Geberit AG (OTCPK:GBERY) Third Quarter 2022 Results Conference Call November 3, 2022 4:00 AMM. , Eastern Time
Participating companies
Christian Bühl – Executive Director
Tobias Knechtle – Chief Financial Group, Chief Financial Officer
Conference participants
Daniela Costa – Goldman Sachs
André Koukhnine – Credit Suisse
Matthias Pfeifenberger – Deutsche Bank
Arnaud Lehmann – Bank of America
Martin Husler – ZKB
Cedar Ekblom – Morgan Stanley
Martin Flueckiger – Kepler Cheuvreux
Yassine Touahri – Finding investment on the ground
Patrick Rafaisz – UBS
Basic Emrah – Baader Helvéa
Marta Bruska – Berenberg
Christian Arnold – Stifel
Alessandro Foletti – Octave
Remo Rosenau – Swiss Bank
Stefanie Scholtysik – Mirabaud Values
Manish Beria – General Society
Laurent Runacher – Exane
Operator
Ladies and gentlemen, welcome to the convocation of the Geberit convention in the convocation of the convention of effects of the third quarter of 2022. Soy Sasha, the operator of Chorus Call. La convention will not have to be recorded for publication or transmission. Right now, I have the thrill of handing over to Christian Buhl, CEO. Continue.
Christian Buhl
Thank you for the presentation, good morning, girls and gentlemen, and welcome to the convening of the 9-month Geberit convention. We will start with the key figures for the third quarter, then discuss the evolution of 9 months and end with the outlook for the rest of the year. Let me start with our key messages for the third quarter. The third quarter was characterized by sharp increases in promotional rates to mitigate unprecedented rate inflation; on the other hand, a sharp drop in volumes in Europe due to an expected but unforeseen sharp reduction in stocks among wholesalers; thirdly, strong expansion of volumes outside Europe; fourth, an unforeseen explosion of energy charges; and fifth, a strong negative effect of the exchange rate that substantially impacts all lines of the P
Let me now turn to a more detailed look at sales developments in the third quarter. Net sales were minimized by 7% to CHF 791 million. Unfavourable advances in the exchange rate resulted in a truly large negative exchange rate effect of CHF 78 million or minus 9%. , the most powerful negative currency effect since 2015. As a result, in local currency, net sales increased by 2%, driven by value increases of around 10% and a volume reduction of minus 8%. The drop in volumes occurred in Europe. due, firstly, to an expected reduction in stocks, however, more powerful than expected among wholesalers after the usual sharp rise in values from July; second, a base effect of the COVID-19-induced trend towards housing improvement over the past year; and thirdly, a switch from toilet to heating in several European countries, triggered by the energy crisis, which led homeowners to upgrade their fossil fuel heating systems with alternatives, such as heat pumps.
Several positive volume drivers in Europe have been the arrival of several new products, for example the new piping system offering, FlowFit, which is also developing faster than expected this year. Outside Europe, we recorded strong volume expansion in many countries. Net sales in the Middle East/Africa region increased extremely in the third quarter with more than 49% in local currencies, driven by strong double-digit expansion in the Gulf region, Israel and North Africa. Net sales in Asia Pacific grew 10%, with strong double-digit expansion in all major regions except China, where sales were below last year’s point due to closures and weakening in the structure sector. In the Americas, net sales increased by 7%.
The 3 product lines showed other sales dynamics in the 3rd quarter. The largest expansion recorded in Piping Systems with [inaudible] of 10%, due to strong allocation activity, new Piping Systems, FlowFit and a strong increase in value. Bathroom Systems net sales greater than 2%, negatively impacted through a base effect similar to the COVID-19-induced housing improvement trend last year. A minimum of minus 5% recorded in the installation and unloading systems, since this product sector was the maximum affected by the effects of stock reduction among wholesalers.
Let’s now turn to the third quarter operating and monetary effects. EBITDA in Swiss francs reached CHF 206 million, negatively impacted by the significant unfavorable exchange rate effect discussed above. In local currency, the EBITDA decreased to –, and the EBITDA margin 26. 1%. The drop in the margin of 520 foundation issues is explained by 3 main explanatory reasons: first, the operating leverage derived from the unforeseen reduction in inventories driven by the decrease in volumes, which reduced the EBITDA margin by approximately 2 percent; second, the unexpected explosion in energy stocks, which rose more than 69% in the third quarter compared to the second quarter. This led to an average energy value point in the third quarter that was 184% higher than the third quarter of last year and hurt the third quarter EBITDA margin through 260 core issues. Third explanation as to why, the greige fabrics price point is still up 16% in the third quarter of last year despite a slight sequential decline from one quarter to the next. And the fourth explanation why for the declining margins a further acceleration in salary inflation to 3. 1% due to the normalization of charge levels after COVID-19 drove declining levels last year and planned investments in digitization.
To mitigate input rate inflation, we increased promotion rates beginning in the third quarter for the fourth time this year. With the effect of a 10% increase in general promotional rates in the third quarter, we almost completely offset the constants on a regular basis. major commodity charges and the unexpected increase in energy charges in the third quarter. After discussing the third quarter EBITDA margin, let me now comment on the other results consistent with the third quarter results. EBIT amounted to CHF 170 million, with an EBIT margin of 21. 5%. Net profit decreased in line with EBIT to CHF 139 million, resulting in a net profit margin of 17. 6%. Consistent percentage gains reached CHF 4. 05 and exceeded net profit thanks to the accelerated percentage-consistent buyback program. In total, we repurchased 331,000 consistent with percentages for a total amount of CHF 154 million in the third quarter. This corresponds to a buyback of approximately 1% of all notable cons with percentages in just 1 quarter.
Now let me continue our nine-month progression. Net sales in Swiss francs, up 1% at CHF 2. 72 billion, have an effect through a significant negative foreign exchange effect. Negative foreign exchange effect amounted to CHF 184 million or less 7% of net sales. Thus, in local currencies, net sales increased by 8%, thanks to a positive sales value effect of 8% and a solid evolution in volumes. Compared to 2019, turnover increased by 26%. This year’s volumes were affected by an extremely strong basis for comparison with last year’s record volumes. Compared to 2019, again, volumes continue to increase by 14%. The main volume drivers this year were, first of all, several successful new product introductions, for example the already discussed piping systems, FlowFit or our new –. Second, a positive progression in several European countries, for example in Switzerland, Italy or Eastern Europe. Third, strong functionality in many emerging markets outside of Europe. And fourthly, the aforementioned transition from sanitary to heating in several European countries.
