Geberit AG (GEBN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Geberit conference call on their third quarter results 2023. I am George, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Christian Buhl, CEO. Please go ahead, sir.

Thank you for the introduction, and good morning, ladies and gentlemen. Welcome to our 9 months results conference call. We will start with the third quarter figures, then comment on the 9-month development and we'll finish as usual with an outlook. Let me start Q3. Geberit delivered in Q3 in the light of an extraordinary difficult market environment and a challenging top line, strong bottom line results. Despite a net sales decline in local currencies of minus 5%, all bottom line figures grew double digit in local currencies. EBITDA grew currency adjusted by 13% and EPS by 14% despite a double-digit volume decline and a substantial wage inflation. The result of the third quarter demonstrate Geberit's capability to create value in a declining market environment. Let me now give you some comments and details on the sales development in the third quarter. Net sales reached CHF 728 million. The unfavorable currency development affected net sales negatively by CHF 25 million or minus 3%. In local currencies, group net sales declined by minus 5%. This decline was caused by a volume decline of around minus 11%, partially offset by sales price increases of around 6%. The volume contraction was weaker compared to the first half of the year in the light of easier comparables. Let me now comment on the sales development of the regions and countries in the third quarter. In Europe, net sales decreased by minus 5%. Positive growth rates were recorded in Eastern Europe with plus 13%, benefiting from a weak previous year quarter. In Austria, Benelux, net sales were also up by plus 3%, respectively, by plus 1%. Net sales declines were recorded in Northern and Western Europe, both regions down minus 3%; in Italy, with a net sales decline of minus 7% due to a negative base effect; in Germany, with a decline of minus 10% due to a weak market environment for residential building construction; and finally, in Switzerland, with a minus 11% driven by a strong base effect. Outside Europe, net sales increased in Middle East/Africa by plus 2%, decreased in Far East/Pacific by minus 11%, driven by China and decreased also in America by minus 6%. I continue with the sales development per product area in Q3 again in local currency. Installation and Flushing Systems declined by minus 8% and Bathroom Systems by minus 7%. Piping Systems sales increased by plus 1%. The significantly better performance of Piping Systems was driven by our new supply piping system, FlowFit. Let me now turn to the operating and financial results in Q3. We managed to grow all bottom line results from EBITDA down to EPS. Excluding the substantial negative currency effect, all bottom line results grew even double-digit. EBITDA grew by 13% in local currencies and EBITDA margin reached 30.6%. The EBITDA margin increased substantially by 450 basis points despite the strong volume decline, a significant wage inflation and an unfavorable currency development. Main drivers for the margin expansion were higher sales prices, compensating for last year's cost inflation, lower raw material and energy prices and a high operational flexibility mitigating the volume decline. EBIT grew in local currencies by 13%, reaching an EBIT margin of 24.9%. The net income increased in local currencies at a slightly lower rate with plus 11% due to higher financial expenses. Earnings per share reached CHF 4.42 and grew by 40% in local currencies, supported by the accelerated share buyback program in the second half of last year. We continued the buyback program in Q3. We bought back 132,000 shares for a total amount of CHF 61 million. Let me continue with a review of our net sales development in the first 9 months of the year. Net sales in Swiss francs decreased by 12% to CHF 2.39 billion, negatively affected by strong currency effects. The negative currency effects led to a net sales loss of CHF 190 million or minus 4%. In local currencies, net sales decreased by minus 8%. This decline was caused by a volume contraction of around minus 18%, which was partially offset by sales price increases of around 10%. The strong volume contraction was caused by a base effect from the record high volumes in the previous year and destocking effects this year. Secondly, a decline in building construction market due to building cost inflation and increased interest rates; and thirdly, a decline in demand for sanitary renovation due to pull-forward effects during COVID-19 and heating-related renovations in selected European countries this year. Moving now to net sales growth per region. Again, all growth figures refer to growth in local currency. In Italy and the Western European region, net sales declined by minus 1%, supported by a more favorable market environment compared to the rest of Europe. Net sales in Benelux declined by minus 4% and by minus 6% in Switzerland. In Nordics, net sales decreased by minus 8% with declining sales in most countries. Double-digit declines were recorded in Germany and Austria, both down minus 13%. Both countries are most affected by heating-related renovations this year. Eastern Europe recorded a decline of minus 18%, negatively affected by the exit from Russia and a strong base effect from the other Eastern European companies. Let me now turn to the regions outside Europe. In the Middle East and Africa region, net sales increased by 12%, driven by strong growth in Turkey. In Americas, net sales slightly decreased by minus 1%. In Far East/Pacific, net sales decreased by minus 5%, driven by China and Australia. Let