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Edited Transcript of GEBN.VX earnings conference call or presentation 15-Aug-19 7:00am GMT

Q2 2019 Geberit AG Earnings Call

Jona Aug 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Geberit AG earnings conference call or presentation Thursday, August 15, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christian Buhl

Geberit AG - Chairman of the Group Executive Board & CEO

* Roland Iff

Geberit AG - CFO, Head of Group Division Finance & Member of the Group Executive Board

* Roman Sidler

Geberit AG - Head of Corporate Communications & IR

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Conference Call Participants

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* Alessandro Foletti

Octavian AG, Research Division - Financial Analyst

* Andre Kukhnin

Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst

* Bernd Pomrehn

Bank Vontobel AG, Research Division - Analyst

* Christian Arnold

MainFirst Bank AG, Research Division - Analyst

* Daniela C. R. de Carvalho e Costa

Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team

* Fabian Haecki

UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research

* Jorg Schirmacher

Baader-Helvea Equity Research - Analyst

* Martin Flueckiger

Kepler Cheuvreux, Research Division - Equity Analyst

* Martin Hüsler

Zürcher Kantonalbank, Research Division - Research Analyst

* Matthew Spurr

Exane BNP Paribas, Research Division - Research Analyst

* Priyal Jitendra Mulji

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good morning. I am the Arkadin operator for this conference. Welcome to the Geberit Conference Call on The Half Year Results 2019. (Operators Instructions) And the conference is being recorded. (Operators Instructions) 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.

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [2]

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Thank you for the introduction. Good morning, ladies and gentlemen, and welcome to our Geberit's Interim Results Conference call. Geberit achieved good results in the first half of the year 2019, with a good top line growth and a further improved profitability despite the challenging business and currency environment. In the first 6 months, sales in Swiss francs achieved with CHF 1.63 billion, previous year's level. Sales in local currencies grew by 3.1%. The operating cash flow grew by 3.3% to CHF 501 million, corresponding to an EBITDA margin of 30.8% and an increase of 100 basis points. Operating profit increased adjusted by 1.7% to CHF 431 million. This corresponded to an EBIT margin of 26.5%, an improvement of 50 basis points.

Earnings per share increased adjusted by 2.4% and reached CHF 10.14. Free cash flow increased by 35% to CHF 257 million. While the margin improved in the first half of the year, the weak euro negatively impacted the financial results due to a negative translation effect, particularly in the second quarter.

Due to the weaker euro, sales in Swiss francs decreased by 1.3% to CHF 797 million in the second quarter. In local currencies, sales increased by 2.6% in Q2, negatively impacted by 1 working day less.

Let me now comment in more details of the sales development of the first half year. The group's first half year sales amounted to CHF 1.63 billion, a minor decrease of 0.2% in Swiss francs. The unfavorable currency development led to a sales decrease of CHF 54 million or minus 3.3% versus previous year. Sales in local currency increased by 3.1%.

Let me now comment on sales growth per region, always in local currency. Sales in Europe increased by 3.2%, with positive growth rates in almost all markets. In Germany, sales increased by 4.9%, with strong sales in Installation & Flushing Systems and in Piping.

In Switzerland, sales grew by 2.0% despite the strong previous year's period. In the Nordic region, sales increased by 1.5%, with strong growth in Installation & Flushing Systems. Eastern European sales achieved previous year's level despite the double-digit sales decrease in Russia and in Turkey. In Italy, sales declined in a weaker market environment and due to a strong comparison by 1.2%. Sales in Benelux grew by 5.2%, with strong growth in all 3 product areas. France recorded a sales increase of 0.9%, with strong growth in Installation & Flushing Systems, but sales declined in Bathroom Systems since we exited low-margin business in ceramics. In Austria, a sales growth of 5.3% was booked with growth in all product areas.

Sales in the U.K. increased by 10.6%. And the Iberian Peninsula grew by 6.6%, with a double-digit growth rate in Portugal. In North America, sales were flat, with good growth in Installations Systems. In Far East/Pacific, sales increased by 11.5%, with strong growth in China. Sales in the Middle East and Africa region were down by minus 4%, driven by a strong decrease in the Gulf region.

Let me now comment on the sales development per product area, again in local currencies. Installation & Flushing Systems increased by 4.6%, with strong growth with behind-the-wall flushing systems.