Also based on strong increases in value, all European markets recorded a positive rate of expansion of sales in local currency in the first nine months. Double-digit expansion rates were achieved in Italy with more than 17%, in the Iberian Peninsula with more than 15%, in Eastern Europe with more than 14% despite — activity in Ukraine and the suspension of activity in Russia in March of this year, and the United Kingdom/Ireland with more than thirteen%. Single-digit expansion achieved in Switzerland with more than 7% and in Germany, France and the Nordic region with more than 6%. And Austria and Benelux with more than 4%.
Let me now turn to the regions outside Europe during the first nine months of the year. Net sales in the Middle East and Africa region increased by 29%, with expansion in all major countries and regions. Net sales in the Far East/ Pacific construction increased by 7%, negatively affected by the blockades in China. However, many other countries recorded strong double-digit expansion rates, for example, India. In the Americas, net sales increased by 6%. Let me now comment on the evolution of sales through product dominance in the first nine months, again, in local currency. The most powerful expansion recorded at Piping Systems with net sales expansion of over 14%, driven by strong allocation activity, strong value building compared to the other 2 product lines and the very smart progression of the new FlowFit piping systems.
Revenue from installation and discharge systems increased by up to 7% and bathroom system profits increased by up to 4%. Housing improvement trend. Let me now comment on the operational and monetary effects of the first nine months of the year. EBITDA in Swiss francs decreased to CHF 767 million. Of this amount, CHF 60 million was lost due to the unfavourable exchange rate effect. Excluding this unfavorable effect, EBITDA was minimized by minus 8%. The EBITDA margin reached 28. 1%, a minimum of 520 foundation problems compared to last year. It is basically due to 2 factors: first, a record and traditionally higher margin point of 33. 3% in the period last year; and second, the unprecedented inflation of input costs.
Let me elaborate on those unprecedented inflationary effects in the first nine months of the year. Raw curtain values increased by up to 21% and energy values by up to 131%. In absolute terms, this means that we have to bear additional charges of around CHF 210 million just due to inflation in electricity values and unfired curtains. This CHF 210 million represents a margin loss in EBITDA of around 8 percentage points. Increases in the healthcare industry. However, and as discussed above, we almost completely offset commodity and energy value inflation in the third quarter and expect to overoffset those 2 points of inflation in the fourth quarter, assuming there is no further turbulence in the commodity and energy markets. Of course. . .
In other words, we consider that the magnitude of the margin decline in the first nine months is not as sustainable due to the delayed effects of the aforementioned increases in the value of sales. However, other drivers of the less pronounced negative margin in the first nine months were wage inflation. 2. 8%, higher than in the recent past, the normalization of travel marketing and pricing following COVID-19 and planned investments in digitalization as presented at our full-year analyst convention this year. However, it is vital to note that the EBITDA margin is 28%, still at a very high level, exceeding the industry average.
After this discussion on the EBITDA margin, let me now comment on the other consistent accounting and monetary effects during the first nine months of the year. EBIT decreased in local currency by minus nine%. The EBIT margin reached 24%. Net profit decreased in local currencies, in line with EBIT to -10%. Gains consistent with the constant percentage decreased disproportionately in local currencies to -7% and reached CHF 15. 62 due to the acceleration of the repurchase program consistent with the percentage. In total, we bought back 837,000 according to the percentages for a total amount of CHF 448 million. This means that we distribute, with the payment of dividends in the spring of this year, CHF 881 million to shareholders according to the first nine months of the year. This corresponds to approximately 6% of Geberit’s current market capitalization.
Free money was minimized in the first nine months to 33% less to CHF 412 million, basically due to the significant negative effect of the currency that led to a reduction in operating money and negative effects on net current capital. Capital expenditures were at last year’s point. Let me now comment on the existing business environment. I will start with the fuel scenario and the threat of fuel shortages in Geberit, which basically affects our 2 ceramic factories in Germany. The relatively warm autumn so far. However, we have taken several emergency measures to mitigate the potential fuel shortage in Germany. For example, the construction of our stock or the improvement of the largest of the 2 LPG fuel plants.
Let me now comment on our outlook for the year as a whole. Persistent geopolitical risks, ongoing uncertainties around COVID-19 and increased macroeconomic risk, in particular due to the energy crisis in Europe, make the outlook, also in the short term, incredibly surprising. challenging. However, in the short term, we expect additional stock reduction in our distribution channel due to improved supply chains. Raw curtain acquisition costs for Geberit in the fourth quarter are expected to be lower than in the third quarter. However, acquisition costs remain at a record of about 10% to 12% above last year’s fourth quarter level.
As far as energy values are concerned, lately we expect degrees below the fourth quarter to the third quarter. But of course, energy price forecasts are very speculative in this environment, as we saw in the third quarter. Despite the heightened dangers and uncertainties until the end of the year, we will remain committed to our priorities for 2022 and the fulfilment of our long-term strategy. The first priority remains constant value control to cope with unprecedented input rate inflation. Of this year’s four value increases, we will increase sales values from the beginning. next year in some countries to mitigate wage inflation as well. The overall promotion value effect at the time of organization is expected to be around 1. 5% in the first quarter of 2023.
A moment of priority remains our newly brought product, in particular the further deployment of the new source piping systems, FlowFit and the execution of improvement projects as a component of our strategic program, for example in the domain of digitalization. And finally, based on our strong balance sheet and strong money generation, we are moving forward in this market environment with our accelerated percentage buyback program. In view of weak earnings expansion and declining operating margins in the third quarter, basically due to the unexpected magnitude of wholesale sell-off and very strong growth in energy prices, we expect medium- to high-year single-digit expansion, an expansion of net income in weaker currencies and an EBITDA margin of around 27%. This is a cautious stance in a superior macroeconomic environment. uncertainty.
The two main reasons why we expect a full-year EBITDA margin under our diverse medium-term target of 28% to 30% are the sharp reduction in inventories and the unexpected accumulation of energy values in the current part of the year and the aforementioned channel. Maintain the value of construction in our industry. Let me conclude our advent with a brief summary. Geberit achieved smart effects in the first nine months with a strong expansion in net sales in local currencies. After volume expansion in the first part, we saw a very extensive decline in volumes in the third quarter due to a larger-than-expected inventory reduction. Record values of curtains and energy have led to unprecedented inflationary stress on margins. Despite the unexpected increase in energy values in the third quarter, we managed, with several revaluations, to almost completely offset commodity and energy price inflation in the third quarter, confirming our pricing power.
