctly, building permits also started to stabilize. On the residential side, even a growth over the first 8 months, January until August, residential building permits grew by 7% in Germany with a positive dynamic. However, on the nonresi side, the picture is still a bit negative. Nonresi building permits are still down around 7% in 8 months. So I would say it's a stable environment with a positive dynamic in some of the indicators, but not yet a feelable and visible recovery in the market in the first 9 months in Germany.

And then my second question on material costs in Q3 in terms of sales, actually, they have sequentially increased by roughly 110 bps, if I calculate it correctly, even though we saw raw material costs to be slightly down sequentially. So what were the major effects for an increase in Q3?

So that is largely a normal seasonality effect. If you look at last year's sequential evolution of the cost of material, it would have had exactly the same change from Q2 to Q3, and that is largely due to mix effects of the inventory during the summer holidays linked to plant closures. So mostly a seasonal effect that you're seeing here.

Okay. Now I remember that you told me that a year ago.

The next question comes from Pujarini Ghosh from Bernstein.

So on your upgraded revenue growth guidance, could you talk a little bit about what has changed? Which markets or products might be performing better that led you to upgrade the guidance? And my second question is on the price cost. So for Q3 or 9M, pricing has remained flat despite you having raised pricing by 1% in April. And on the cost side, wages have come down from Q2, but it's still up 4%. You've highlighted higher energy costs and raw materials are slightly down. So if we talk about price cost, could you talk about the different moving parts and what that implies for the price/cost spread in Q3 and how we should expect that to evolve in Q4 and going into 2026?

Thank you for your questions. I will answer number one and number two will be answered by Tobias. The main reason why we have slightly upgraded our top line guidance was the result of Q3, which was a bit better than what we expected, not a specific country, it was just across the board. Question number two, Tobias?

So there's various factors that come into that. If we start with the top line, the price effect, yes, 0 year-to-date, but 1% in Q3. That is, as explained previously, that is linked to the timing of the price increases. And therefore, it's only fully reflected in Q3. The other effect that we have is indeed the persistent wage increases, which is in Q3, around 3% and on the year-to-date, still at 3.8%. We expect, as said previously, to have a wage inflation during the year of around 3% to 4%, so fully in line with what we said previously. And the other effects that's less the price cost area are then the other cost increases, which are in line with previous guidance, so especially the sales growth initiatives, initiatives in digitalization and marketing.

The next question comes from Cedar Ekblom from Morgan Stanley.

It looks like one of the positive contributors to your top line in the quarter was the rollout of new products. I wonder if you could talk a little bit more about which product categories you've seen the most success and traction with and also where we are in the product rollout time line? How many more products should we expect to see coming to the market in the fourth quarter and then into next year? Just to try and understand how much more of a tailwind we can get from these new product introductions.

The new products played an important role in Q3 as they played an important role also in H1. And we do not plan any further new product introduction until the end of the year. We typically introduce products as of Q2 of the year. So there is nothing new to be expected. What was a bit specific in Q3 that we had the second rollout wave of the Duofix system, which supported sales in the third quarter.

The next question comes from Priyal Woolf from Jefferies.

Just 2 from me, please. So firstly, just a follow-up on pricing. So obviously, you reported 1% in Q3. Can I just check where you are with the pricing adjustments in Switzerland. I seem to recall you said that was going to be a drag for the full year. Is that no longer the case? Or actually, are we seeing better pricing elsewhere basically? And then the second question is just on the upgrade to the top line guidance for full year '25. I think it implies a sort of 5% organic growth rate in the last quarter of the year, so similar to Q3. But obviously, comparables get much easier. Is this just reflecting fewer new product rollouts as we go into the final quarter? Or are you just being conservative?

So question number one, with regards to pricing in Q3 in Switzerland, nothing changed. We implemented, as you know, selective price decreases, currency-related price decreases in Switzerland, and they have the same impact more or less on each quarter of the year, no specific in Q3. Q4 implies -- so our guidance implies a Q4 growth, which is more or less in line with the first 9 months of the 4.4%. So also that is not driven by specific new activities. It's just that we believe that we should do relatively similar than what we have seen in the first 9 months, also supported by the sales in October.

