Geberit AG (GEBN) Earnings Call Transcript

Good morning. I am the acting operator for this conference. Welcome to the Geberit conference call. [Operator Instructions] The conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator 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, sir.

Thank you for the introduction. Good morning, ladies and gentlemen, and welcome to this conference call. The objective of this communication is to inform you directly and promptly about the current situation and the impact of the COVID-19 crisis on our business. We will cover the following 3 topics in this call: first, a state update for Q2, followed by a review of the first half-year state figures; second, a stated update on the impact of the COVID-19 crisis on Geberit; and thirdly, our priorities going forward. Let me start with our net base figures for Q2. The second quarter was substantially impacted by the COVID-19 crisis and the negative currency development. In Swiss francs, net sales declined by 16% to CHF 671 million. Thereof, the negative currency development led to a sales decline of minus 5%. In local currency, net sales declined by minus 11%. The severity of the COVID-19 impact on demand varies substantially by geography, depending on the degree of the local knockdown. In March, where construction sites were temporarily closed, sales declined substantially, or in some cases, even collapsed in the second quarter. These countries include Italy, France, Spain, the U.K., India and South Africa. The remaining countries were also impacted by lower construction activities imposed by the COVID-19 restrictions, which led to a sales decline in Q2, however, much less pronounced. As a result, net sales in local currencies declined in all 4 regions in Q2: in Europe by minus 10%; in Americas by minus 11%; in Far Eastern cities by minus 16%; and in Middle East Africa by minus 37%. Let me now continue with a review of our net sales figures for the first half of the year. In Swiss francs, net sales decreased by minus 9.8% due to the substantial foreign currencies and the COVID-19 crisis impacting the business since mid of March. The negative currency development, mainly driven by substantially weak euro, led to a net sales decrease of minus 5.3%. In local currencies, net sales declined by minus 4.5%. In Europe, net sales decreased in local currency by minus 3.3% in the first half of the year. In countries without the severe COVID-19 lockdown of construction sites, we recorded a sales growth of at least based on previous year level in H1, mainly due to a strong first quarter. In Germany, net sales grew by 2.9%; in the Nordic region by 2.2%; in Eastern Europe by 1.4%; and in Switzerland, Austria and Benelux, net sales reached previous year level. In the remaining European countries with a severe COVID-19 lockdown of construction activities, net sales declined substantially in the first half of the year. In the U.K. by minus 34%; in Italy by minus 25%; on the Iberian Peninsula by minus 21%; and in France, by minus 19%. Turning now to the markets outside Europe. In North America, net sales decreased by minus 5% in the first half of the year. In Far East Pacific, net sales decreased by minus 18%, driven by the lockdown in China in the first quarter and the sales collapse in India in the second quarter. In the Middle East Africa region, sales decreased by minus 26%, driven by the sales collapse in South Africa and substantial decline in Israel and the Gulf. Let me now comment on the sales development per product area, again in local currencies. All 3 product areas were impacted by the COVID-19 crisis. Installation & Flushing Systems decreased by minus 4.8%; Bathroom Systems by minus 4.6%; and Piping Systems by minus 3.8% in the first half of the year. Let me now comment on the current status of our business in the context of the COVID-19 crisis. I'll start with the demand side. After a strong decline in demand starting mid of March due to the impact of the COVID-19 restrictions on construction activities, the situation started to continuously improve since mid of May, in line with the release of the lockdown in the various countries. Business construction sites are now largely open again in all countries, and overall, demand on group level had almost reached previous year's level. However, there are 2 important -- 3 important remarks to be made to the current demand announced situation. First, demand is still very volatile; second, we have indication that demand in June was positively impacted by inventory orders of wholesalers; and thirdly, selected individual countries still suffer from COVID-19 post restrictions, and demand is still substantially below previous year, namely in the U.K., in Spain, in the Gulf, in India and South Africa. Especially weaker economies show a substantially slower recovery than the normal limit. Let me now comment on our supply chain. Overall, the supply chain was impacted with only a few temporary production closures forced by local authorities. Since mid of May, all plants and logistics sectors are up and running again. The availability of our products was secured during the entire lockdown period except for temporary production interruptions of our shower toilet Mera. The order back off from this production interruption has been almost eliminated in Q2. Let me now comment on our priorities going forward. Independent of the risk of the second wave, we stick to the priorities defined in March. First, no change of our strategic agenda or operational priorities. Second, we continue to think long-term and invest also during the crisis into our strategic and operational initiatives. Third, we do not restructure our goals. On contrary, as a strong and financially very healthy player, we continue this crisis as an opportunity to emerge stronger. And fourth, we adapt our operational activities to the current market realities. For example, by keeping a high degree of flexibility in our clients and logistic centers, to cope with the high fluctuations and volatility of demand, or, for example, by further leveraging the digitalization step made during the lockdown: internally, with our digitalized way of working; but also externally, in the interaction and support of our customers with digital tools. We did refrain, in the current situation, from providing an outlook for the building construction markets due to the continued uncertainties and risks around the COVID-19. The biggest risk, of course, will be the second wave of lockdown, negatively impacting activities on building construction sites, renovation works or showrooms as seen in the second quarter. Let me close my introduction with a short summary. Net sales declined in the second quarter in almost all countries, driven by the COVID-19 lockdown. Since the mid of May, the situation gradually improved, and demand reached almost previous year level. However, the situation around the COVID-19 pandemic remains to be highly fragile, which makes the short or midterm outlook impossible or not meaningful. Thank you for your attention. We are now ready to answer your questions.