With an EBITDA margin of 28. 1% in the first nine months, we achieved a margin point that is still very forged and obviously leading the industry. To mitigate wage inflation, we will increase the costs of some successful stocks from the first quarter of next year. We accelerated our percentage buyback program based on our strong monetary position and strong business money generation, even in challenging times. In addition to our normal dividend payout this year, we distributed CHF 881 million, or approximately 6% of our existing market capitalization in the first nine months, demonstrating our confidence in our ability to generate new higher margins and strong cash flows.
Geopolitical dangers continue to mount and economic prospects have deteriorated. However, Geberit is well prepared to also master the demanding situations and uncertainties that arise from this environment, as has already been demonstrated several times in the past. Our confidence is based on core demand for medical devices, resilient strategy and business model, strong innovation and visitor relationship functions, pricing power, operational excellence, monetary strength with industry-leading profitability and, finally, our strong long-term track record of price creation.
Based on these fundamentals, we are confident that we will continue to achieve our medium-term objective of an average annual expansion of net sales in local currency of 4% to 6% and an average EBITDA margin point of between 28% and 30%. Before we begin the question and answer session, let me address two issues at the outset. First, we are aware that market expectations were higher in terms of earnings and net source of profit in the third quarter. The two main reasons for this hole are the sharp and expected reduction of stocks among wholesalers and the explosion of energy costs in the third quarter that surprised everyone. Secondly, keep in mind that the visibility of our company is very low, with an e-book of orders of less than 2 weeks. Due to major uncertainties and low visibility, we answer questions about the market outlook for 2023. Thank you for your attention. We are now in a position to answer your questions.
Q&A session
Operator
[Operator Instructions]
The first comes from Daniela Costa of Goldman Sachs.
Daniela Costa
Hello smart tomorrow. Thank you for answering my question. I have 3 quick things. First of all, with regard to your comment on wholesale inventories, I think at the beginning of the year you said that they were much higher compared to the afterlife. Can you give us an indication of how many weeks or months they have now?Where they have bottomed out in the afterlife just to get a sense of this stock reduction that has begun, how far can it still go?
And the question of the moment, just about the increase in value, I wanted to explain if I heard that it is going to make a 1. 5% increase in Q23 in January. But what is the general remnant of all the increases in value he made?, adding October 1 to next year? And then third, in the purchase, it seems that you recently invested in capacity, marketing, IT. So, given the existing context and the fact that you have already made those investments, can we expect a further acceleration in the speed of buybacks in the coming months?
Christian Buhl
Thank you for your inquiry. First of all, we do not have positive data on stock levels in wholesalers, but the reduction in stocks in the third quarter led noticeably to a very large drop in stock levels in wholesalers. But we don’t think we’ve returned to a general stock point in wholesalers. Secondly, you are right, we have higher values in some countries since January of this year. On average, the overall effect on the organisational point is 1. 5%. And we have, you’re right, a ripple effect from the other four increases in value, which we’ve done so far this year. And query No. 3 will be answered via Tobias.
Tobias Knechtle
We are still at an accelerated buyback rate. But at this stage, we refrain from quantifying an accumulation or a slight slowdown.
Operator
Next comes from André Kukhnin of Credit Suisse.
Andrey Kukhnin
Hello, thank you very much for answering my questions. In fact, I need to delve into the dynamics of value just to make sure we all have the numbers right. I can first verify the value of the 7. 5% that accumulated on July 1, which only partially materialized in the first quarter, right?I think we calculated the overall effect on all the accumulations of value that you made with that 7. 5%, which would have been 11. 8% for the third quarter, and it was 9. 6%. Therefore, I must check whether this calculation is correct. And then, secondly, the 2. 2 problems that didn’t take place in the third quarter, do they now reach the fourth quarter?
Christian Buhl
So, ask if it’s worth building ups in Q3. Firstly, a general remark. Pricing is not a precise science. So I’ll pay attention to numbers with too many digits, numbers with one digit. So it’s still there. But you’re right, technically the cumulative value in the third quarter is expected to have been just over the 10% we reached. in the decreasing value grades of the current quarter, as this value increased by 7. 5% in the third quarter. Therefore, we had even higher volumes delivered in decreasing value grades from the current quarter, which technically resulted in a decreasing value effect from the 3rd quarter, but this will disappear over time.
Andrey Kukhnin
It is ok. It’s great. It’s useful. So, starting on October 1, you implemented a 2% value increase, right?
Christian Buhl
It is ok. Again, the selective accumulation of value is higher, but the overall impact is around 2% at the organizational level.
Andrey Kukhnin
So, the one you discussed for the start of next year, is it January 1?Should we think about January 1, 2023 and a magnitude of 1. 5% at the organizational level?
Christian Buhl
It is ok. I’m going to go back and carry everything. And if you could, just for energy, do you buy energy on the spot?What average contract length do you have so that we can know where you stand in relation to detecting costs and how this might evolve in the future?
Christian Buhl
It is based on the corporate point and also on the point. On average, we still have 20% of our energy value covered through futures contracts and 80% is exposed to spot values also in the fourth quarter.
Operator
Next up is by Matthias Pfeifenberger of Deutsche Bank.
Matthias Pfeifenberger
Yes, hello. And thank you for answering my questions. Really, without prejudice to offending, what is taken away from this set of results?That was clearly below market expectations, but also, I think, below their expectations. Where is the balance between giving your consumers slack and then being surprised by sudden adjustments in input costs, i. e. you may have implemented the October 2% worth accumulating earlier, such as at the beginning of the month?Or can you know how the delay works? How hard is it to increase values so often?Can you elaborate a little more? I mean, he underestimated his long-term margin forecast, which is obviously not what he had in mind, I guess, at the beginning of the year. And then secondly, the power is only 1% if you think about the cost. So it wouldn’t be very expensive to cover power, for example, would you consider that when values normalized?