The next question comes from John Revill from Thomson Reuters.

It's just a bit more of a drill down into your raised guidance. I know, Christian, you mentioned that basically you did a lot better -- you did better in Q3 than expected. it's basically broad-based, but can you give us pick out what was behind that or a bit more -- just a bit more color on how much better Q3 than expected and what was driving that? That's the first one. And then the second one is, I know it's very, very early days, but are there any kind of initial indications for 2026, how the construction market in Europe is looking next year? I mean, obviously, it's very preliminary, but I wondered if you had any thoughts or opinions based on permits? And is it likely to be more renovation again next year in Europe or new build or what you see next year?

So looking at the products in Q3, what was a bit better than expected was the rollout of the new Duofix system. Duofix system is quite a large part of our business. It's a large assortment, which we rolled out into 2 waves. One was in Q2 and the other one was in Q3. And it turned out that in the wave 2, customers seem to wait a bit until we were coming with the new product in Q3. So therefore, Q3 was a bit benefiting from this rollout wave #2 of Duofix systems. That was from a product perspective, the reason why we have been a bit surprised by the positive and not by the negative. And with regards to market 2026, as usual, as you know, we only will then talk about our market outlook as usual, with our first in mid of January.

The next question comes from Patrick Rafaisz from UBS.

I have a couple of follow-ups. Staying with Duofix, which you just elaborated on. Was that the last wave 2? Or will there be more to come in the future? And related to the new products, you spoke about Mapress, Alba, FlowFit for the 9 months. How did these new products evolve during Q3 versus H1? That's the first question.

So as I just mentioned, the Duofix system is a large assortment. We talk about hundreds of SKUs, and it was always a plan to roll that out in 2 waves and only 2 waves, one Q2, as I said before, and the second wave then in Q3. And as I mentioned before, we realized that customers waited somehow in Q2 for the Wave 2, which was launched in Q3. The same effect didn't happen with Wave 1 because we had the price increase as of Q2, if you remember. So there was an incentive to still buy in Q1 due to the lower prices. This was not the case from Q2 to Q3. So that's now true. We have 100% rolled out, no effect anymore to look at in Q4. So it's important to look at the 9-month figures where we have reached a 5% growth, including now the replacement with the new Duofix systems, I think that's a good way to look at that. With the other new products, all of the 3, which we have mentioned have been growing significantly double digit, and they all 3 together contributed substantially to the growth of the 4.4% in the first 9 months.

Okay. That's clear. Then the second question would be on the EBITDA bridge. When I look at the Q3 bridge and look at the guidance, which implies a Q4 EBITDA margin that is more or less in line with the prior year, should we assume that your planned Q4 EBITDA bridge is very comparable to the Q3 one with the only difference being less dilution from closure costs. Does that make sense?

To be honest, we haven't done the bridge for Q4. But what is definitely correct is that there won't be or there will be less closure cost for Wesel. There will be only EUR 2 million compared to EUR 4 million in this quarter. The other cost effect indeed will be similar. You remember that we had the ramp-up of the EUR 20 million. So these will be comparable to Q3 indeed as it was back-end loaded compared to H1. Price effect net on the top line pricing, we expect the same. Cost of material could be lower than in Q3 because of the seasonality effect. And I think -- and then currency effect, who knows, but that's probably as well comparable. So I guess your assumption with these few remarks I made could be relatively correct and would lead then to the around 29% we guided.

Okay. Perfect. And the last one would be just some geographic details. trying to understand the slowdown in Far East. Was that more due to China worsening versus Q2 or H1 or India slowing? And similar question to Western Europe. Can you maybe add some color on the impact from France there?

Question number one, with Far East Pacific, you're right, this was more driven by a weakening in China and not by a weakening in India. And in Western Europe, there were no specific -- the main reason was that we had a bit better business than in France also -- Q3, sorry, versus in the first half of the year.

The next question comes from Alessandro Foletti from Octavian.