me now comment on the sales development by product area, again, in local currencies. All 3 product areas declined with similar dynamics year-over-year. Installation of Flushing Systems by minus 10%; Bathroom Systems by minus 8%; and Piping Systems by minus 5%. The stronger decline in installation of Flushing Systems compared to the other two product areas was driven by stronger stocking effects at wholesalers. Furthermore, Piping systems benefited from the strong growth of the already mentioned new supply piping system FlowFit. I continue with the operating and financial results in the first 9 months. The substantial negative currency effect led to declining operating results on all levels in Swiss francs. However, in local currencies, we managed to grow all bottom-line figures. EBITDA reached CHF 749 million, an increase in local currencies by 4%. The EBITDA margin increased by 320 basis points and reached 31.3%, despite the strong volume contraction, the significant salary inflation of around 5% and the substantial adverse currency effect. The main positive drivers for the profitability improvement were sales price increases compensating for cost inflation last year, lower energy prices and the high operational flexibility and cost discipline, mitigating the volume decline. Raw material prices in local currencies were only 1% lower compared to the first 9 months of 2022 and did, therefore, not have a material impact on margins. EBIT increased current adjusted in line with EBITDA by 4%, EBIT margin reached 26.5%. Net income increased in local currencies with plus 2%, slightly less than EBIT due to higher financial expenses. Earnings per share increased currently adjusted by plus 5% and reached CHF 15.35, supported by the accelerated share buybacks in the second half of last year. The share buyback program was continued this year with 379,000 shares bought back in the first 9 months for a total amount of CHF 184 million. CapEx increased by CHF 34 million to a new record level of CHF 128 million due to strategic plan investments and the construction of a new customer center in Germany. Free cash flow increased by 2% to CHF 421 million, despite the significant volume contraction and the substantially higher capital expenditures. Let me now comment on our outlook for the rest of the year. The geopolitical risks have significantly increased since our H1 communication in August this year, leading to further increased uncertainties. We continue to expect a very challenging environment for the building construction industry this year with a declining new built market as well as a decline in renovation market driven by increased interest rates and significant building cost inflation. While indicators for the residential building sector in Europe continued to be weak, non-residential indicators proved to be more resilient. Additional and specific challenges for the sanitary industry in 2023 emerged from the pull-forward effects from the COVID-19 induced home improvement trend and the current focus on heating-related renovation in selected European companies. Positive catalysts for the sanitary construction industry emerged from the fundamental demand for renovation and new housing in several European countries, the structural trend towards higher sanitary standards and a quite positive market environment in several emerging markets, for example, in India and the Gulf region. On the cost side, we expect for Q4 sequentially stable raw material prices and higher energy prices compared to Q3 this year. In the context of the declining market environment, we continue to stick to our two guiding principles: strategic stability and operational flexibility. The purpose of these principles remain to manage the volume uncertainties with a maximum of flexibility. However, without harming the midterm potential of the business. The margin improvement in the first 9 months of the year, considering the significant volume contraction of minus 18% is a testimony for our high operational flexibility, especially in the plants and logistics and our strong cost discipline. The overarching objective remains to gain further market shares regardless of the prevailing market environment. To do so, we will focus on several levers and initiatives as outlined at our Capital Market Day 4 weeks ago. In light of the significantly increased geopolitical risk, it's very hard to predict even the short-term future. Volume uncertainties also emerged from the unpredictable wholesaler inventory strategies in the current market environment. Under the assumption of no material changes of this fragile environment, we expect for the full year a mid-single-digit net sales decline in local currencies and an EBITDA margin of 29% to 30%. Please note that in October, net sales in local currencies were slightly above previous year's level. Let me close our introduction with a short summary. Geberit delivered in Q3 in an extraordinary difficult market environment, strong bottom line results. Despite the volume contraction of minus 11%, we managed to increase our margins and to grow all bottom line results in local currencies, even double digits. EPS grew currency adjusted by 14%. These results confirm our strong and consequent pricing management, our high operational flexibility and our cost discipline in a declining market environment. Geberit is well prepared to master the challenges emerging from this environment as already demonstrated several times in the past. Our confidence is based on our resilient strategy and business model. Our strong and long-lasting customer relations, our industry-leading financial strength and our long-term focus and track record. Thank you for your attention. We are now ready to answer your questions.

