Geberit AG (OTCPK:GBERY) Q4 2022 Results Conference Call January 19, 2023 3:00 AM ET
Company Participants
Christian Buhl – Chief Executive Officer
Tobias Knechtle – Chief Financial Officer
Conference Call Participants
Daniela Costa – Goldman Sachs
Martin Husler – ZKB
Andre Kukhnin – Credit Suisse
Martin Flueckiger – Kepler Cheuvreux
Arnaud Lehmann – Bank of America
Christian Arnold – Stifel Schweiz
Cedar Ekblom – Morgan Stanley
Patrick Rafaisz – UBS
Yassine Touahri – On Field Investment Research
Remo Rosenau – Helvetische Bank
Marta Bruska – Berenberg
Charlie Fehrenbach – AWP
Stefanie Scholtysik – Mirabaud Securities
John Revill – Thomson Reuters
Emrah Basic – Baader-Helvea
Christoph Dolleschal – HSBC
Manish Beria – Societe Generale
Andre Kukhnin – Credit Suisse
Operator
Ladies and gentlemen, welcome to the Geberit conference call on the first information of the year 2022. I am Sandra, the Chorus Call operator. I would like to remind you that the conference is being recorded. The presentation will be followed by a Q&A session. The conference must not be recorded for publication or broadcast.
At this time, it’s my pleasure to hand over to Christian Buhl, CEO. Please go ahead, sir.
Christian Buhl
Thank you for the introduction, and good morning, ladies and gentlemen. Welcome to our Geberit full year sales conference call. We will first comment on our fourth quarter sales figures, then review our full year sales performance, followed by our guidance for the operational and financial results in 2022 and finish with an outlook for this year.
Let me start with the fourth quarter. We had a challenging fourth quarter. Net sales declined by minus 14%, negatively affected by a substantial negative currency effect of minus 6%. In local currencies, net sales declined by minus 7%. Net sales were driven by three factors: first, a positive impact of around 13% from price increases; second, a negative effect of minus 2% from 1 working day less; and thirdly, a volume decline of around minus 18%.
This significant volume contraction was mainly driven by two factors: first, a base effect from strong volumes in the previous year due to the benefits from the COVID-19 induced home improvement trend and the stock buildup of wholesalers; and secondly, de-stocking of wholesalers after the extraordinary strong price increases in the second half of 2022. We assume that with this strong volume decline in Q4, the majority of the excess stocks in the channel have been destocked until the end of 2022.
Let me now comment on the development in the various regions in Q4. I start with Europe, where currency adjusted net sales decreased by minus 8%. Growth was achieved in the Nordics with plus 1%, in the Benelux and Italy with plus 2%, and in the U.K. with plus 18%. Single-digit net sales declines were recorded in France with minus 1%, in Austria with minus 2%, and in Switzerland and Iberia with minus 4%. Net sales declined by double digits in Germany with minus 18% and Eastern Europe with minus 19%.
The stronger decline in Germany and Eastern Europe was driven by a stronger base effect compared to the other European countries and the impact of the war in Ukraine on our business in Russia and Ukraine. Outside Europe, we increased net sales in Far East Pacific by plus 4%, supported by growth in China. Net sales were down by minus 6% in America and minus 5% in Middle East and Africa.
The three product areas showed again different sales dynamic in the fourth quarter. Piping Systems grew currently adjusted with plus 1%, supported by a very good development of the new Piping System, FlowFit. Bathroom Systems net sales decreased by minus 4%, negatively affected by a base effect from the COVID-19 induced home improvement trends. A decline of minus 16% was recorded in Installation & Flushing Systems as this product area was most affected by destocking effects at wholesalers.
We will now comment on the full year 2022 sales performance. Net sales in Swiss francs decreased by minus 2% to CHF3.39 billion. The slight net sales decrease was driven by a substantial negative currency effect of CHF234 million or minus 7%. In local currencies, net sales grew by 5%. The war in Ukraine led to a sales loss in Russia and Ukraine of around 1% of group net sales in the full year 2022.
The full year sales growth of plus 5% was driven by strong sales price increases of around 9% and continued strong volume growth in the first half of the year. Volumes reached new record levels in the first half of the year, also due to the further buildup of inventories at wholesalers and sometimes even at installer levels in light of the extraordinary strong price increase. In the second half of the year, volumes declined sharply due to the anticipated reduction in the channel inventories.
New product introduction considerably contributed to sales growth last year. For example, the new Piping Systems FlowFit, which was rolled out to several new companies; or the new WC Flushing System Alpha launched in the emerging markets outside Europe. Compared to pre-crisis COVID-19 levels, hence without any base effect, current adjusted net sales in 2022 were 22% higher than in 2019. This comparison demonstrates the strong performance over the last three years.