[Operator Instructions] The first question received is from Fabian Haecki of UBS Asset Management.

So you said, since mid-May, the situation improved and demand reached almost precrisis level. And I remember, in Q1 call, you were saying in April, you had a low double digit decline, roughly between 10% and 50%. So this means you had a short and hard slump in April, followed by a significant recovery in May. And then can you also give some colors on the inventory levels? You said at end of March, you had a relatively high inventory levels that should be reduced in April, and now you're saying, but in June, it was increased again, probably after further expectation of normalization. Can you explain how over Q2, over the months, revenues -- how this developed? And also some comments on the inventories?

So I'll try to guide you again on the time sequence, starting on mid of March until end of June. Mid of March, the crisis started with a substantial collapse or decline of demand. And for end of March, inventory levels of wholesalers were on a high level. Then in April, demand and sales declined by a lower double-digit percentage between 10% and 50%, 5-0 percent, for the lower double digit, most probably also driven by a reduction of inventory levels of wholesales. As of mid-May, we have seen a constant or continuous improvement of demand and also sales on in the end of June. And as I said before, we are now almost on previous year's level. And we have also indications that this, in June, we have seen some inventory orders and inventory are all at a high level due to the uncertainties at the moment with the wholesalers.

Okay. And then maybe also comment on the lockdown countries. I was a bit more pessimistic on countries like Italy and Spain. So in Q2, it seems you still are able to sell 50% of your previous year's level. So how did you -- even been able to sell into Italy during Q2? Can you explain a bit here the situation, how it was in Italy?

So all in all, these shutdown countries: Italy, France, U.K., Spain, but also India and South Africa, don't forget, all these shutdown counties were down by about 40% in the second quarter. It hasn't been completely closed. Of course, there were still going on some renovation, for example. And also, these countries as one region, and also these countries started to recover, to open again, beginning May -- mid-May. So it's also -- May and June are much better than April for these shutdown countries.

Okay. Okay. And I also saw, the last question at your Bathroom Systems. You know you're one to face with the closure of the showrooms, that this will be particularly impacted, and it actually performed the best from all your product categories. Is there -- have you also seen a certain shift to online channels? Or what it shot -- all driven by the reopenings?

No, that's just too early. The closure of the showrooms in Europe are around 2 months between mid-March until mid-May, had not yet an impact on our sales figures for end of June. It's just too short because you have a certain delay. Just imagine, you are choosing your bathroom in a showroom, there's a certain delay as it comes to sales with installers, wholesale and finally at delivery. It's just a question of time.

And the next question received is from Martin Flueckiger of Kepler Cheuvreux.

Just firstly, I was wondering whether you could provide a little bit more granularity with respect to your key market, Germany, what you saw there in Q1 and Q2. If I remember correctly, you didn't provide a Q2 -- Q1 sales numbers at the time. So I was just wondering to get a little bit more granularity on the dynamics in that market for you. That's my first question.

In Germany, we have had a very strong first quarter. And in the second quarter, we have seen an impact from the COVID-19 restrictions, but much less severe compared to the other companies, of course. But also in the second quarter, sales in Germany were slightly down.