Christian Buhl
It was a basket of inquiries. I think number one, I’ll step back to respond. First of all, the general lag that we have in our industrial control in transferring valuable construction is because we sell to dealers, they sell to plumbers, and plumbers sell to you as the end consumer. Therefore, we will have to give our consumers time, at the point of distribution, at the point of the pumping facilities, to appreciate in value. This is why we couldn’t, for example, launch the accumulated value from the previous fourth quarter due to energy stocks, which exploded in the third quarter. The timing part, I think, of your first query was what we think of the third quarter results. As I said in our introduction, we were expecting destocking, that it was clear that we will see destocking due to this historic increase in value starting in July. However, we underestimate the extent of this stock reduction. But if I may comment, this destocking is not just negative. It is also quite positive because it means that we are moving more towards normalization. We have more transparency again in the real market demand and we also have less uncertainties and risks in terms of volumes. So this destocking is not just negative. But we were a little surprised by what you just said about the magnitude and speed of the third quarter.
The consultation so far involved power and the canopy of power. We don’t cover power massively. We had top canopy last year. Some of them were no longer valid this year. We still have 20%. What will happen once we return to a general environment for energy prices, if we replace our strategy with non-material hedging prices, we will see: we have not yet made a resolution. Obviously, it also depends on the level. I give you a transparent answer right now.
Operator
Next is from Arnaud Lehmann of Bank of America.
Arnaud Lehman
Thank you so much. Good morning, sir. I have two questions, please. Firstly, could you give us an indication of the evolution of volumes in October?Are they consistent with the kind of single-digit decline I suspect you’re experiencing in the last component of the third quarter?So, minus 5%, minus 6%, is this a moderate assumption for the fourth quarter?And secondly, more, shall we say, strategic issues. I think he discussed a few times the shift in demand for health responses to heating responses due to the energy crisis and that heat pumps were perhaps more popular in the short term than sanitary products. Is that a domain that you are looking for?Because it can be more than a short-term trend. It can be anything that lasts a few years. Would you like to get warm answers?
Christian Buhl
The first query is the evolution of sales in October. October sales were lower than a year earlier and in line with our full-year earnings guidance. Second consultation, the transition from sanitary to heating, no, does not generate strategic reflections or perhaps a delay in Geberit to embark on this sector. It is too far from our core business. This does not generate strategic considerations to reorient, for example, our business more towards heating solutions. So, obviously, it’s no.
Operator
The next one comes from Martin Hüsler from ZKB.
Martin Husler
Hi, thank you for answering my question. First, how is the effect of wholesale stock reduction measured?And how do you measure the underlying demand, say, from installers?What do you see there, the stock point of the installers, also went down?That’s the first question.
Christian Buhl
So, to answer: the short term is clear, we do not measure. We cannot measure the degrees of stocks of wholesalers and, obviously, not at the point of plumbers. Therefore, the only one we have is qualitative feedback of more or less individual and selective discussions with customers. We don’t have a systematic approach or KPIs or quantitative measurement to measure the stock point of wholesalers. That is not possible.
Martin Husler
It is ok. And when you look at installers, what are their inventory levels?
Christian Buhl
Worse, of course, because they are farther away from us. We do not sell to installers. But in the canal, plumbers do not have a peak of stock. The stock in our distribution channel, in our price chain, is controlled through the distributor, through the wholesaler which is the essential added price to manage the grades of stock and the plumber regularly does not have a higher point of stock, especially it is not small.
Martin Husler
Yes. Sorry, I was given incorrect wording. So if you look at the German plumbers, what is the order you see there, the order situation?How many weeks?
Christian Buhl
This has replaced since our effects in the first part of the year, it is still the same number. We have new figures in 17. 9 weeks, which is a record level, which corresponds to the existing e-book of orders from plumbers in Germany.
Martin Husler
It is ok. And so my query at the moment would be, if I look at the sequential evolution of the costs of the body of workers, it has decreased a little more than I expected. Are you already implementing measures to decrease the body of workers’ costs?
Tobias Knechtle
No. No we have implemented any specific charge discounts on staff. So, it’s seasonal trends and the overall flexibility we have with staff.
Martin Husler
And normally, in the fourth quarter, the seasonal trend would mean that prices would rise a bit again. That’s right?
Tobias Knechtle
It’s flat, I would say. What is right is that we. it is increasing to the extent that we close the plants at Christmas and therefore the proportion is increasing. Yes, he is right. But let me be specific, it doesn’t replace from one year to the next, the same effect you would see each and every year.
Operator
The next one comes from Morgan Stanley’s Cedar Ekblom.
Cedar ekblom
Thank you so much. Hello, sir. Some questions and follow-ups. Could you give us some data on the pace of volumes in July, August, September, October?The explanation I ask is to understand, first of all, where we are in the liquidation process. And then also just in reference to a comment he made that he sees sales in October decline compared to last year. And I would expect the value contribution in October to be higher than in the third quarter. So I’m just trying to figure out what that means for the development of your volume. Does this mean that your volumes declined in October compared to the third quarter, given that you saw a positive expansion of foreign currency earnings or a steady expansion of foreign currency earnings in the third quarter?First question.
The current question is about your fabric load, how much energy and how many other raw fabrics so we can see the sequential and year-over-year accumulation in your total fabric load in the fourth quarter?The 3rd Questions considerations on the pipe sector, how much of this sector is exposed to the healthcare markets compared to the heating market?I’m just looking to find out if it’s possible you’re making a profit from some of the investments similar to heat pump adoption in Europe, given that it might require investments in underfloor heating and how much of your pipe business is exposed to it?
And then, just on the last point about values. If I look at your comment, you say that the increases in value have not fully materialized, and there are 2 tactics to interpret this, that you will protect the increases in value even with a delay or that your increases in value do not really stand. I would have a tendency to lean towards the option at the moment because its volumes are particularly negative. Could you tell me why I’m wrong and why you literally think all your values will be published, but only with a heist?
Christian Buhl
Multiple queries. I hope we cannot forget them all. We’ll start with the first one. The volume was. . . If I start with the first one, I think I’ll move on to the October volume. Then, we had an even positive evolution of volumes. Also in the second quarter, during the second quarter, a very intelligent volume also at the end of the second quarter, then the negative evolution of volumes of minus 8% in the third quarter. In October, sales were only slightly lower than last year, slightly lower than last year. A slightly more powerful effect on higher charges than in Q3 means that volume is very likely to be less negative than in Q3. The moment when the consultation on the power and burden of fabrics will take Tobias.