Piping Systems grew by 6.7%, with strong growth in both product lines, supply piping and drainage piping systems.

Bathroom Systems sales decreased by 1.7%, driven by a weak market environment in the Nordics, a strong comparison from strong sales for shower toilets in the first half of 2018, weak sales from Keramag due to the brand phase-out and the exit of low-margin business in France.

And now let me update you on the financial results. Geberit EBITDA reached CHF 501 million, corresponding to an increase in Swiss francs of 3.3% versus the first half 2018. The EBITDA margin reached 30.8%, 100 basis points above H1 2018. Roughly half of this improvement was driven by the new accounting standard, IFRS 16. The remaining operational margin improvement was achieved despite a weaker market environment, limited topline growth, the highest tariff increases since many years and extraordinary marketing expenses for the brand harmonization. The main drivers for the operating margin improvement were: Firstly, increased sales prices in a challenging market environment; secondly, a positive product mix due to upselling of our product portfolio; thirdly, efficiency improvements, combined with strong cost control and cost discipline; and fourthly, slightly lower raw material prices. The currency fluctuation had almost no influence on the operating margins due to our continued efforts to maintain a strong natural currency hedge. Operating profit achieved CHF 431 million, which is an increase in Swiss francs of 1.7% compared to the adjusted previous year's level.

The EBIT margin reached 26.5%, 50 basis points above the adjusted H1 2018 level. Due to a higher tax rate, net income increased under proportionally by 0.9% compared to the adjusted previous year's level to CHF 365 million.

Earnings per share grew by 2.4% to CHF 10.14 versus the adjusted previous year's number. Free cash flow increased significantly by 35%, driven by a positive development of the net working capital.

We further continued our share buyback program and have now repurchased in total 702,000 shares for CHF 296 million per end of Q2 this year.

Let me now comment on our market outlook for 2019. Our view has not changed significantly since our publication of Q1 results in May this year. The uncertainty and volatility of the building industry remains and selected markets are slowing down, driven by weaker new residential sector. In Europe, we expect overall a favorable but mixed construction market environment. We remain confident about the construction demand in Germany, although the limit qualified installation capacity might remain a bottleneck. In Switzerland, we expect on high level a slightly decline in construction market. In the Nordic region, we expect at best a stagnating market, driven by a positive outlook for Denmark, a slight growth in Norway, a stagnation in Finland and a decline in Sweden.

In Italy and France, we expect overall a stagnating market environment, driven by the decline in new build segment, compensated by a more robust renovation sector. We expect overall a declining market environment in the U.K., driven by the non-residential sector due to the Brexit uncertainties. In Austria, we expect a positive construction market with a slight growth. We are positive for Benelux, although the strong construction growth in the Netherlands over the last years led to shortages of qualified installer capacity.

The outlook for the Eastern European markets remains mixed, with a weak environment in markets like Russia or Turkey. And finally, on the Iberia and Peninsula, we expect an ongoing recovery of the building construction sector. In North America, we foresee a moderate improvement of the institutional construction market, driven by the educational sector.

In Asia Pacific, we see a mixed picture across the region. We expect a moderate increase of the residential construction market in China. We are positive for India and expect a decline in building construction market in Australia.

Let me finalize our market outlook 2019, with the Middle East and Africa region. We expect overall, a weak market environment in the Gulf and a stagnating bulk building construction market in South Africa. We remain cautious and foresee a mixed picture for the Northern Africa and the near East region. And now a few words about the raw material price environment. The raw material markets remain uncertain and volatile due to the increased uncertainties about the global economy. After increased raw material prices in the second quarter, we expect now a mixed picture in the third quarter, with overall stable raw material prices compared to the second quarter this year. And finally, let me briefly update you on the Geberit outlook 2019. We expect for the full year, a sales growth in local currencies between 3% and 4% and an EBITDA margin between 28% and 29%. CapEx should reach around CHF 180 million. This is the end of our introduction, we are now ready to answer your questions.

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Operator [3]

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So would you like to start the Q&A now?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [4]

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Yes, please, yes.