Let me now comment on full year sales in more detail again in local currency. In our European mature markets, we achieved an overall growth of plus 3%. Strongest growth was recorded in Italy with plus 14% after an already strong previous year. Switzerland and Benelux grew by 4%, Austria by 3% and Germany by 1%. The growth rate in the European expansion markets reached, in line with our strategy to grow faster in these more underpenetrated markets.
The strongest growth rate was recorded in the U.K. and Ireland with plus 40%, Iberia grew with plus 10% after an already strong growth in 2021. Net sales in Eastern Europe were up by plus 6% despite the war in Ukraine, which accounted for a loss of around 10% in this region. In Nordics, net sales grew by plus 5% and in France by plus 4%.
Let me now turn to the regions outside Europe. Net sales in Far East Pacific were up by plus 7% in 2022, substantially driven by strong growth in India and Southeast Asia, which was partially offset by a decline in China due to the lockdowns in Q2. Net sales in the Middle East and Africa region increased by 21%, with growth in all major countries and regions. In Americas, net sales increased by 3%.
Let me now comment on the sales development per product area. All three product areas grew 2022 in local currencies. Piping Systems grew by 11%, Bathroom Systems and Installation & Flushing Systems both by plus 2%. The strong development of Piping Systems versus the other two product areas was driven by stronger price increases, a solid project business and a very good development of the new FlowFit supply Piping System. Bathroom Systems were affected by a stronger base effect from the home improvement trend in the previous year compared to the other two product areas, whereas Installation & Flushing Systems were affected by stronger destocking effects.
Let me now comment on our guidance for our 2022 operational and financial results. Pressure on margins in 2022 resulted primarily from massively increased raw materials and energy prices. Average raw material prices peaked in May and were slightly downwards pointing since then. In Q4, currency-adjusted raw material prices declined slightly by minus 1% sequentially versus Q3 2022. Over the full year, prices for raw materials rose by plus 19%.
Energy prices in Q4 were below Q3. For the full year, energy prices, however, approximately doubled compared to 2021. Due to the multilevel distribution channel in the sanitary industry, adjustments to the sales price can only be implemented with a delay, meaning it was not yet possible to compensate the higher raw material and energy prices in the full year period of 2022. Accordingly, we expect an EBITDA margin of around 27% for 2022.
Due to an extraordinary one-time impact, we expect an extraordinarily low tax rate in the single-digit range. The reason for this low tax rate is a one-time impact of transitional measures in connection with the Swiss tax reform. This will also significantly impact 2022 net income and EPS. We expect a positive one-time impact of around plus 10% on net income and EPS. CapEx for the full year is expected to be around CHF160 million.
Before I come to the current business, let me briefly update you on our share buyback program. In total, we bought back 1,109,000 shares for a total amount of CHF570 million last year. This means that we distributed together with the dividend payment CHF1 billion to shareholders in 2022. This corresponds to around 6% of the market capitalization of Geberit for end of the year.
Let me now comment on our outlook for the building construction industry in Geberit in 2023. Due to the ongoing geopolitical and macroeconomic uncertainties and risks, we expect overall a challenging environment for the building construction industry in 2023. Challenges for the sanitary industry emerged from potential pull-forward effects from the COVID-19 in used home improvement trend over the last years.
Secondly, from the increased interest rate environment, although it is important to note that many macroeconomic forecasts expect the stabilization maybe even a declining interest rate environment as of Q2 or Q3 this year.
The third challenge comes from the shift to sanitary to heating solution mainly through heat pumps. However, keep in mind that this effect has also limitations due to the ongoing supply chain constraints for specific components in the heating segment and the fact that only a limited number of Geberit markets are affected.
Positive catalysts for the sanitary construction market emerged from the fundamental need for renovation and for new housing in several European countries. For example, in Germany, with a market requirement of around 400,000 new residential units per year and the upcoming renovation cycle from the last strong building boom in the 1990s.
A second market catalyst is a structural trend to better sanitary standards, for example, in the context of the demographic change in many European countries. Outside Europe, we expect a quite positive market environment in several emerging markets, for example, in India or in the Gulf region.
In the context of these challenging market environments, we defined for Geberit 2 guiding principles for 2023: First, strategic stability; and second, operational flexibility. The purpose of these principles is to manage volume uncertainties without harming the midterm potential of the Company.
Short-term volume challenges emerged from the still existing, however significantly reduced excess stock in the channel. As mentioned before, we assume that the majority of the excess stocks in the channel has been destocked, and there is only a smaller part remaining. The overarching target this year is to gain further market shares regardless of the prevailing market environment. To do so, we will focus on several leverage and initiatives.