Tobias Knechtle
Energy is not in raw curtains. Therefore, the line of raw curtains is purely raw curtains.
Christian Buhl
The third consultation concerned the exposure of our piping business to heating solutions, e. g. heat pumps. Yes, there is a safe activity or a safe component of our pipe business, which is exposed to heating because it is one of the programs that you bring in this hot water, — in a construction and also with — in relation to the heat pump, there is a safe demand for pipes. But still, the largest and most maximum part of our pipe business is for sanitary ware and the smallest component for heating.
Cedar ekblom
Yes, then we interpret the fact that the value of T3 was a little lower than the value. . .
Christian Buhl
Yes, I do not forget the question. Yes. And you have 2 assumptions, the first one is just a delay; and two, we couldn’t get any stock builds off the ground, obviously we think it’s number 1. The decline in volumes in Q3 was due to destocking, not some kind of stock sensitivity. And the reason for this is that, as I explained earlier, the cumulative value as of July, 7. 5%, was traditionally a maximum cumulative value. We had a traditionally high order book at the end of June, even at lower value levels. Therefore, the volume, which we deliver in July or even August, due to the large order book on our part, with lower values, in the current quarter was a little higher than normal. And that’s why we haven’t seen a full effect so far in the third quarter, only about 10% and not maybe 11%, 11. 5%. So it’s a deadline. In fact, it is not a sentiment argument that volumes are declining because we are not able to trigger worthwhile rallies.
Cedar ekblom
It is ok. And then, sorry, I just didn’t perceive the only answer about the volumes. So, in the current part of the year, its volume. . . Sorry, in the third quarter, your volumes were down 8%. And to be clear, you say your volumes are down less in October–.
Christian Buhl
Price increases are more powerful in — or this value effect is strong in October. The decline in volumes is therefore more powerful than in the third quarter, and is likely to peak in October.
Operator
The next one comes from Martin Flueckiger of Kepler Cheuvreux.
Martin Flueckiger
Yes, good morning, gentlemen. Thank you for accepting my question. Just to explain this, I myself am a little speechless now. Volume trends when you – originally, said slightly below last year and in line with forecasts for the whole year. Was it an absolute or relative statement because you had a minus 8% drop in volume in the third quarter. So, are you saying it’s worse than the minus 8% in the third trimester?Or do you say it’s higher than minus 8% in the third quarter?
Christian Buhl
Yes. Let me repeat, Martin. Let me repeat. Net sales in October were lower than a year earlier. The value effect, at most, was stronger, more positive than in the third quarter. Therefore, volumes were lower than minus 8% in the third quarter. We don’t have the numbers yet, but that’s what we’re seeing. And this is online and you may have to repeat that it is in line with our full-year earnings forecast.
Martin Flueckiger
This is bien. me they gave it The volume is slightly worse than the minus 8% of the 3rd quarter of October.
Christian Buhl
And if I would possibly upload a comment. I think it’s a very dubious environment, and I think we saw it also in the third quarter, the unforeseen scale of stock reduction. I wouldn’t put too much emphasis on monthly figures.
Martin Flueckiger
Of course. It is ok. They gave it to me. Regarding the accumulation of value that you did for 1. 5% in the first quarter or on January 1, 2023, I think you also mentioned the ripple effects of the other four accumulations of value now. I realize we can do a lot of calculations ourselves, but it’s getting pretty complex these days, to be honest.
I wonder what kind of total value development we are contemplating for next year. Because I was already contemplating a 5 to 6% increase depending on value developments, the four value developments I had announced so far, I think. About 7% now, or what kind of greatness are we looking for?And I will take my last consultation after this one.
Christian Buhl
In all honesty, we also do our calculations. At the moment, I don’t have the number in my brain right now. Therefore, I cannot give you a transparent answer, therefore, I need to avoid giving you an answer. But it is technically calculated. You can calculate it, I don’t have it, be careful at this time. And remember, they still don’t know what’s going on, it’s evident that it’s worth moving last year. It is not yet clear what we will do with our increase in normal value, which we normally do from the time of the quarter onwards. We still don’t have what we will do. And it all depends, of course, on the progression of uncooked fabrics as well. So sorry, I can’t give you the — the right number right now.
Martin Flueckiger
It is ok. Not even for Q1?
Christian Buhl
Currently.
Martin Flueckiger
It is ok. And then my last query is about installers’ evaluation of customer preference for HVAC over medical devices. Now, based on what I’ve noticed from the German Healthcare Industry Association, the 17. 9 weeks you have, which you talked about earlier, is a big difference when you look at HVAC services compared to healthcare services. We’re just curious here, or at least the summer survey I’d noticed?I’m just curious, are we still looking for a top point of HVAC order eBook for installers here?And I wonder how, is this trend going to continue in the fourth quarter and potentially even into the early part of next year or even beyond?I’m just looking for some color in that, if I could, please.
Christian Buhl
First, for the fourth quarter, I agree. I think there is still a replacement or a call for heating solutions, especially in Germany. And, by the way, those are just a few corporations in Europe. It’s not everywhere. For example, in Switzerland, this is not a big topic because we already have a top, for example, of heat pump solution. Germany is one issue, Austria, but not in the whole of Europe.
And that may also be the case in the fourth trimester. I don’t know for next year, and again, don’t overestimate this replacement here because you still want a bath, you still want a bath. That’s not what disappears completely. There is some transience in this, but I would not overestimate it. And I don’t know what will happen next year.
Operator
The following comes from Yassine Touahri of On Field Investment Research.
Yassine Touahri
Yes. Hello. Some questions of mine. I think he’s done very well over the last few years in an environment where he experienced a supply chain disruption. And it probably gained a market share compared to its competition that wasn’t as organized as you were. Do you see a reversal of those percentage market gains in an environment where supply chain constraints are eased?That would be my first question. And the question of the moment, when we take a look at long-term and long-term expansion customers of your business, do you think there might be an opportunity for you to gain or invest in more electric power and heating products to capture long-term expansion?of this sub-segment, does Europe need to be carbon neutral?