Okay. And then just on your -- just on the -- sticking with Germany, just on the order backlog, the installs, the last number I saw was 9-point-something week, if I remember correctly. Has there been an update? And if yes, could you quote that update? And did you actually see -- or do you expect a favorable impact from the lower order backlogs as installers have now more free time to deal with your products?

The order backlog of installers in spring came down substantially to actually 9.6 weeks. That's around 25% less than in spring 2019. One of the main reasons for this decline was cancellations of projects, smaller or bigger projects. And that gives also an indication that, for the second half of the year, especially the fourth quarter, we have somewhat more [indiscernible] where we have seen that. Projects, which were planned, are delayed, postponed or maybe also canceled. And you see that in the figure of the order backlog of installs in Germany.

Okay. And then my final question will be on your performance in the shower toilets business then. If I remember correctly in Q1, your shower toilet model, Tuma, was impacted, I think, with the situation there with MERA and overall, how your supplies -- how your shower toilets business performed in Q2 versus Q1.

It was only 1 model which was affected from a temporary production interruption, that was MERA, Tuma was not affected. It was only the MERA in the first quarter, and we have been able to almost eliminate the backlog from this production interruption in the second quarter. So we had a relative weaker Q1 for shower toilet, but a very strong Q2, because we were catching up from the production interruption in Q1.

Okay. And I guess that double-digit growth rate you targeted that didn't materialize because of this external circumstances. But could you provide us with an indication of how well you did in shower toilets?

We did very well in the first half of the year with shower toilets, and we have been growing double-digit in the first half of the year.

And the next question received is from [ Charlie Fehrenbach ] of AWP.

I'm not sure if I got your comments on how you adapted your production. Did you reduce the capacity of workforce because of the lower sales? And my second question is, as you said, the trend between April and June was -- beginning with May, was trend up again. Is the assumption correct and then that the Q3 should be -- the sales development should be better than Q2?

To the first question about our production plant, we did not restructure our production plants. But of course, what we did during this crisis and the lockdown, we tried to be as flexible as possible in the plants, which means with temporary workers or also by increased flexibility of permanent staff, for example, holiday planning, but also flexibilization of work time. So we're trying to cope as good as possible with the lower demand in the plants in the second quarter without any fundamental restructuring. Regarding sales: Q3, as I said before, it's very challenging at the moment to give any outlook, also short-term, because demand is still very volatile. So we refrain from our outlook for Q3. But what we have seen at the moment is, if you look at the project pipeline that we see that running projects are still running, and they are maybe a little bit delayed, but they are going to be completed. We expect also this in the third quarter. As you see in the funnel also that new projects are postponed or sometimes also cancelled, and that might have an impact more midterm or maybe versus the end of the year.

[Operator Instructions] And the next question we received is from Martin Hüsler, Zürcher Kantonalbank.

I have 2 questions. First of all, about the U.K., which seems to be strongly peaked by lockdown in terms of sales decrease. Was it only lockdown? Or do you think that's also an underlying demand that was weaker or should we -- not possible actually to tell the difference between the 2? I also saw that last year, in the first half, actually, U.K. was pretty strong. That's the first question. And the second one is more a channel one market observations. If you detect any change in competitor behaviors? Do you see that you get stronger because you have a strong balance sheet? What do you see in terms of payment terms? Do you see the customers pay later? Do you have any problems with cash-ins? Just maybe a very high-level observation from you.

So the first question in the U.K., can you just talk out or compliment demand, very difficult to say, but predominantly, obviously, it must be the lockdown, with people on construction sites are not allowed -- have not been allowed to work. So that is the predominant driver for, I would say, the decrease in the first half of the year. Of course, going forward now, it will be a very important question, was it only in the U.K.? How will demand develop? How will the economy develop? How will consumer confidence developed? But that is too early, at least for us, to have a view on that. Your second very, very broad question about competitive landscape and payment terms of customers. I'll give you a high level answer. Of course, we try to emerge stronger from this crisis, which means we want to be stronger than competitors. And we do that in various dimensions. We do that short term, for example, that we use if possible, some availability issues of competitors, and also mid- and long-term, but not restructuring, by continuing our investments into our R&D pipeline, by continuing to invest in our plants. The second part of your broad question was around customers, have we seen any impact in terms of customer payments. We have not seen any impact so far, so no bankruptcies, but also no losses from bad debt with customers, a little bit of pretty minor prolongations of payment terms, not material on the group level.

And the next question we received is from Christian Arnold of MainFirst.