Let me give you three examples. First, we will strongly focus on new product introductions, which proved to be an important contributor to growth over the last years. For example, the new supply Piping System FlowFit or the new concealed WC Flushing System, Alpha.
The second example is our focus this year on the full WC system to further penetrate the concealed systemtechnology and to promote our best-in-class WC flushing performance. A third example of our market share initiatives this year is prefabrication. We will put a stronger emphasis on our prefabrication business in the DACH region to offer efficient solutions, while at the same time addressing the bottleneck of qualified installers.
On top of our efforts to gain market shares, top line in 2023 will benefit from a positive price effect of around 6% to 7% due to the various sales price increases throughout last year and at the beginning of this year. On the cost side, we expect a wage inflation of around 5% to 6% for the full year 2023, and raw material prices in Q1 to be on the level of Q4 last year.
Let me close our introduction with a short summary. Despite the record results in the previous year, Geberit recorded a further sales growth in local currencies. The year was marked by the end of the COVID-19 crisis and historical high inflation, leading both to unprecedented stocking effects in our distribution channel.
For 2023, we expect again a challenging market environment. However, we believe Geberit is very well prepared to also master the uncertainties emerging from this environment, as already demonstrated several times during the past. Our confidence is based on the fundamental need for our products, our resilient strategy and business model, and our long-term focus and track record.
Based on these fundamentals, we are also convinced to continue to achieve our midterm targets of an average annual net sales growth in local currencies of 4% to 6% and an average EBITDA margin level between 28% and 30%.
Thank you for your attention. We are now ready to answer your questions.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from Daniela Costa from Goldman Sachs. Please go ahead.
Daniela Costa
I have three questions, if it’s possible. So the first one, I just wanted to regarding your annual April price increase, if you have decided on whether you’re going to move ahead with that one or not this year, if you know already?
And the second one related to how you purchase raw materials and energy. Can you give us any color if you have the ability to go on spot, let’s say, now that gas prices have declined significantly? Are you tied into contracts in some sense? Or can you just be nimble and purchase on spot? And if we were to just look at spot now, I know you gave the helpful reference of 1Q versus Q4. But can you talk about, if everything just frees now, what would be the tailwind in 2022 from raw materials and energy.
And my final question relates to the capital allocation. You mentioned this 10% impact in net income and EPS. Shall we think about, sort of, a reflection of that in the dividend this year? And related to that, are you accelerating the buyback like you did in Q3?
Christian Buhl
Thank you for your questions. Number one, we have not yet decided if we will implement the net price increase as of April this year. Second question, no change in terms of buying patterns for raw materials; however, for energy, there is a change. Last year, we have still 20% of our energy exposure hedged due to longer-term co-effects. This will now come into the spot market, which means we have 100% at the moment exposed more or less of our energy exposure to the spot market. And question three will be answered by Tobias.
Tobias Knechtle
The tax effect the dividend has not yet been decided by the Board.
Operator
The next question comes from [indiscernible] from BNP Paribas. Please go ahead.
Unidentified Analyst
So, just on margins given the sharp reversal in input costs and the delayed impacts of the sequential price increases, is any risk of exceeding your medium-term guidance in 2023? And if you did, how would you think about pricing in that scenario? Would you give anything back to customers?
Christian Buhl
As usual, we will not comment on our margin expectations at this point in time for the year. We will only with H1 results, give a guidance for our EBITDA margins. Therefore, I can’t give you a precise answer. In terms of pricing, at the moment in this environment we do not foresee a plan for any price reduction.
Unidentified Analyst
Okay. That’s really clear. Maybe just another question on volumes. So clearly, new residential indicators in Europe have been pretty weak over the last few months. Can you give us a sense of how reactive the installers are to those indicators? Or the slowdown, do they buy less stock in anticipation of lower demand? Or is it all very last minute?
Christian Buhl
So I’m not sure if I 100% understood your question. The negative volume demand on our side was not driven by a much stronger — sorry, much weaker demand. It was mainly driven by destocking effect of wholesalers.
Unidentified Analyst
Okay. Do you have a sense of the underlying demand with the installers, though?
Tobias Knechtle
Underlying demand.
Christian Buhl
We don’t have, no. Because we don’t have — we have a sense, of course, demand was not as weak as what we have seen in the volumes for even in the second half of the year, but it’s very difficult to quantify the majority of the decline that we have seen at Geberit was driven by destocking.
Operator
The next question comes from Martin Hüsler from ZKB. Please go ahead.
Martin Hüsler
Yes. Good morning. Thank you for taking my question. First of all, I wanted to ask you if you were surprised negatively by the volume development in the last quarter, so this minus 18%? Or did you have this in your calculations when you gave your margin guidance of 27% with the Q3 numbers?