Our first question comes from Daniela Costa from Goldman Sachs.

Actually, 3 things, quick ones if possible. So first, can you comment in terms of like where do you think the inventories at the wholesalers are now if you think that they have already bottomed out? And then second, on pricing, I think when we are mechanically aggregated the various price increases from last year, we would get to even a slightly higher amount of pricing. Is that a 6% just because of the mix that pricing maybe lower in Piping and you've done better on Piping? And then how shall we think about pricing in Q4 and into next year? And then the third one, just a very quick clarification [indiscernible] I heard you saying a comment on October or the start of --

We can't hear you anymore, Daniela, sorry.

Sorry, you couldn't hear my question?

We could hear question number one and two, but three was interrupted. If you repeat question number three, please.

So on question number 3. Yes. So I don't know if my line was interrupted before and I didn't -- and you said something about October or the beginning of Q4. I just wanted to clarify if you did say something. And if not, if there's an observation on how sometimes you comment on the start of the quarter.

Understood. Question number one, the wholesale inventory levels, we have seen in Q3, still a little bit of destocking on the wholesaler level, at least that's what we have heard from some wholesalers. However, we have also got feedback from wholesale telling us they have not further lowered their stock levels with regards to our products. So what we assume is there was still a destocking effect but much less than in the second quarter. Question number two about pricing. The 6% price effect in the third quarter, which was a bit higher than what you could technically expect because we increased prices over the last 12 months by around 3.5%. The reason for that is that we had a delay effect in Q3 last year, you might remember. We had a little bit of lower price effect in Q3 last year due to late deliveries or still deliveries in Q3 last year of volume of products at lower prices. And this delay effect from Q3 last year has obviously an impact on Q3 this year. This is the reason why the price effect is around 6%, a little bit higher than what you technically expect if you just add the static price increases over the last 12 months. And then the question about Q4 pricing, we expect that pricing impact is now coming down because we did not further increase prices. The price effect in Q4 could be around 2%, that's what we currently expect. And for next year, we do not yet communicate what we do with our pricing because we are currently in the final decision what we will do and we will communicate first to the customers in terms of pricing decisions for next year. So I can't give you an answer there. And number three, in October, as we mentioned that net sales were currency adjusted slightly above previous year October.

Our next question comes from Yves Bromehead from Societe Generale.

I'll have two. My first one is I just wanted to come back on the strong performance of the FlowFit. And generally speaking, the Pipe division in the third quarter. Can you maybe elaborate on some of the key drivers? And remind us, I think you introduced FlowFit into new countries. Was that in Q3? And should we expect you to roll out FlowFit into new countries as well in Q4? My second question, just on the volumes with the comments, obviously, after the October month but also your performance in the third quarter. Does this suggest that you do not expect volumes to continue to decline sequentially, at least with the visibility that you have? Are you comfortable given the volume performance versus sort of the outlook that you're giving, which is still quite challenging and negative on your end markets. So I'm just trying to reconcile the two together.