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Questions and Answers

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Operator [1]

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[Operators Instructions) The first question is from Andre Kukhnin of Crédit Suisse.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [2]

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I'll go one at a time, please. Firstly, on your growth guidance of 3% to 4%, you've delivered 3% in H1. And obviously days effect was a negative in there. Can I ask whether you're seeing kind of improvement of momentum anywhere in the business, and hence that guidance of 3% to 4%? Or is it just purely mechanically taking through in H1, should get a bit better in H2, given the days?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [3]

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We do not expect in the second half of the year, a structural acceleration or change of the market environment. And basically, it's driven by the more favorable year-on-year comparables in the second half of the year, and we have also 1 working day more in the second half of the year. That is the reason for the 3% to 4% sales growth guidance for the full year.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [4]

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Right. Yes, certainly clear on no expectation of end market structural pick up. But is there anything within kind of Geberit own actions that you're seeing that maybe is gathering pace? We saw quite a few new products introduced at ISH, for example.

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [5]

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No. No structural acceleration in the markets and no structural changes affecting half year for Geberit internally. Purely technical.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [6]

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Very clear. Can I also just double check on Germany, the growth of 4.9% was on a higher comp from last year. Is there anything for us to be aware of in that growth in H1 '19 that you delivered in what seems to be a flat market?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [7]

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I think our colleagues in Germany did a very good job on the various initiatives which are running there. Our up-selling initiatives or activities are going very well, up-selling to higher-end products, which are especially easier and faster to install. We have had also a lot of success in new products, which we introduced in Germany, for example, in Drainage pipes, we introduced an important new fit in 2016, and we see a nice growth here. And we had also little bit more encouraged price increase this year in Germany, increased prices a bit more compared to the last 2 years.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [8]

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Very helpful. And can I also check on the ceramics business exit. Is this new to the 2 sites that you closed? Or is that still a [fall-on] effect from that?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [9]

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No, that is completely independent of the site closure in France. That's I think to do by the fact that we have a part of the ceramics business in France, with very low and unacceptable margins. And it was a conscious decision to exit that business, nothing to do with the site closure.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [10]

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And could you give us some idea of the size of that business?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [11]

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No I can't, because it was with a dedicated customer. Therefore, I can't disclose you any figures.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [12]

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Right, and that was specifically in Q2?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [13]

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In the first half of the year.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [14]

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Okay. Great. And finally, just on the other cost effects line on the profit bridge. When I look at what you give in H1 versus what you gave in Q1, the implication for second quarter is that it stepped up by more than CHF 6 million. So just wanted to firstly ask if my math is -- kind of agrees with yours? And if it does, then I think 1 item that we had in there was the Keramag rebrand cost that was supposed to step up, but I thought we were talking about EUR 10 million for the whole of remainder of the year there. So just wanted to check if there's any front-loading of that in the second quarter?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [15]

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No. We have said that we spent CHF 10 million marketing expenses during entire year-end as of Q2 and roughly 1/3 of that was now spent in the second quarter as planned.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [16]

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Okay. So the rest of the sales step-up is wage rates ticking up?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [17]

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Exactly. We had also in the previous year, we had a positive one-time effect in the second quarter, in Q2 2018, also a little impact on the margin development for this year.

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Operator [18]

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The next question is from Daniela Costa, Goldman Sachs.

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Daniela C. R. de Carvalho e Costa, Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team [19]

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So on the first question, just wanted to follow-up on the new product launches of Geberit One, on when do you expect to start to see sort of the contributions from that into growth? I guess you have commented previously on your 4% to 6% medium-term target includes a bit of sort of innovation-led growth, but when will this step kick in? And then the 2 other ones, more -- a bit more technical. So I wanted to check on the tax rate, given, I think there were the results of the Swiss referendum in May, and you had in prior quarters, commented on that your views on the tax rate would depend on that, sort of where do you stand for the future based on that? And the third one on IFRS 16 impact, I think was a bit higher in 2Q than it had been in 1Q, where do you stand for the full year?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [20]

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I start with the first question, the first impact of sales from the new bath this year is Geberit One, which we launched this year, the earliest as of next year. We do not expect any substantial sales this year, earliest next year. For the tax rate and IFRS 16, I ask Roland Iff to answer the question.