Christian Buhl
We have not been surprised by the volumes in the fourth quarter. That was part of our scenarios. However, it was overall at the lower end of our expectations to minus 18%.
Martin Hüsler
And then, the fact that you can now reconfirm your margin guidance, does this mean that we have to see also some positives that you — that maybe are not so visible, so maybe that the price impact was stronger that you were expecting? Or was your margin guidance of 27% before rather a very cautious guidance?
Christian Buhl
Neither/nor. The price effect was exactly on the level that we internally forecasted I think the margin is a testimony to our operational flexibility that we’re able to show. So, we really managed to drive costs down at the same pace as volumes and therefore, maintain our margin on these very high levels.
Martin Hüsler
Okay. Then maybe the last one, I remember that in the Q3 comments or Q&A, you’re citing some markets where you’re saying — where you said that we don’t see that huge destocking, so the underlying demand is better reflected in the sales development. Could you remind us in which market piece were also in Q4? And maybe then we get a better feeling on how underlying demand really was.
Christian Buhl
These two exceptions were and are Italy and Switzerland, where we have seen less stocking effects throughout the year, in Italy, driven by structural market effects. There’s a — we have a much more fragmented distributor landscape, much more smaller distributions, less stocking effects. And in Switzerland, the price increases were lower than compared to other countries, leading to less stocking effects. And that also prevailed in Q4.
Operator
The next question comes from Andre Kukhnin from Credit Suisse. Please go ahead.
Andre Kukhnin
I just wanted to come back to your comment on the destock being largely complete now. Could you talk about what gives you confidence in that? And if you’re confident in that, why can you not quantify the impact of the destock in Q4?
Christian Buhl
So confidence and quantity is not the same. The confidence comes from the source of this information, which is basically our distributor is telling us qualitatively that the majority of this excess stocks have been destocked. There’s only minor part left. But that is also the answer to your second part. As I explained several times over the last couple of quarters, we can’t quantify because the wholesalers do not share these numbers with us about the inventory level.
Andre Kukhnin
Got it. That’s very helpful. And is there any way to tell the size of the impact on the shift to heating even exactly your ballpark?
Christian Buhl
No. That’s the same that’s even more complicated, more challenging because the shift basically as the consumer or maybe as a plumber, you could argue there we don’t have any sales relationship. As you know, therefore, even more difficult to quantify any shift effects from sanitary to heating which is only taking place, as you know, in a couple of companies not across Europe.
Andre Kukhnin
Yes. I appreciate that. And just on energy costs, if we assume current spot rates prevail, what would that do to your energy bill for 2023 versus 2022, please?
Christian Buhl
I don’t want to speculate, because energy prices are so highly volatile. Even that [indiscernible] consideration, I think it’s relatively, I wouldn’t say dangerous, but not really meaningful. It’s so highly volatile. But as I said, we expect that energy prices last year overall will have doubled versus 2021 that will mean that we have a little bit more than 3% of net sales last year as energy costs.
Andre Kukhnin
Okay. So in Q3 and Q4, your energy costs were up, I guess, 4x in Q3 and a bit less than that in Q4.
Christian Buhl
In Q4, we don’t have yet the numbers. That’s the reason why we can’t give you ready numbers, but we don’t have that. But they were substantially lower than in Q3 as we also guided for with our Q3 results, but we don’t have yet the number.
Operator
The next question comes from Martin Flueckiger from Kepler Cheuvreux. Please go ahead.
Martin Flueckiger
I’ve actually got two. First one is a clarification question. Did I understand you correctly that you now including this one-off tax rate impact that you’re now guiding for CHF160 million net income, if you could confirm or clarify that? That’s my first question.
And then the second one is, if I have heard everything that you’ve said so far, you haven’t been talking about the shower-toilet business yet. Could you make some comments on how that business performed in Q4? And how much of that was affected by destocking effects?
Christian Buhl
So number two, I’ll start at number two, Tobias will answer number one. The shower-toilet business was going well last year. However, we have not been growing. We were more or less on previous year’s level. But that is very much driven by strong growth in the two previous years, driven by COVID-19. So we are on a very high level stable with our shower-toilet business last year. And question number one, Tobias.
Tobias Knechtle
At that stage, we don’t make any reference to net income. So could it be that you’re mixing up with the CapEx figure, the CHF160 million that we mentioned. So that would be, in that case, it will be unrelated to the tax effect.
Martin Flueckiger
Great. And just — sorry, just on the shower-toilet business. What about the destocking effects in shower-toilets? Did you see that as well in that business, or was there a difference?
Christian Buhl
I would argue — I would assume not to the same extent as what we have seen, for example, for Installation & Flushing Systems, at a lower extent most probably.