Can you hear me?

Now we can hear you.

Did you hear the answer about FlowFit or you have some -- No, I repeat my answer to FlowFit. So FlowFit's strong development in Q3 was not driven by new countries. We introduced FlowFit this year in the U.K. and France already as of Q2. The basic reason for the strong growth is just the demand, which is very pleasant in all the countries where we have introduced FlowFit so far, which is almost all countries in Europe. The second question about volumes in Q4. Yes, we expect a sequentially improvement of the dynamics of the volume meaning at least a less negative dynamic, maybe even a stabilization or a slight positive growth in Q4. However, I want to restate that the uncertainties are relatively high. But we are a little bit more optimistic for Q4 in terms of volumes that what we have seen for the first 9 months.

The next question comes from Martin Flueckiger from Kepler Cheuvreux.

I've actually only got one left. On raw material prices, I saw that they were down a little bit less than what I had expected sequentially. I was just wondering what your observations were with respect to raw material prices here? And whether that's -- whether I'm correct in calculating the positive impact on the EBITDA margin of around 180 basis points?

Can you be more precise is that the impact in the Q3 or 9 months?

Yes, sorry. Of course, that's Q3.

Tobias, you have a view on that?

Let me quickly see I'm not sure.

Yes, I would say it's just –

Yes, you're right. Round about correct. I would say it's correct yes, roughly. We don't have the exact -- to think about it, but I would say roughly, yes.

Okay. And was there any -- if I remember correctly, raw material prices were down a little bit more than what you had expected. Could you elaborate a little bit on that?

Nothing specific, to be honest, because as you know, we don't have a lot of visibility also not on the raw material price side. There were some prices just a bit more down than what we expected. Nothing specific, which I could mention here.

And Martin, just to reiterate the [indiscernible] are correct.

The next question comes from George Speak from BNP Paribas.

Do you mind just helping us understand your margin guidance a bit better. So we had 9-month margins of over 31% but full year guidance of 29% to 30%. So I appreciate the seasonality. But given costs are going to be lower, you're saying sales could be up in Q4, volumes could be stable. Pricing is resilient why couldn't Q4 margins be a bit better than the low 20s or mid-20s that you're implying?

There are 2 reasons for that. First of all, we have less positive effect from sales price increases, as I mentioned before, that will come down substantially compared to the first 9 months. And secondly, we also again expect rising energy prices sequentially in Q4 versus Q3.

The next question comes from Lehmann Arnaud from Bank of America.

I have two questions, please. Firstly, coming back on the Q3 numbers, your SG&A is coming down quite a bit relative to the first half of the second quarter. Is there any one-off in there? Is that a good cost discipline. And I guess the actual number, I think, is CHF 117 million in Q3. Is that the new normal compared to the, let's say, CHF 130 million, CHF 140 million that we saw in the first 2 quarters of the year? That's my first question. And my second question is on the pricing trends, they seem to be quite steady on a sequential basis. Do you still see good discipline on pricing in the industry? Any sign that some of your competitors might be trying to be a bit more competitive on the pricing side.

I'll take question number two, number one will be answered by Tobias. We don't want to go too much into details of pricing of competitors for obvious reasons. But in general, I would say there is quite a stable price environment, what we observe at the moment in the industry. No big outliers. And question number 1 is Tobias.

Yes. No, there's no special effect that would influence it in any special direction.

So the CHF 117 million is a new level that is sustainable you think into the coming quarters?

Yes. On the other -- yes again, there's always a seasonality. But simply, there's no specific effect in the other operating expenses in Q3 that would be noteworthy.

The next question comes from Patrick Rafaisz from UBS.