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Roland Iff, Geberit AG - CFO, Head of Group Division Finance & Member of the Group Executive Board [21]

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The mid-year tax rate is higher than last year. That doesn't have anything to do with the referendum in Switzerland. That's mainly because of positive one-off effects in 2018 in H1 and some mix effects. Referendum, yes, was passed in Switzerland. And we also know now that the tax rate in the Canto em Sao Carlo, where we are paying taxes is going down. However, not all the implementation details are known yet. So we still believe that we might pay a little bit higher taxes than in 2020. Going forward tax, the guidance is around 16% versus around 15% for this year. We had a minor positive impact now midyear because we could release some deferred tax assets in the -- sorry, deferred tax liabilities in [Arapina]. But this has a minor effect, not material. For IFRS 16, the impact for the full year will be around 0.5%, 0.6%. So no significant change compared to what we have seen in H1 and the difference between Q1 and Q2 is just normal volatility driven by FX and other items.

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Operator [22]

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The next question is from Martin Hüsler, Zurcher Kantonalbank.

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Martin Hüsler, Zürcher Kantonalbank, Research Division - Research Analyst [23]

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I have 2 questions. First, maybe to the strengthening of the Swiss franc. Do you foresee any changes in your pricing strategy in Switzerland? You have to adjust your prices there or doesn't it have any impact at this stage?

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Roland Iff, Geberit AG - CFO, Head of Group Division Finance & Member of the Group Executive Board [24]

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Of course we are closely observe the situation, the currency development. At this moment in time, we do not foresee or plan any extraordinary price changes due to the currencies in Switzerland.

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Martin Hüsler, Zürcher Kantonalbank, Research Division - Research Analyst [25]

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Okay. And then the other question is about your guidance or outlook, you talked about -- or we talked about the 3% to 4% in sales growth. If I assume you would achieve the 3% and then I look at your margin band that you gave with 28% to 29%. I think the lower end of this band is quite pessimistic then, assuming that raw materials stay more or less where they are and you have some scale effect due to the volumes, what's the biggest risk for you that the lower end of the band might seem to be realistic?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [26]

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That this, the raw material price development in the fourth quarter. Our outlook for the raw material prices only for Q3. We have a very low visibility. And as I said before, a high volatility also in raw material markets. You might have seen that some prices like nickel went up massively. Nickel went up, the spot price by 30% in the last few months, nickel is now up 55% -- sorry 45% up year-to-date. So there is a risk in the fourth quarter about raw material prices. And keep in mind, last year, in the fourth quarter, raw material prices also went down already. So that is the biggest risk for our margin guidance this year.

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Operator [27]

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The next question is from Matthew Spurr, Exane BNP Paribas.

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Matthew Spurr, Exane BNP Paribas, Research Division - Research Analyst [28]

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Just a, yes, couple from me. Can you say how the price of raw materials developed in Q2 versus Q1? Obviously, you can see year-on-year, but just wondered sequentially, whether you can give us some guidance on what happened?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [29]

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Yes, the raw material prices in the second quarter went up compared to the first quarter.

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Matthew Spurr, Exane BNP Paribas, Research Division - Research Analyst [30]

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And the pricing was the same as this prices went up in the start of the year and so it's the same price effect year-on-year, but -- and the same sequentially, yes?

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Roman Sidler, Geberit AG - Head of Corporate Communications & IR [31]

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Sorry, can you repeat the question, sorry?

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Matthew Spurr, Exane BNP Paribas, Research Division - Research Analyst [32]

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And your pricing was basically the same year-on-year Q2 in -- as it was in Q1.

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [33]

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We increased prices, as you know, typically for the second quarter, the price increase, the base price increase this year was somewhat higher than what we planned for. Finally, we achieved more base price increase between 1%, 1.5%, a little bit more than what we initially planned.

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Matthew Spurr, Exane BNP Paribas, Research Division - Research Analyst [34]

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All right. And then can I have your thoughts on Germany? You said the market is healthy. How worried are you? Obviously, the manufacturing sector, big part of the economy is looking in trouble. You've also got -- had noises in the quarter about rent freezes coming in, in Berlin. What your overall thoughts on just the -- do you think German housing market is going to be resilient to these sort of headwinds?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [35]

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We believe still the biggest challenge from a market perspective, for our markets is the question of the capacity of installers, of qualified installers and not that much the demand. There is still a strong demand in the market for building construction, there is also an inventory level for tasks which have to be fulfilled. There is a renovation need. So we are not that really worried, that much worried about demand, although the general economy in Germany, obviously, it seems to slow down, especially the exports.