Operator
The next question comes from Arnaud Lehmann from Bank of America. Please go ahead.
Arnaud Lehmann
Both my questions are about the 2023 outlook comment. And I just talked about obviously at this stage, you said it’s going to be challenging. Would you mind giving us a little bit of color firstly, by divisions when you think about the professional side of your business, Piping System, Flushing Systems relative to your more consumer side, the Bathroom Systems, where do you think there is more risk or more upside?
And the second question is the same at country level on what you’ve seen recently, where do you think there is in your markets? Is it the Nordics? Is it Germany? And at the same time, where do you feel more confident about some stabilization in markets?
Christian Buhl
I think the picture across the three product barriers is not massively different. One effect might be a difference that the base effect from this COVID-19 in used home improvement trend will be stronger on the Bathroom Systems, because this is the product area which benefited the most. That is maybe one.
And maybe for piping, it could be in terms of market expectation, a bit more challenging because new build has come down or will come down to a certain extent, meaning that building permits are not growing that strong anymore. They are more or less stable in Europe, if you look at the first nine months of last year.
That brings in to the second part, a geographical perspective. If you look at building indicators just from a building permit perspective, just the new build center, there are some countries where building permits have been growing last year for the first nine months, for example, France and Italy and other countries where we have seen rather a decline or regions like the Nordics, for example, building permits were down around 9% in the first nine months, but also the Benelux.
So it’s a bit mix picture. Overall in Europe, building permits, just as one indicator, are more or less stable in the first nine months of 2022. And this is an indicator for the new build business in 2023.
Operator
The next question comes from Christian Arnold from Stifel Schweiz. Please go ahead.
Christian Arnold
Yes, good morning, gentlemen. Two questions from my side. First, coming back on pricing, you haven’t quantified the price increase you made in January. Was it the 1% you mentioned before?
Christian Buhl
Maybe that’s a misunderstanding. So we will or have implemented an extraordinary price increase of January, only the selected number of companies with an impact of around 1.5% as of January this year. I’m not sure what the 1%
Christian Arnold
Okay. And this 1.5%, that’s included in your guidance about the top line price increase of 6% to 7% for ’23?
Christian Buhl
Correct.
Christian Arnold
Second question on your focus product introduction, product innovation, I mean, you had a very strong support from your FlowFit product launch two years, I think, the last two years. Do you expect this FlowFit support also to happen in ’23 that you have, again, an outperformance of the Piping Systems division?
Christian Buhl
We expect that FlowFit will be a significant contributor to growth also this year. If it is sufficient for an outperformance for our other product areas, I don’t know. But we expect significant contribution of FlowFit this year.
We will further roll it out to another two countries. We roll it out to France and the U.K. this year. So we will have around 10, 12 countries where it’s introduced. But that means we expect also from the markets where we have introduced the system two years ago or last year, growth not this year. So it is a significant contributor to the top line for Piping Systems.
Christian Arnold
Okay. And on the new products, you are launching this year in ’23, which are the, let’s say, the blockbuster product this year, although probably not as big as FlowFit, but still, where do you have your greatest hope for top line support from your new products?
Christian Buhl
We have, as usual, several introductions, innovations this year. We will talk about them in a bit more detail than with our full year results in March. But one highlight is, and I can talk about that already now, is a new toilet bowl, it’s called Acanto, a new toilet bowl. It’s a ceramic WC, with a further improved performance in terms of water — sorry, flushing performance. Or water saving, however, you want to look at it, also with further development technologies for easy installation for plumbers. So, this is for us internally, and hopefully, also the customers than the highlights this year, but we will give you more flavor about this product I think in our full year results.
Christian Arnold
Okay. Last question would be also on another focus you have for ’23, the prefabrication in the DACH regions. Could you remind me what kind of sales you generate with the prefabricated products so far on group-wide basis? What we expect for — yes.
Christian Buhl
On a group level, it’s a small single-digit number, not that much. But if you go to the specific segments, for example, within Installation Systems, it’s obviously a higher share. But more importantly, we are growing strongly with these prefabricated solutions, double digit.
We have also invested into this business since one or two years, for example, into a new production hall in Germany, where we are — that’s one of the two plants where we are doing this prefabrication solution of products. So it’s an important part, and it’s one of the areas how we can, we believe, gain further market shares in the German-speaking region this year.
Operator
The next question comes from Cedar Ekblom from Morgan Stanley. Please go ahead.
Cedar Ekblom
I have a follow-up question on the point of destocking being at an end. I appreciate that you don’t have quantitative visibility on that. But assuming that it is at the end, would it be fair to say that right now, you’re seeing your volumes in Q1 down sort of mid-single-digit range because ultimately, if destocking is coming to an end, that should be where — or broadly where your volumes are trending. Is that a fair assumption?