Yes. Three questions, please. The first is a follow-up on the discussion around Q4 and October. I know you don't like to talk about monthly trends, but if I go back to Q3 last year, you had indicated October to be slightly down in local currencies, which for volumes had implied around minus 10% or so. But you closed the quarter with minus 20% on volumes. So my question is the slight increase in October now, does that mean that we should see a sequential acceleration in November, December, given that the comps will get progressively easier or much easier? That's the first question. Second question is a follow-up on piping. I understand what you said about FlowFit and the strong reception in the market. But I don't see FlowFit contributing 5, 6 percentage points to the segmental revenue. So I'm just wondering with piping often an early indicator, does that also support a view that the market is maybe slowly improving? And then the last question is on Austria, Benelux, which were positive against the trend. You talked about the regions behind other regions. Can you add some more color on Austria and Benelux as well?

I'll start with the October questions. You're right. Last year, we had a negative dynamic within Q4 with regards to volume. And as I said before, also in October, volumes were slightly up. And this year, it's very hard to say what happens in November and December, to be honest. Therefore, I got to be careful. I don't want to give you an answer considering a little bit easier comps in November, December last year, but it would be too much of a speculation just to talk about one or two months. The second question about piping. There's one other reason we didn't mention again, but don't forget pricing. We had also -- sorry, piping had also a bigger pricing effect. We increased prices also a little bit more that also contributed to the better performance. On the piping side, but the main driver was indeed profit. It is -- I have to say it, I already said it 2 years ago, it is a blockbuster for us and it turns out to be a blockbuster also in terms of numbers. And with regards to Austria, just maybe one comment with regards to development. We have seen a very weak first half of the year and some, let's say, normalization in the third quarter. I would call that the quarterly seasonality in a specific country. There's nothing specifically has changed the structure of the fundamental demand and also challenges which we are facing in this market. And the second one was Benelux, if I remember correctly, where you could have expected a bit better Q3 because we had a very weak Q3 last year already. So that was a bit maybe on a disappointing side, but it shows that these countries, especially in Netherlands, a little bit later with the negative effect from the heating-related renovations. That's what we believe is one of the reasons why Q3 was with weaker in the Benelux, having in mind that we had a relatively easy comparison basis from Q3 last year. I hope that helps.

The next question comes from Alessandro Foletti from Octavian.

I was also wondering maybe one general view. I mean, is it too early to basically call the bottom?

Are you still here, Mr. Foletti?

Yes.

That's a very interesting question. As I said before, as we've said before, the uncertainties are high. And therefore, it's very difficult to [ spot them ], especially in this environment, we will not give any answer to that because we just don't know it.

Right. But when I look at next year, Q1, Q2, Q3, Q4, now we have had really lots of quarters with double-digit declines. What are the risks? And unfortunately, the new permits are really indicating very, very low trading that might be upcoming. But what can basically go wrong for you when you talk about this uncertainty?

Depends on how you define wrong. Obviously, the more tailwinds we have in the market, the better. On the other hand side, and that is our overarching goal to gain market share. So what could go wrong is that the miss the opportunity in this environment to gain market share versus competitors. This is the biggest mistake: What we could do, and we are quite confident that we do the right things that, that will not happen, but we can't change the market. So the worst that could happen is not gaining market share in this digital market environment, that could go wrong.

The next question comes from Yassine Touahri from On Field Investment Research.

I would have just one question. When I look at your raw material costs. So you -- I understand your volumes were down by approximately 11% in Q3. You had a raw material price decline of minus 6% and a negative currency effect of minus 3%. So based on this, I would have expected your raw material costs to decline by approximately 20%, minus 11% volume, minus 6% price and minus 3% FX. But you [indiscernible] minus 11% decline in raw material costs. Am I missing something?

Well, I'll take that answer. There's various stuff, which the calculation is, I think, so far correct. But there are various other effects, which are not quantifying that easily for you. I will mention a couple of these. The first one is destocking. We had relatively strong destocking during the summer breaks that affects the quote negatively. We also have some value adjustments, there's some mix effect as well that go into there. And lastly, there's also a time lag until the lower prices are really reflected in our raw material quota. And the sum of all that should explain the difference between your calculation and the reported figures.