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Operator [36]

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The next question is from Martin Flueckiger, Kepler Cheuvreux.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [37]

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Martin Flueckiger, Kepler Cheuvreux. First one, and I'll go 1 at a time. Coming back to the issue of Germany and the problem you just mentioned about the lack of qualified installers. Could you talk a little bit about any dynamics that you have seen with respect to this issue? And particularly, I'm interested to learn what kind of order book levels in weeks for installers you saw in Q1 and Q2? I think the last number you provided was by the end of last year. And also, if you could talk a little bit about your own training programs for installers in Germany, and how that's going? That would be my first set of questions.

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [38]

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There is no fundamental change in Germany regarding situation of the capacity of qualified installers. You're referring to the statistics of the order book levels, the latest figure is that the order book level in Germany, it slightly increased to 13 weeks, around 13 weeks currently. So there is no relief from that side. Regarding to our training, we are still very happy that we are able to attract many installers despite the bottleneck to our training. So we do not see a lower demand; on the contrary, we're seeing a higher demand for support services, speed training or be our sales force to support these customers, which is, of course, one of the elements of this bottleneck of qualified installers. The people are there but qualification levels are lower. So the need for support and services is increasing, and we are focusing on that. And we see that also now on our numbers.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [39]

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Perfect. And just to clarify, that those 13 weeks you just mentioned per order books among installers, is that a Q1 or Q2 survey?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [40]

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That is a summer survey, the latest summer survey.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [41]

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Okay. Perfect. And then on -- my second question is on the Bathroom business. Can you talk a little bit about your organic growth in the shower toilets business, AquaClean in Q2? And maybe also elaborate on -- more on the reasons for the decline of the Ceramics business, was that just Nordics driven? Or what was that?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [42]

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Shower toilets was growing in the first half of the year, but only single digits due to the fact that we had a very strong first half of the year last year for shower toilets, driven by some dedicated marketing initiatives. In general Bathroom business, as I said during my introduction a little bit, there are basically 4 levers influencing the business in the first half of the year. One was the strong comparisons for shower toilets; the second one was the weak market environment in the Nordics. And as you know, the Nordics is the most important market for our ceramics business. And we had also weak sales from Keramag due to the phase-out of the brand in the second quarter. And we have the effect, which I mentioned before in France, where we decided to exit low-margin business also for ceramics in the French market.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [43]

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Perfect. And then a final question is on your EBITDA development in Q2 and also the guidance for 2019. Doing -- I'm trying to doing in the math on Q2 profit bridge, your volume mix effect has dropped quite significantly or is less positive, I should say. Looking at Q1, it was up 100 bps; and I think for the H1, it was 70 bps; so probably around 40 bps for Q2. What is the main reasons for that? And with regards to your EBITDA margin guidance for 2019. Have you seen -- have there been any recent unexpected developments that have impacted that range of 28% to 29%?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [44]

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Question number one, as I said before, we have a somewhat stronger price increase this year or in the second quarter than in the previous periods. As I said before, we increased prices more in the range of 1% to 1.5% across the group. That means that also the volume effect, of course, is a little bit lower towards the stronger price increase. Your second question, we have not seen any extraordinary short-term effects, which had an impact on our EBITDA margin guidance for this year.

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Operator [45]

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The next question is from Bernd Pomrehn, Vontel.

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Bernd Pomrehn, Bank Vontobel AG, Research Division - Analyst [46]

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Two questions, if I may. Firstly, you mentioned Turkey, how important is Turkey about, how big is Turkey about for you within Eastern Europe? That's the first question. And then the second question is on the brand harmonization program? How is it progressing? Is it everything going according to plan? And was there any impact? Or will there be any impact this year on your cash flow, inventory management, et cetera?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [47]

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Turkey has within the region, of course, a substantial impact, especially if the sales decrease is double digit. So for that region, it is important on the group level, of course, it's not that much material. But for the region, it's an important contributor. To your second question about the phase-out of the brand. All in all, it is running according to plan, which means that we have stopped at the end of Q2 to produce and to deliver any Keramag branded products. So you don't get any Keramag product anymore from Geberit. It's all Geberit -- it's now all Geberit branded. What we have seen is, although that some of the wholesalers, and we have heard from wholesalers used that Keramag brand switch to lower and clean up their inventory levels. So they have lowered their inventory with old Keramag product and used that opportunity to clean up, so to say, their inventories. That's what we are focusing in the second quarter. And as of now, the main focus is to refurbish the remaining showroom. As you know, we have to refurbish many, many showrooms in Germany from our customers with the Geberit branded products. That takes time, and that is also the effort now towards the end of the year.