Christian Buhl
We will not give any guidance or comments on any quantitative volume outlooks for the first quarter. Look at the last two quarters, how uncertain this volume developments are, especially due to the destocking effect. And we still, as we said before, we assume still that a minor part is less of excess stock. So I refrain from making any quantitative outlooks for Q1 volumes.
Cedar Ekblom
Could you comment on what the volumes have been year-to-date, so not from here, just what you’ve seen in the first three weeks of the year, so not an outlook of backward looking?
Christian Buhl
I also want to refrain on that. We have now more or less not even two weeks, working weeks. That’s really too short, just to take a couple of days and taking that as an indicator. So I also refrain from making any statements of the last 10 trading days.
Cedar Ekblom
Fine. And then could you comment on — remind us how much of your business is resi versus non-resi, and then the new build versus renovation exposure? That would be really helpful.
Christian Buhl
It’s around 2/3 residential versus nonresidential. And roughly the same number applies for renovation versus new build, 2/3 renovation, roughly 1/3 new build.
Operator
The next question comes from Patrick Rafaisz from UBS. Please go ahead.
Patrick Rafaisz
I’d like to follow up just on the previous question around volume trends. And I realized you won’t give any quantitative guidance, but just thinking about comparable basis, not just Q1 but Q2 where we did see the inventory build and pre-buying with the price increases coming in July.
Would you say or would you confirm it’s reasonable to assume that the basis will still be very high? And especially in Bathroom Systems, we should assume lower activity levels on the volume side compared to H1 2022, just from a logical perspective.
Christian Buhl
I agree on that. Of course, we have strong comparables in the first half of this year due to the inventory buildup and strong volume growth in the first half of last year. So to that extent, I agreed. Comparison basis is tough, this is true.
Patrick Rafaisz
Okay. Okay, great. And the second question on piping. You talked a bit about the performance, also being supported by a strong FlowFit business and rollout. Was there, in your view also, an element of a heating benefit, right? I think you have a bit of heating exposure in piping.
Christian Buhl
Yes, this is true. We have a smaller part, but a smaller part of our Piping Systems are dedicated Piping Systems for the heating solutions in a building, basically to transport heating water. And that was also doing well last year, but it’s a smaller part of the piping business. Might be that we also benefited there with partnership from [indiscernible].
Patrick Rafaisz
Okay. And then the last one is you talked in quite some detail about the challenges for 2023: Energy costs, wage inflation and input costs in general. And you also mentioned the focus on operational flexibility. Should we build into our bridge an element of cost savings? Are there any plans already to maybe manage a bit lower plant loadings in the first half of the year? Or is that nothing we should consider in a material way?
Christian Buhl
So we don’t have any specific structural cost-saving plans in mind or implemented for 2023. Operational flexibility means that there where we can afford, we try to be flexible with cost, where it doesn’t harm our midterm potential. I’ll give you an example where we will not be flexible.
For example sales organization, assuming in a scenario, volumes are challenging, we would not downsize our sales organization. Or even more a no-brainer that we would not adjust our cost base in R&D. However, in the plant in logistics as far as possible, we try to cope with volume flexibility.
And as Tobias said before, one of the reasons why we stick to our EBITDA margin guidance of 27% for 2022 was driven by the fact that the plant and logistic did a great job in the fourth quarter to cope with this very strong volume decline of minus 18%.
Operator
The next question comes from Yassine Touahri from On Field Investment Research. Please go ahead.
Yassine Touahri
I would ask just a question on your raw material costs. Could you give us a bit more color on what’s happening on raw material? What are the key raw materials that you’re using? Is it ceramics, aluminum, copper? Any color on that would be very difficult to understand the evolution in the past couple of quarters and what you see for 2023.
And then my second question would be on your gross margin. Have you seen a sequential improvement in your gross margin in the fourth quarter? And do you expect a further improvement in your gross margin, given the price increase that you implemented and the stabilization of raw material?
Christian Buhl
I’ll take number one. Number two will be answered by Tobias. Our raw material exposure is about 40% is exposed to industrial metals. About 25% of our raw materials are exposed to plastics, and 35% is the rest, electronic components, packaging, ceramics, raw materials. What we have seen over the last quarter is that plastic prices came down to a certain extent. However, on the metal side, some of the metals have not come down.
For example, nickel went up quite strongly. That is an important cost driver for stainless steel, or steel which we need. And we have also — part of our raw materials are semi-finished goods or components, even which we need for some of our products. For example, shower-toilet products where we are exposed also now going into this year with second-round effects, meaning that wage inflation, which takes place, obviously, also the supplier side has an impact on our purchasing price.