Should we expect a better trend in the coming quarter?

Definitely, there's no summer anymore. So the destocking effect from the summer break is not there anymore. There's an inventory, so let's see. On the time lag, that definitely will help. So difficult to tell it all together, but there's -- at least the time lag effect and the destocking should ease.

And then another question on your operating expense and your other operating expense. You read it's a little bit higher in Q4 than in the third quarter. Should we expect again this increase because of energy price and because of seasonality? Like could you do -- because you did like only CHF 117 million in Q3. Could you see an increase in Q4? Or do you believe that you can achieve again other operating expense of less than CHF 120 million?

I think you're absolutely correct. You mentioned that the main point, energy, we're seeing higher prices that will influence it negatively. The other factors are relatively stable compared to Q3. Q3 slightly positively influence as well from taking holidays, et cetera. But all in all, it's likely that we see slightly higher Q4 than Q3 out of that.

And maybe then a last question on the pricing outlook for next year. I understand that you have not decided about the price increase. Does it mean that you have not yet sent a price increase later because we're already at the beginning of November, I would have expected you -- or is it because you don't want to communicate it to the market at this stage?

This is very company-specific in some countries, you do it earlier and do it later. And don't forget pricing is not just send out the price list. It also includes negotiation about rebates and bonuses and that has not yet taken place. Therefore, it's not yet communicated what is the final price effect for a customer.

The next question comes from Charlie Fehrenbach from AWP.

Regarding Germany and Switzerland, you had a sales decline in Q3 in local currencies of around 10%. Is the assumption fair that we will see further declines in the coming quarters given the situation of the building permits in Germany and the regulation situation in Switzerland?

So first one remark to Q3, the minus 11% in Switzerland had different reasons compared to Germany. In Switzerland, it was basically a base effect because in Q3 last year, we were up by 11%. In other words, Switzerland is doing quite well. In Germany, however, we have this negative market environment which most probably will prevail in Q4. We will not talk about the next year we will do that as usual with our first [ interim ], providing you a detailed market outlook as far as possible then with our first interim results in mid-January.

Okay. That's fair. Would you maybe be ready to say something about your expectations '24 besides any quantitative indicators, of course, what your general expectations?

No, because the uncertainties are too high. I also said it before. You should not forget the geopolitical risk significantly increased over the last 4 weeks. And therefore, I think it will not be professional to do that at that moment.

The next question comes from Stefanie Scholtysik from Mirabaud Securities.

I have a question on the Middle East. What exposure exactly do you have to Israel and overall in the region, maybe also to Egypt and to other countries which are close to Israel?

So Israel has come to -- half business in Israel, which is relatively small. It is clearly below 1%. We have a small organization there around 15 people, not affected directly, but obviously a very difficult situation also. The construction industry is basically down at the moment in Israel for the group as Geberit, not a material impact. In the rest of the region, we have a more important exposure in the Middle East, Africa region is a significant part driven by the Gulf region, where we have offices in Dubai as a headquarter, sorry, where we are serving the region, including Saudi Arabia. There we have more significant business, but this business is not affected so far, we have not seen with that business now in October.

Okay. Maybe two other questions, if I may. I mean, the standard -- the shift towards the retail solution has this accelerated Q3? Or is it on the same level as it has been since the beginning of the year? How do you view this situation?

Very hard to answer because we actually do not know it exactly. However, what we hear, and I guess you have that word as well that for the heating suppliers, Q3 was also quite difficult as far as I have heard from a couple of these companies. So it seems also there, there are some challenges in the heating sector for various reasons, especially around the uncertainties of legislation, but maybe also some strong demand before, which is now [ only ] down. So it seems that also there, it's not always sunny weather. But the direct impact on us, as usual, very hard to quantify or to give a clear answer to that, sorry.

Okay. And then a last question on your product. You presented the new shower toilet at [ Alibaba ] some months ago some months ago. What are the first feedbacks from your clients and from your wholesale, how did they receive this new product?