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Operator [48]

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The next question is from Fabian Haecki, UBS.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [49]

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A few questions. The first one on the U.K. that was surprisingly up plus 10.6%. I think in Q1, you said you had quite a pre-Brexit benefit with customers refilling inventories. Can you tell us a bit how growth distribution was in Q1 and Q2? Or was there any kind of reversal impact in Q2 at all? And you see non-residential, which is nearly all of your business being down, do you already see that visible in your numbers?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [50]

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We had a strong dynamic in Q2, Q2 -- Q1 and Q2 in the U.K., meaning, Q1 was very strong. And then we have seen the reverse effect in Q2. Overall, the 10%, 11% growth in the first half of this year has also been seen in the context of the relatively weak comps from the previous year. Previous year, we were minus 8%, but that was also driven by easy comps the entire first half of the year.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [51]

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Okay. Then on piping, that was also unusually strong at plus 6.7%. You mentioned the introduction of the new drainage pipes and also Piping Systems strong, but I mean, structurally, the Piping business is growing clearly below the Installation Systems. How long do you think will this effect of -- driven by the new products last? Will it last through H2? Will it last into 2020? Before, at some point, I mean, we can assume it will also normalize rather down to low single digit or what's your view on that?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [52]

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I can't quantify, give you a quantify quite outlook for the Piping Systems. I can talk about the new products, which we believe that still have a large potential in the geographies where we have introduced them, so there is definitely not yet the full potential. How long it lasts in term of the structural growth rate is difficult to say. It's important that we are growing above the market in Piping Systems, and I'm confident that we do that for the near and midterm future.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [53]

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Okay. Then my last question is on Bathroom Systems. Do you see -- I mean, I mean, with Villeroy & Boch also warning on the ceramics market in bathrooms in Europe for this year. And we know there is overcapacity in the market. And I don't know if everyone is so disciplined as you are in taking out capacity, shutting down some plants. So overcapacity is expected to persist and with now declining volumes and increasing competition, do you see anything moving on the pricing front in an adverse direction?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [54]

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No. No structural systematic differences in terms of pricing in Bathroom systems compared to the other 2 product areas. I couldn't confirm or support your hypothesis.

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Operator [55]

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The next question is from Jorg Schirmacher, Baader-Helvea.

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Jorg Schirmacher, Baader-Helvea Equity Research - Analyst [56]

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In fact, most of my questions have already been answered. Just have 2 follow-ups. And the first one, I did not understand acoustically in the beginning, the marketing costs of CHF 10 million. Is it correct, you spend 1/3 so far in the second quarter? Let's go one at a time.

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [57]

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That is correct. Okay.

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Jorg Schirmacher, Baader-Helvea Equity Research - Analyst [58]

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And then the second one, more on a structural trend. The trend to multi housing where we can assume that prices matter more. Do you see here a trend that is not beneficial to Geberit? Or is it -- what's your view on that?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [59]

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No, we do not see that. And maybe a good example is Germany in the first half of the year. As you know, multifamily building in Germany are growing quite fast, faster than single-family, and we have achieved a growth rate of 4.9%. So I can't confirm your hypothesis.

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Operator [60]

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The next question is from Priyal Mulji, Jefferies.

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Priyal Jitendra Mulji, Jefferies LLC, Research Division - Equity Analyst [61]

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He.

Priya from Jefferies. I've got 3 questions. The first one is just a follow-up on the U.K., obviously, you said Q1 for restocking Q2 was weaker. I just wondered as we go into another Brexit deadline, is Q3 likely to be strong in the U.K., again, because there could be potentially restocking occurring again? That's my first question.

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [62]

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Could be, but to be honest, I'm very hesitant to make any forecasts for the U.K. and stocking effect, quite difficult to say. Could very well be that something similar will happen. So far, I can say, we don't see it.