Tobias Knechtle
On the second question, we do not yet have the final gross margin. But if you take the indication we have at that stage, Christian mentioned before the raw material quarter-on-quarter have been down pricing-wise by minus 1%. Energy is not part of the gross margin, so you cannot take that into account. And prices have been clearly higher up in Q4 than Q3 based on the implementation of price increase of July and especially as well the one of September. So that should set its variable support on the gross margin.
Yassine Touahri
Maybe just a follow-up on the industrial metal, you mentioned nickel. What are the other key metals that we should look at? Is it aluminum, copper, [indiscernible]?
Tobias Knechtle
It’s basically nickel, aluminum, copper and a little bit of zinc. These are the four main industrial metals affecting our raw material basket.
Yassine Touahri
Can you share the proportion which is the most important, or is it too…
Tobias Knechtle
No, honestly, I don’t even know myself, so I can’t share because I don’t know. But most of nickel is definitely a very important one, but I don’t have a number in mind how important it is.
Operator
The next question comes from Remo Rosenau from Helvetische Bank. Please go ahead.
Remo Rosenau
One element of increasing costs were also rising marketing and travel costs versus the COVID years ’20 and ’21. Have they been back on — 100% back on normal levels now in 2022 so that we shouldn’t expect an additional, let’s say, margin impact due to those elements in ’23?
Tobias Knechtle
So marketing expenses most probably will be more like on the previous year’s level, or in other words, will not yet be back on pre-COVID-19 level, where we had a marketing spend of around CHF120 million. So we will not yet be fully back. And travel expenses will be higher, I guess, than in the previous year. Basically back on the pre-COVID level.
Remo Rosenau
So you were not back on pre-COVID levels in ’22 and it will go there in ’23 more or less?
Tobias Knechtle
No, in travel — in travel, we’re back already in ’22 on pre-COVID level.
Remo Rosenau
Okay. But it will increase further?
Tobias Knechtle
No, we didn’t make a statement on that. I think that — sorry, maybe that was not — Chris has first been commenting on marketing. And now the statement we’re making here is on travel. And travel basically is ’22 on pre-COVID level, and we stayed roughly around about there as well in ’23.
Remo Rosenau
Okay. And what was the difference between ’21 and ’22, if you are able to tell us?
Tobias Knechtle
We don’t yet have the final figures, and I don’t have that in mind, so I apologize.
Remo Rosenau
Okay, but there will clearly be a lower effect here compared to ’21, ’22?
Tobias Knechtle
Now you confuse me. Where do we have a lower effect compared to ’22?
Remo Rosenau
Yes. I mean these costs were up in ’22 versus ’21, because they were going back to usual levels. So this jump again will be certainly lower in ’23 versus 22% compared to ’22 to ’21?
Tobias Knechtle
Yes, yes. Again, ’23 will be roughly on the same level than ’22. And therefore, there’s not a jump anymore from ’23 to ’22.
Christian Buhl
Allow me to comment, Mr. Rosenau. Travel expenses at Geberit are at a relatively low level. We are a very cost-conscious company. Therefore, whatever travel expenses we’ll do this year versus last year will not have a major impact.
Remo Rosenau
The marketing, is the biggest thing, do you agree?
Christian Buhl
Marketing is more important.
Operator
The next question comes from Marta Bruska from Berenberg. Please go ahead.
Marta Bruska
So I have two questions actually, if I may, please. What is the percentage of your sales that you derive now from the FlowFit or the percentage of the sales in the Piping System, please?
Christian Buhl
Sorry, we didn’t understand.
Tobias Knechtle
FlowFit percentage.
Christian Buhl
FlowFit, sorry. We don’t disclose this number, but it’s a substantial part of the piping business. And if we will be a pharma company, we would talk about a blockbuster. But we are not disclosing the numbers.
Marta Bruska
All right. Well, it’s my understanding that it was below 1% when — sometime in 2019, right? So if that was a blockbuster, then maybe it’s tripled at the moment. Is that the right way to think about this?
Christian Buhl
As I said, we do not disclose any quantitative numbers or comment any quantitative estimates.
Marta Bruska
All right. And then with regards to the prefab question. So I was wondering what sort of the share of your revenues do you currently derive from the prefabricated product? And in particular, also with regard — if you were able to give us some indication on the margin, so these are the products that, to my understanding, you actually have to put a little bit more labor into. As with the wages going up to mid-single digits, as you mentioned, what is the impact on the growth and EBITDA margin mix coming from the system or prefabricated products according to your expectations?