We actually did just after the Capital Markets Day, a big customer event here in our headquarters, inviting most important customers, mainly from Central Europe and presented a product the first time to customers and I must say, sorry for the word, the feedback was overwhelming because I've heard literally the sentence this could be a game changer a couple of times because, as you know, the big difference now is that we have a shower toilet at entry price level of around EUR 1,000 for an end consumer, and that might be reopening new market segments, which were not accessible so far with our higher price from our products. So feedback so far, very positive. We will start to deliver only as of Q2 next year. So we do our best and utmost that we are ready as of Q2 next year to deliver then also the product to the customers.

The next question comes from Cedar Ekblom from Morgan Stanley.

I've got one follow-up question on your other operating costs. I wonder if you could dig a little bit into the improvement there just in terms of the big buckets, so your freight costs, your energy and maintenance costs marketing and admin. It came in a lot better than my expectation. And I'd just like to understand how much of that is around the energy benefit, which is obviously variable and then around the other items which might be stickier at lower levels?

So I would say there were three main drivers for the significantly lower operating expenses in the third quarter. First, freight cost and freight prices obviously came down significantly. Number two, energy prices, as you said as well. Last year, in Q3, we had record high energy prices. And the third is lower marketing expenses because also there, we implemented some flexibility measures, I would call we did some selective marketing activities at a lower level because just demand was not there. These are the 3 main reasons why other OpEx were substantially lower in the third quarter.

Perfect. That's helpful. And then just in terms of the marketing expenses, should we assume that when volumes recover, that the marketing expenses should move with that? And I just ask that with respect to a previous answer that we should think about other operating expenses being at this level going forward. So just want to understand what might come back if volumes recover.

So I would say, in general, we try to keep marketing expenses also quite stable. However, a little bit of operational flexibility is in their self going down and going up but not the effect that it has a material impact on the total other operating expenses as Tobias laid out before.

The next question comes from Nitesh Agarwal from Citi.

I have 2 questions, please. So first one is basically a clarification of the prices. Did you say that you expect overall prices to be up 2% in the next -- in the current quarter and fourth quarter? And my second question is basically on heat pumps. So I was just wondering if there is a mechanism that you follow to track the volumes that shift to heat pumps. And if so, what kind of forward-looking data do you get on that? As in how soon will you be able to monitor if there is a reversal in this trend or not?

First question, we expect in the fourth quarter price -- effect from sales price increases of around 2%. And the second one, I'm not absolutely sure if we understood the question. If we have a framework to follow the heat pump trends, was that the question or?

Yes. So the question was basically, if there is a way -- how do you follow the volumes that actually shift towards heat pumps from sanitation? And if so, like how early is it possible for you to track that this volume shift is basically changing? This trend is basically changing reversing from heat pumps to [ back to towards sanitation ].

No, we don't have any special mechanism to track that. That's, we think, actually impossible. We follow some competitors, but would be too tough to give an overall direction here.

The next question comes from Christoph Dolleschal from HSBC.

Just a follow-up on what you said could go wrong and gaining market share. We've been talking a lot about price increases now for 2024. But if the markets were to remain, say, difficult. Would that also include price decreases because you said you want to gain share? And would that also imply that you would be willing to lower prices or let me phrase it differently, what kind of a utilization level would get you to consider lowering prices? And where is the current utilization level?

I can't give you a clear chart answer because that depends obviously very much on the input cost development in other words, how raw material prices mainly develop. If raw material prices would collapse massively. Obviously, I would assume also our industry would decrease prices. So it all depends on the question how big is the extent of a potential deflationary environment on income input cost side. And the second part of your question, are you looking at utilization, in terms of pricing and if you refer to utilization, the plans, for example, we do not look at that at all. If we look at pricing, the only one important question is, do we have the perfect price point in terms of gaining market share, not losing market share by using our pricing power. So that is the main purpose of pricing, not about utilization, for example, of our [ plants ]. There, the task is different. They need to react as flexible as possible in terms of volume from [ fish]. We do not think these two things together.