Christian Buhl
The first question, we believe that we have gained a disproportionate percentage of the market place in the last 3 years, especially with the tailwind of COVID-19 and how we have dealt with the COVID-19 crisis. At the moment, we think we’re more back to the overall market place gain percentage. We don’t think we’re gaining a disproportionate percentage of market place right now. The question of the moment, as I perceive it, if we are thinking of strategic moves toward more powerful answers, the answer here is, as I said before, is no. We are not converting or modifying our strategic programme due to the existing context of energy crisis in Europe. We are talking about water management. This is our core business. There you also have a very vital size of sustainability. It is not that we are making a substantial contribution to the construction economy in Central Europe and open-air Europe. Therefore, we stick to our core competence, order management, and do not translate it to more energy-efficient responses due to the existing energy crisis.
Operator
The next one comes from Patrick Rafaisz of UBS.
Patrick Rafaisz
Yes, hello. And thank you for answering my 3 questions. Perhaps first in the stock reduction cycle. I am only curious about regional differences. Would you say that only with the evolution of net sales in local currency in the third quarter, this is a smart indicator of your degree of progress in stock reduction, that is, in Switzerland, nothing at the moment; Italy, nothing yet; Does the United Kingdom, still nothing, still underway in Germany and perhaps in France, in the Iberian Peninsula, make sense?That’s the first question.
Christian Buhl
There is a regional difference in terms of destocking. For example, in Switzerland, we saw a lot less destocking in the third quarter, just because we had a big drawdown, or the stock point at wholesalers wasn’t as high because we had a drawdown that was worth accumulating in Switzerland. This is also a good indication of how we found that the price increase basically triggered the destocking effect, and not the demand. Thus, Switzerland’s third-quarter destocking effect was weaker because inventory buildup was weaker due to declining value buildup. And the same is in Italy or with someone else, for another explanation of why. In Italy we also had a set third quarter, less destocking, but that’s for a structural reason. The design of the wholesale market in Italy is much more fragmented than in other countries. Therefore, there was less garage in Italy, that is, less destocking than in the third quarter. The UK was another case. The UK is just a base case, base effect explanation why. We had a very, or relatively weak, third quarter last year. So that was the main explanation for why the UK had double-digit growth.
Patrick Rafaisz
It is a useful color. Now, let’s get on topic, perhaps: what your updated forecasts mean for the fourth quarter. There is a very wide diversity in the possible outcomes of local currency expansion, and I agree with you, minus 8%, 9%, 10% is still in that diversity. But you seem to be much more confident about the margin, on the right, which is in line with the fourth quarter of last year. Does that make sense? Therefore, its confidence point is a much higher profitability than the result of the volume of the year given the uncertainty in the channel.
Christian Buhl
It’s based on how you outline the word around. Therefore, I would not entirely agree with you that the word is based on what is around. We just didn’t give you a rank, but about 27%.
Patrick Rafaisz
It is ok. Well, then, the last query about moneyArray. The third quarter is the first quarter of this year where loose money has declined somewhat in line with EBITDA, right?Prospective power situations, it turns out that the working capital structure has not continued on a large scale, right?And what is your vision for the quarter with surplus for the fourth quarter?Will we now see disproportionately greater functionality for loose money given that the canal structure has stopped and its protective stock is probably at a sufficient point, internally?
Christian Buhl
So, at this point, we. the biggest effect, I would say, has already passed. We continue to build up moderate protective inventory due to uncertainties in the supply chain and on the energy side. But in fact, at this stage, and do not forget that it is a bit difficult to predict especially with the other elements of net operating capital, but we do not expect primary delays, which would be general outdoor seasonal fluctuations.
Operator
The next one comes from Emrah Basic of Baader-Helvea.
Basic Emma
Hello smart tomorrow. I have 3 questions. Maybe I’ll go through one by one. First, what are the main drivers of expansion in your foreign regions? Or which product segments grew more productive in the region?
Christian Buhl
Basically, all of our product spaces have evolved in the same way. However, we have the largest product domain outside Europe’s doorstep in installation and washing systems for reasons. So that’s just the biggest thing. We have a disproportionate percentage of installation and washing systems in this region. Therefore, it was the largest contributor. But the other smaller portions of those spaces also did very well in the third quarter.
Basic Emma
Second, how much has FlowFit increased approximately? And approximately, what percentage of sales do you expect to get from FlowFit in about five years?
Christian Buhl
The first issue doesn’t make sense because we introduced FlowFit last year. So there is no basis. Therefore, it makes no sense. We don’t publish figures, but FlowFit has already made a really important contribution to Piping Systems’ sales expansion this year as an indication.
Basic Emma
It is ok. Super. And then my last, a little more granular. Comparing the operating money of the first nine months with the first nine months of last year, can you tell us a little more about the main driving force of the decrease of around CHF two hundred million during the nine months, given that net profit decreased by around CHF 110 million and net operating capital increased by around CHF 40 million?So what’s the rest?
Tobias Knechtle
Yes, of course. So, once again, you see that these two hundred million francs include, in large part, obviously, the decrease in operating profit, the decrease in EBITDA, but we also had a negative evolution of net operating capital. And that’s the – you want to apply to net current capital. Therefore, replacement in net current equity was driven through accounts receivable. And then the same comment that we had in the last quarter, it’s a declining price that we had at the end of year 21 compared to the end of year 20, and it’s by far the largest negative contributor to net current equity and a much smaller effect was obtained from accounts payable. It begins at the end of the year and not through a general accumulation of net current capital. So, if you take a look at the balance sheet figures, you won’t see big adjustments from year to year.
Basic Emma
Yes, exactly. That’s why there isn’t a big change. But when you look at nine months of 2021 and nine months of 2022, the operating money is still in, that’s why I wondered.
Tobias Knechtle
But you have to take the starting point at the end of December, and that explains that one of the main participants in this is accounts receivable.
Operator
The next one comes from Marta Bruska de Berenberg.
Marta Bruska
Hello. Hello. I have two questions, please. I will answer them one at a time. I was wondering, he discussed several times during the call that he has an EBITDA margin of around 28% to be at a very smart level, obviously at the forefront of the industry. Quarter onwards given that commodities have weakened and you have already argued that the fourth quarter deserves to be sequentially larger than the third, and especially in a weakening of the environment?Does this inspire your consumers to switch to the Geberit brand?And maybe it threatens to lose market share in volume?
Christian Buhl
The explanation why, in the first place, is not an accumulation of values between countries. This is a very selective value in several countries from the first quarter onwards. And the main reason why is extremely high wage inflation, which we may be expecting next year in some countries. So that’s the main driver. But he is right, in trend, we expect a slight reduction in commodity values. In the fourth quarter, energy values are also expected to fall, hopefully, in the fourth quarter. to selectively very high wage inflation, which we will be expecting next year.