Like Fabian, I was also surprised this morning by the outperformance of the Bathroom Systems in the second quarter, thinking of the closed showrooms. And I think we got the explanation for that on the one side, the catch-up in Q2 on the MERA and, on the other side, on the buildup of the inventory levels at the whole [ 7 years ]. Nevertheless, Mr. Buhl, you also made a comment that this negative impact of the closed showrooms will be felt with a delay of 2 months, if I understood that correctly. So that means that most likely in the third quarter, we will see an underperformance of this product segment. Could you confirm that view?

I confirm your fundamental thinking. I would not confirm the exact figure of 2 months. It's depending, of course, on the project length, but typically, maybe 3 to 6 months until we see an impact from showroom closures on our sales.

3 to 6 months?

Yes. Not -- those are not exact timings, you know, of delay.

Sure. Then the second question on Far East Pacific. Here, you were mentioning the collapsing demand in India segment that would serve somewhat company facing the positive impact in China, I believe, in the second quarter. Could you give us your view on India for the future? I mean, does it stay like it is now? Do you expect also a recovery to normal levels?

Let me first comment a bit on the dynamics of India in the second quarter. In April, our sales are basically down to 0 in India, because everything was closed. And since that, it's gradually improving. But still, as of now, the recovery -- the demand is substantially below previous year. We believe that, in general, it's weaker economy, like India, but also Southern Africa, will take more time to recover to a normal level, thanks to previous year's level than other economies like, for example, France or Italy. So in general, we are more pessimistic also, especially for India, but also for South Africa.

Okay. Then third question on pricing. Could you actually increase the prices you -- the mustered -- you planned like this 1 percentage point, I think you have guided us in the last call?

Yes, we did implement the price increases as planned around 1% as of April.

As in April? Okay. And the last question, on margins. I know you don't want to talk about margin at this point in time. Nevertheless, we had a positive impact of some 100 basis points on EBITDA margin, I think, in the Q1. Can you confirm that you won't have this kind of extraordinary impact again in Q2?

Yes. That -- and truly, it was a one-time effect in the first quarter. We do not expect that in Q2. But there are mainly -- there are 3 main levers for our March in the second quarter. First of all, of course, lower raw material prices. We have seen lower raw material prices in April and May. Year-to-date, raw material prices are down minus 3%, that's for May 2020. That's lever number one. Secondly, of course, the operating leverage will impact our margin in the second quarter, because volume is down around 10%. And that's an indication in normal times for the operating leverage, we have about 50% cost, 50% variable cost. So that's 50% pent up. And thirdly is the possibility to mitigate this margin impact from lower demand, first of all, by the flexibility in operations, I mentioned before, flexibility of the plants, factory workers, and also permanent staff. And secondly, cost containment measures we took mainly in the SG&A area, hiring freeze, but also we have possible and meaningful lower marketing costs, parity cost, of course, and that support at the margin. So these are the 3 main levers, lower raw material prices in the second quarter, negative effect from operating leverage, but mitigating measures from flexibility in the operations and cost containment measures in SG&A.

And the next question received is from Remo Rosenau of Helvetische Bank.

You mentioned 2 times the postponements and/or cancellations of new projects in Germany. Could you give any more details about the impact of the subsectors? I mean is that mainly commercial construction, where you are not that much involved? Or is it also concerning the housing sector, that March?

First, a remark, I was not only referring to Germany. I think the delay or postponement of the projects will happen across geographies, not just in Germany. Secondly, yes, there is a different picture if you go one level more detail, mainly nonresidential projects are affected, typically motel projects, but also retail projects. The residential sector seems to be less affected at the moment when it comes to project delays or postponement.

Okay. And it's still true, of course, that your exposure is much larger in the residential sector than in the other ones overall, right?

Larger. More than 50%, that's correct, yes.

And the next question received is from Iris Zheng of Credit Suisse.

I'm asking on behalf of Andre Kukhnin. So I've got 3. Just firstly, can you please provide a [ dictation ] of how much the order pipeline was down at the end of Q2 year-on-year versus the start of the year?

I'm not 100% understood your question acoustically, but I think you asked about the order pipeline for the end of June?

Yes. So basically -- yes, yes, so how much the order pipeline looks like now at the end of June versus the start of the year?

As I said, in my introduction, currently, the demand is almost of previous year level for end of June.

Yes. But on the order pipeline or -- okay, or maybe the -- for Q2 overall, if it goes with any indication?