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Priyal Jitendra Mulji, Jefferies LLC, Research Division - Equity Analyst [63]

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Okay. Fine. The second one is just on raw materials. You said that Q3 raw materials will be -- will have stabilized versus Q2. I just wondered what -- if they do stay flat versus Q2, is that still higher year-on-year, i.e., Q3 '19 versus 3Q '18?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [64]

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No. Q3 '18 -- sorry Q3 '19 will be below Q3 '18, but stable versus Q2 2019. Because the raw material prices came down quite significantly in the first quarter.

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Priyal Jitendra Mulji, Jefferies LLC, Research Division - Equity Analyst [65]

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Cool. And the final question is just on Keramag, it sounds as though the impact from sales is more to do with the distributors starting to clean up their inventory. Is the phasing out of that brand potentially making you lose sales on a fundamental basis, i.e. people aren't switching over to the new Geberit branded product? Any signs of that?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [66]

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No, we do not have any signs and also not expect that you see a mid-, long-term structural change or lower sales due to the brand change. On contrary, I would assume mid, long term that is to support our sales. That is one of the reasons. But on a short-term or during that transition phase, we have now seen that we are impacted by what you said before, a lower inventory level, a cleanup of the inventories of wholesalers. But structurally midterm, we do not expect to do not have any signs that there is a structural shift away from the rebranded products.

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Operator [67]

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The next question is from Christian Arnold, MainFirst.

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Christian Arnold, MainFirst Bank AG, Research Division - Analyst [68]

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Two, three questions from my side. First, on France, there you had a organic growth rate of 0.9%. Could you give us information about if we take out this extraordinary effect from the phasing out of the low-margin business in the Ceramics, what that growth would have been in France? The second question would be on the business day, you mentioned you will have 1 business day more in the second half. Will that be in Q3 or in Q4? And the third question on the material prices. I mean there is uncertainty about your Q4 or the Q4 development. But if things stays like this today with higher nickel prices. But everything else, yes, stays the same, what does it mean on a year-over-year basis for Q4 material prices?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [69]

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I go. I start with the question number one. Unfortunately, I can't give you a guidance how much same-stores would have been without exiting that low-margin business, because that will give you a quantitative indication of how big the business was so I can't give you that number, sorry. Question two, the working day effect, 1 working day more in the second half of this year will come from the third quarter. So in the third quarter, we have 1 working day more. Q4 is that equal in terms of working days compared to the previous year. Question number three, if raw material prices would stay at the level where they are now, and now, for example, the nickel spot price increases not yet in the prices, of course. But assuming our purchasing prices would stay stable also in the fourth quarter, then we would have, all in all, for the full year, lower raw material price than in 2018. But I want to repeat (inaudible)[is high] we do not know what happens in the fourth quarter.

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Operator [70]

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The next question is from Alessandro Foletti Octavian.

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Alessandro Foletti, Octavian AG, Research Division - Financial Analyst [71]

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I'd like to come back again on this margin guidance, excuse me for that. When I make the maths and I look at the Q1 margin of 31%, more than 31%, Q2, 30%, and then I roll forward towards your guidance, if I take the bottom range of your guidance we come out in Q4 towards 21% maybe, maybe even a tick below that. So my question is twofold. Is my math wrong, number one? Number two, why is that? I mean we all know that Q4 is weak. But normally, you end up, I don't know, at 23%, sometimes a tick below that, but often, 23.5%. 21% in Q4 seems really very low.

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [72]

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So first of all, important to note that we have a seasonality in the margin. As you know, Q4 margins are typically lower. The simple math, if you look at the margin improvement on EBITDA level in the second quarter, around 30 basis points, you should extrapolate that margin improvement to the second half of the year, and you make a simple math, you are within our margin guidance. And secondly, as I said before, we have also more headwind from raw materials in the fourth quarter this year, because raw material prices started to decrease last year in Q4.

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Alessandro Foletti, Octavian AG, Research Division - Financial Analyst [73]

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All right. Good. So there is basically really nothing else than raw material costs?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [74]

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I'm sorry, didn't understand the question.

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Alessandro Foletti, Octavian AG, Research Division - Financial Analyst [75]

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There is, in terms of uncertainty, there is really nothing else than raw material prices?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [76]

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And on top, there is an uncertainty around raw material prices in Q4.