Marta Bruska
Yes, I get it, however, wage inflation is providing the same point of tension in your margins as raw fabrics and energy prices combined, right?
Christian Buhl
Sorry I didn’t understand. Can you repeat that?
Marta Bruska
Then, I understood that it was motivated by the expected inflation of wages. However, given the charges of its body of workers, I would only believe that it offers the same point of tension in its margins as unfired fabrics and then the combined power charge so far in the 3rd quarter.
Tobias Knechtle
You are right. But it’s not that we’ve noticed a stabilization in raw tissues and energy. But year after year, they continue to rise slightly, so that does not call into question the increases we have had so far. But we see sectoral effects on wages, as Christian just said, and that’s why we made the decision to raise costs selectively.
Marta Bruska
It is ok. And then my query at the moment has to do with their purchasing power strategy. So it’s strange, to be honest, that the 2 ceramic factories in Germany ended up with more than 2% of their EBITDA margin. However, it’s a bit unexpected to realize that you’re not covering 80% of your energy costs because those plants are, we know they consume a lot of energy. So some other corporations have that energy intensity point and regularly have an agreement with local energy suppliers. So, I asked them what made them decide on this strategy. And when would we expect to see the rest of your LPG facility in Germany?When will it come online?
Christian Buhl
Maybe it’s a misunderstanding. The two factories in Germany that we were talking about, that we just talked about, are going down due to a shortage of sources. These two factories consume energy, but they make up only a small proportion of the total power we have. Half of our energy exposure or consumption is similar to electrical energy and the other component to fuel. And part of that component is the two factories in Germany. It is a smaller component, powered by fuel intake from the two ceramic factories in Germany. The hedging strategy has nothing to do with two factories in Germany in componential. The resolution of not covering energy costs or massively not covering energy costs, which was taken a few years ago, and we have benefited significantly over many, many years from this strategy because energy costs, of course, as you know, have been reduced. massively in the last 5, 10 years. And at the moment, of course, we still only have 20% coverage. Now they pay us, it’s true. And we will see what we do after this power crisis in terms of strategy. But overall, we’ve also benefited over the years from lower energy costs.
Marta Bruska
And when will LPG be online?
Christian Buhl
That will be next year.
Operator
The next one comes from Christian Arnold de Stifel.
Christian Arnold
Yes, good morning, sir. Two spaces for my look that I need to discuss. First, once again, the effects of livestock reduction. You were talking about much, much higher stock stocks in the middle of the year and then the negative impact on higher prices, so we had that stock-reducing effect in the third quarter. No problem, now I want to stand up in terms of garage titles. , a higher level, much higher, you said above average now, at a general level. What are your assumptions here?
Christian Buhl
Honestly, I give you an express answer. I wish I could give you an express answer. But I can’t. So what’s transparent is that we’re down in terms of wholesale stock levels compared to the record high at the end of June. I think that’s transparent. But what is also transparent, what we hear from wholesalers, we have not yet returned to the general. Where exactly are we in the middle? Honestly, I don’t know.
Christian Arnold
It is ok. But tying those stock-reduction effects to this peak value increase you implemented last summer would mean that the stock-reduction effect deserves to be less in the long run given your smaller value accumulation, right?
Christian Buhl
I don’t need to speculate, to be honest. Because I don’t have enough data to crunch the numbers. So it’s speculation. I can’t tell you anything about that.
Christian Arnold
It is ok. And perhaps compare the livestock reduction effect with the heating/sanitary effect. Is it fair to say that the livestock reduction effect is much more vital than the sanitary/heating effect?
Christian Buhl
It is, I would say, yes, it is very clear. Yes. This is basically the stock reduction effect. And health services go from [inaudible] further down. There we are quite sure.
Christian Arnold
It is ok. And then, looking at Germany’s progress, which was, I mean, quite positive in the third quarter, and thinking that the impact of heating might be the most important thing in Germany, it deserves us to worry that will this impact on warming be more important in the coming quarters?
Christian Buhl
The next few quarters, I don’t know. I think it will remain for the fourth quarter, that is, for Germany, what we saw for the third quarter in terms of the magnitude of this effect. For changes, I don’t know. But for Q4, I agree, it will stay.
Christian Arnold
It is ok. And the warming effect, I mean, is basically Germany, it’s basically Austria, some other European companies, but in fact it’s not Switzerland, isn’t it international?
Christian Buhl
I agree. It is not Nordic. This is not Switzerland. The most important are Germany, Austria, the Netherlands and Belgium. These are the four most sensible countries where I would say we see some effect from this transitional transfer to the heating solution.
Operator
The next one comes from Alessandro Foletti de Octavian.
Alessandro Foletti
Yes, hello. Thank you for answering my questions. Just a few follow-ups, please. Does this warming effect also mean festival with workers?I mean, are the same installers running for toilets and heating?So if they are looking for heat pumps, can’t they make sanitary facilities?Are they 2 other teams of people?
Christian Buhl
No, it’s the same, the same delicious. So it’s a double effect, you might say. From the point of view of the end consumer, when you move a little maybe to heating, but also to the installation level, the plumbers, are moving a little more at the moment, for example, in Germany, to the heating solution. instead of the toilet. Then it’s the chubby same guy who does both.
Alessandro Foletti
It is ok. And now it’s about the EBITDA margin. He argued that the current point is not sustainable. I understand that he is telling us that he is lower than normal. Does the value increase enough to bring you back to the range, to the target range?? Or do you want more, i. e. if you have volume drops, will it be harder for you to get back into range?
Christian Buhl
So, as you may have noticed and as we also said in our presentation, which is online, you can see that we were able to almost completely offset energy and commodity values with our sales price increases in the third quarter. However, in the early part of the year, we were unable to do so because of the delayed effect of those value increases. And that’s the main explanation for why we expect the EBITDA margin to be below 28% this year. So, in other words, if the total effect of [inaudible] value increases, we expect it to reduce us to 28%.
Alessandro Foletti
It is ok. So a significant operational lever in this regard?
Christian Buhl
Oh no.
Operator
The next one comes from Remo Rosenau of Helvetische Bank.