The next question comes from Christian Arnold from Stifel.

Personnel expenses, which you broke down, I think, some 6% year-to-date. That looks -- first side looks good. But thinking about the volume mix effect of minus 18%, thinking about the FX impact, which was a favor I believe one could even thought that these personnel expenses could decrease further. So I mean, I wonder what shall we do for next year, assuming volume effect let's say, being stable, thinking about wage inflation, Shall we expect a harsh increase of personnel expense going forward? Also on the back because you probably have asked your personnel to be very flexible to take holidays because of lower volumes. And so that will be less of an impact. So what's a little bit -- yes, can you give us here some a little bit more color on what we should expect or model in for next year when it comes to personnel expenses?

The two parts of the answer. One is wage inflation. The other one is capacity, number of people. The first one, we do not get now, but we expect that we will see again wage inflation, maybe significant wage inflation next year because we have heard first results from the tariff negotiations in Germany. So we will face again wage inflation next year that is clear. On the capacity side, basically, we'll continue with our two principles. There are areas where we will not change the capacity at all, for example, in R&D or in the sales organization, so no decrease, maybe even slightly increase. And on the operational side, we tried to be flexible as we did this year. Obviously, it will become more and more difficult, but we are confident that we still have room for flexibility whatever the volume will do next year also in the operational part of the business.

Could you remind me about the wage inflation impact of this year?

Around 5% in the first 9 months.

And in terms of -- I don't know if that goes now too much in details. But in terms of holiday credits, I mean, where do you stand on a group-wide basis? Have they been used now completely? Are you -- yes. somehow at normal levels? Yes, what you say this year?

So that is obviously one of the levers for our flexibility, and we have required flexibility from that part -- point of view also in the third quarter because volumes were down so that we are continuously using this kind of flexibility. But as I said before, we still have some room for flexibility. I don't want to go into individual holiday accounts, but we still have room for flexibility going forward, although it comes more difficult.

Our next question comes from Remo Rosenau from Helvetische Bank.

I would like to come back to this sanitary heating pump switch. I mean the backlog of sanitary installations went up a lot in the last 18 months or 2 years due to the switch to installers going into heating pumps a lot. I mean, given the slowdown in the market, do you have any indications is now coming down somewhat or no?

We don't have an indication -- [ quite ] indication. And maybe it's also not yet at the proper level. But I agree with you, obviously, if people do less sanitary, let's say, less elevation of bathrooms or they delay their bathroom renovation, this demand piles up, obviously, maybe only at the end consumer investor level at the moment, but at a certain point, that will come because people need to renovate at a certain point. And you know renovation is 2/3 of our business. So we don't have a quantitative indication, maybe even not yet reached the plumber, but this demand, this fundamental demand for our product will pile up. That's what we mean when we always talk about fundamental demand for our products, you can delay to a certain extent, especially renovation. You can also delay the number of new apartments built, for example, in Germany, which is going down at the moment. But at a certain moment, you need apartments. So that is piling up, we can fortify.

But the other effect, however, was when it was still booming, the sanitary plumbers could not just not do the work because they were busy doing heating pumps. And so there goes also kind of a backlog. And has that been reduced?

So if you refer to the quantitative effect of German installers, that came down a bit. It's around, I think, 17 weeks at the moment. I don't have the exact – [ 70.7 week ] thank you. At the moment, that came down a bit also driven by seasonality or another or it didn't increase for, let's put it this way. But as you know, this is all backlog also plumber, including heat pumps as well that has come down a bit.

Okay. What was the peak there?

I was trying to keep 1-something, if I remember correctly, around 6 months ago. But there are also some seasonal effects. So don't get that one-for-one.

Okay. But still, I mean, rather a bit down [indiscernible].

Yes.

Gentlemen, that was the last question. I would now like to turn the conference over to Christian Buhl for any closing remarks.

Thank you all for your participation, for your questions. We wish you all a great day. Goodbye.