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Operator [77]

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We have a follow-up question from Andre Kukhnin Credit Suisse.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [78]

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I just -- a slightly kind of technical

stuff, but I hope you bear with me here. I was just trying to run the maths of -- on the bridge components volume and product mix effects on the margin and trying to kind of, from that and your pricing comments, figure out what sort of drop-through rates you're seeing on your price and -- sorry on your volume and mix growth specifically, and it seems to suggest that it's kind of in -- around 60%, 70%, which is very high. Could you comment on that and where you see it? Or is it really that high because you're mixing up, as you mentioned a couple of times?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [79]

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Sorry, but I can't comment these details and then how detailed math within the volume for volume mix effect. I can't comment on that, sorry.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [80]

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But just conceptually, if we're thinking about kind of you generating CHF 10 million extra of revenue from purely volume and mix, what would you expect that to result in kind of EBITDA increase?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [81]

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I never made that example. I have to think through it, sorry.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [82]

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Okay. Fair enough. Sorry. And then secondly, just -- so you effectively confirmed that there was Keramag de-stock in Germany in Q2, right?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [83]

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Yes.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [84]

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And any kind of degree of magnitude? I mean we're talking about kind of tens of millions there or higher?

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Roland Iff, Geberit AG - CFO, Head of Group Division Finance & Member of the Group Executive Board [85]

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Actually, I didn't -- we don't even know, of course, we don't even know. That is more or less a figure customer by customer, but it has -- what we heard from our customers, it has an impact, but I can't even -- if I would -- I can't quantify. We do not have a figure.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [86]

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And they normally hold, what, around 30 days of inventory? Is that fair? Or is it much kind of faster-moving?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [87]

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That very, very much customer by customer, but I would say that's more at the lower end.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [88]

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That's at the lower end. Okay, great. And then finally, on -- sorry, another one on raw materials. I know it's kind of probably the seventh one now. But in terms of your outlook for Q3, when you talk about stable versus Q2. Can I interpret that as a kind of similar ratio of cost of materials to sales that we should expect for Q3, as you saw in Q2, which I think was 28.2%?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [89]

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No, if we talk about raw material prices, that as you know, we talk about the prices which we are paying that is not directly linked -- correlated to the raw material cost in percent of sales because you have other inventory effects in there. So that is not a 1:1 correlation.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [90]

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Okay. Okay. And is there any way you could give us an indication for that cost of materials to sales ratio evolution? I mean do you expect that to be up or down in Q3 versus Q2?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [91]

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No. No. We do note that the only area where we are guiding is on the raw material prices, but not on the cost of materials in terms of percentage of natural sales.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [92]

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Got it. And apart from nickel, was there anything else that's gone up because we're quite surprised to see it up. I mean, obviously looks like most of commodity plastics have all kind of gone down during the quarter.

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [93]

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That's correct. As I said in the introduction, we expect it to be a mixed picture, nickel is certainly one of the examples on the upside side, but also on a technical plastic side, we see slightly increasing environment, but you're right, for example, commodity plastics, we expect slightly lower prices in Q3.

But all in all, a stable picture.

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Operator [94]

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And the Next question is from Martin Husler, Zurcher Kantonalbank.

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Martin Hüsler, Zürcher Kantonalbank, Research Division - Research Analyst [95]

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I have 2 follow-ups. First of all, we heard from a different building supplier that there was a very weak June due to working day effect, but then a very strong July, so a very strong start of the H2. Can you confirm this for Geberit as well?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [96]

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I can confirm in June, it was a weak June, that was very much driven by substantial less working day, that is correct.

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Martin Hüsler, Zürcher Kantonalbank, Research Division - Research Analyst [97]

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And a pickup in July?

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [98]

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Nothing special in July, we have nothing seen special in July, in (inaudible).

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Martin Hüsler, Zürcher Kantonalbank, Research Division - Research Analyst [99]

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Okay. And then the other question is about Italy. Did I read it correctly that you're a bit more positive on Italy in your outlook? Because before you said environment somehow cautious, now you see a stagnating environment.

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [100]

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No, I would not say, maybe the difference is we have a little bit more confirmation that we have more clarity that we expect a stagnating market this year. That was not that clear, maybe a quarter ago. That's the reason why we were more cautious. But from a positive way, no different view. We expect stagnating market in Italy.

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Operator [101]

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There are currently no further questions.

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Christian Buhl, Geberit AG - Chairman of the Group Executive Board & CEO [102]

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If there no more further questions, thank you for your participation. We wish you all a great day, and thank you. Goodbye.

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Operator [103]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.