Rowing Rosenau
Are you going to hire about 80,000 plumbers a year?Thus, you will benefit not only from a qualitative review of your wholesalers to make a judgment on the stock reduction effect, but also from a permanent qualitative review of your thousands of plumbers much closer to the market. So what kind of qualitative feedback are you getting from them about the actual progression of the underlying market, the healthcare market right now?I mean, is it just an [inaudible] for heating?Call to decrease if you listen to your plumbers?
Christian Buhl
Listening to our plumbers at this time, one observation is precisely what he said, and that is that they get a little hotter in some countries and, as discussed above, due to the strength of heat pumps. In general, if you pay attention and they still have a lot of paintings, they still have first-rate books also in terms of sanitary facilities. So they don’t see, they don’t see a deterioration in their business right now, not at all. are small businesses, an average company in Germany has 7 employees. If you contact those companies, what are your expectations for the company?They don’t make a business plan for next year. They don’t have a number. They see their order books, they have a lot of paintings, that’s what they’re saying right now. We still have many paintings to do. They don’t make forecasts or macroeconomic analysis, not at all. At the moment, it remains a smart environment in as many countries.
Rowing Rosenau
I mean, I perceive that the order books are very high. I mean, that’s the case everywhere. But even talking to those guys, I mean, you also listen, yes, but I don’t actually get a lot of new orders. I mean, what about that?
Christian Buhl
To be honest, I can’t give you a transparent answer here because we don’t collect this systematically. I can only say that it is more of a discussion about temperament here. And the general temperament is good at this time. Obviously, if I summarized in my words, the uncertainties that are also advancing next year, they, if I tried to summarize their returns, comfortable returns, has increased. This is transparent because they also read the newspapers, they also perceive that costs are rising, that they have a power challenge in many European countries. So it’s uncertainty. Like the general uncertainty that you have also observed, I would say, on the street, it has also increased.
Operator
Next up is by Stefanie Scholtysik of Mirabaud Securities.
Stephanie Scholtysik
Yes. Hello. I have 3 questions about your product. They talked about FlowFit, which is a wonderful success. I mean, can you provide a percentage of the countries you’ve implemented it in so far?And do you see any cannibalization of other products?And is the EBITDA margin comparable to other products they already have?
Christian Buhl
Therefore, FlowFit arrived last year in German-speaking countries in the Netherlands last year. And this year, we implemented it again in Italy, Belgium, the Nordic countries and some countries. It’s not about cannibalizing our existing piping systems. So, in total, we are growing, thanks to FlowFit. No substantially cannibalizes the other system. And in terms of margins, we don’t have an EBITDA margin for FlowFit products. But the gross margin at this time is still a little below the organization. Average, however, has to do with volume and scale effects. Once we succeed in the higher volumes, we will also be waiting for the average margin point of the FlowFit organization.
Stephanie Scholtysik
And then, in the AquaClean, you didn’t mention anything about it. It’s more of a product for the customer, so to speak. How do these products behave in the existing inflationary environment?
Christian Buhl
So AquaClean in the first nine months, sales and volumes are at the point of last year. So there is no expansion. But keep in mind that we have noticed a very strong expansion in the last 2 or 3 years, also driven by the tailwind of COVID-19. So, until 2019, we’ve made steady progress with a CAGR, with a really extensive double-digit CAGR. for more than two years. So we’re selling, in other words, this year’s call is at last year’s high.
Stephanie Scholtysik
Okay. good listen And then reviews about Geberit ONE?How is this product line working?
Christian Buhl
We are very happy with Geberit ONE. Se is developing and we are improving year after year. However, this is not the same as for FlowFit. It’s a product. It’s essentially 1 or 2 SKU. La contribution in terms of absolute contribution is much, much smaller, but it’s a product in development.
Operator
The following is by Manish Beria of Societe Generale.
Manish Beria
Salut. Bonjour. Je will take my questions one by one. First of all, a clarification. You said October sales were down year after year. So, I just need to understand, is it in local currency or CHF, low sales in October?
Christian Buhl
All we are talking about is in currency.
Manish Beria
In local currency, that’s fine, it makes sense. Instant query considers the raw material. So if you look at spot prices, they’re already going down. So what is your estimate if you calculate how much commodity prices will fall next year if the spot rate prevails and also over the power charge and we want the power charge to stay here, so what will be the effect next year in terms of values, on the accumulation or reduction of power values now next year?Maybe it will increase the value of power.
Christian Buhl
As I said in our introduction, I don’t need to speculate on the coming year, especially on commodity and energy prices. So I can’t give you an answer for next year, sorry.
Manish Beria
Okay, no problem. And then, this plumber order ebook is very high. So, I think he discussed something like 17 to 18 weeks. the plumber’s order ebook, I mean, the customer’s request is weaker, but the plumber is still eating his order ebook, and that’s why you don’t see a big drop in volume next year. Therefore, this kind of trend can still occur?
Tobias Knechtle
Yes. Again, the same [inaudible] answer above. At this point, we are speculating about ’23.
Operator
We have a follow-up of Laurent Runacher from Exane BNP Paribas.
Laurent Runacher
Good morning gentlemen. It’s good to hear from you. Just a query about the delay effect because I have seen that housing rents in Germany are very low lately. So to what extent and with what delay can we see that it has consequences on your sales?Is it a delay of 6 months?What would you do as an estimate?
Christian Buhl
The average time between the effect of construction letting in our sales depends on the domain of the product is about nine months, and maybe 15, 18 months. Usually, pipes are affected earlier due to the production process and bathroom systems usually have the longest delay effects between a building permit and an effect on sales in our industry.
Laurent Runacher
And I have a supplementary question, because first we’re talking about the non-residential outlook for 2023. Some think there is for reindustrialization and other people are getting tired of supply chains that are too long. So, relocating a component of the industry to Europe, when loan rates are notoriously very negative, what would be your opinion?Do you see orders or inquiries about massive factories being built in Europe?What is your point of view?
Christian Buhl
As you know, 2/3 of our business is residential. So, if I can perceive your query correctly, it affects non-residential ones and the small component of that non-residential is perhaps similar to the chain of origin, logistics centers, etc. A relatively small company. Whatever the effect of relocating or building brands from more factories in Europe, it has a minor effect on our business. Because, as I said, more commonly residential and even non-residential, much of it is made up of advertising companies, hotels, hospitals, and a smaller component of advertising facilities.
Operator
There are no questions at this time.
Christian Buhl
I think that’s it Thank you very much for your questions. We wish you all a wonderful day. Thank you.