Christian Buhl
So the share of prefabrication business is in a low single digit, the share of group sales. As I said before, within the specific product areas, it’s a higher share. From a group level, it’s a low single-digit share. Margins are a little bit lower, correct, but still very attractive, and even though we are hopefully growing faster with this segment, that doesn’t have a major impact on margin dilution. So the difference is not so big that it has really a material impact on margin dilution, for example.
Marta Bruska
All right. And if I may, just really the last one, please. What is your — just a general one, really, what is your ambition for Geberit over — as a company or as a group for the next 5 to 10 years?
Christian Buhl
Overall, we — you could argue our rolling midterm targets to achieve profit with growth. And profit and growth means that we want to grow. You know the numbers, total currencies average 4% to 6% with a margin level of 28% to 30%. But to continuously grow this business, our business franchise, mainly in the regions where we are active. There is still enough growth potential in underpenetrated markets.
For example, also in Europe, in the market, which you call expansion markets in Europe, that’s 30% of our business. Also outside Europe, in the emerging markets where we see potential, but also in the mature markets, the Central European markets more or less, where we are basically growing the market.
Not that much to market share, but the market with innovative solutions or upgrading the market to new better toilet solutions, for example, shower-toilet. So also next 5, 10 years, we want to grow continuously in average by 4% to 6%, and that’s basically what we did since the IPO 20 years ago.
Marta Bruska
I’m sorry, maybe I wasn’t clear. I didn’t mean the financial target, but more like a mission for the Company. Do you have something like the second mission statement?
Christian Buhl
A mission? Yes, we want to be the best toilet and piping manufacturer in Europe, basically. We are strong in Europe, with a selective presence outside Europe, which we want to grow this selective presence.
But we have, for example, to put it more negative, we don’t have the ambition to be the global leader for this company in 5 to 10 years, the European leader for sanitary products with a unique position behind and in front of the wall and selective presence in attractive markets for European sanitary technology outside Europe.
Operator
The next question comes from Charlie Fehrenbach from AWP. Please go ahead.
Charlie Fehrenbach
Maybe one more to Germany. The start of new buildings in December went down, I guess, the fifth time consequently. And the building permits in November went down strong as well. Is this something correct that the decline in volumes in Germany, at least will continue in the first semester of 2023? Or is it possible that you could balance this out with your higher prices?
Christian Buhl
I will not make any outlook for our volumes in Germany for the coming months, but I want to comment on the building permits. As I said shortly before, building permits were coming down in Germany, that’s true. It even accelerated a bit towards the third quarter.
Overall, building permits are relatively still okay in Germany. Residential in the first nine months were down minus 6%. Residential almost at previous year’s level, and keep in mind, there’s still a large number of approved buildings, but not yet built buildings in Germany. So there’s a certain caution as well, which should also help for the market.
But I agree with you, the latest indicators, building permits in Germany, were rather negative versus end of the year.
Operator
The next question comes from Stefanie Scholtysik from Mirabaud Securities. Please go ahead.
Stefanie Scholtysik
Could you give us any idea or indication of the dynamics of the volume decline in Q4, so speaking about October, November, December. So did the volume decline accelerate over the quarter, or how has the pattern there?
Christian Buhl
Yes. The beginning was a bit better than November and December. So it was a bit worse in November and December. But I would not read too much into these monthly numbers, to be honest.
Stefanie Scholtysik
And then maybe a second question on the German installers. What’s the current backlog? And how many weeks is this, has increased because of the shift from demand for heating solutions or decreased? Or how does this look like as compared to last quarter?
Christian Buhl
The latest number for the order backlog in — with German plumbers is 16.7 weeks. That’s a bit lower than the number in summer, which was 17.9 weeks, but that’s mainly driven by seasonality.
Also this autumn number of 16.7 weeks is a new record number that’s year-on-year plus of 20%. So again, coming back to my answer to the previous question, the order backlog is still very strong in Germany in general. However, the 16.7 weeks might be driven also very much by the fact that there’s a strong demand for heat pumps for the heating segment.
Stefanie Scholtysik
So I mean, — then when you look at organic growth in Germany, I mean, it was really down. So is this attributable half-half to destocking effects and the shift to heating solution? Or have — I mean you cannot quantify it exactly, but just to give a rough idea.
Christian Buhl
So I think because of this substantial stocking effects, especially also in Germany last year, the first and in the second half of this year, maybe it’s helpful to look at the longer period. If you look at the last two years of Geberit in Germany, we have been growing by 12% or less, around 6% annually.
This is a strong growth. As you know, we have strong market shares in Germany. It is a strong growth — and it’s very hard to say due to destocking effect, what exactly happened now over the last couple of months on the demand side. Maybe we have a better clear picture now going into 2023 about the real demand for our products once these excess stocks are really washed out of the [indiscernible].
Stefanie Scholtysik
And maybe another one on Piping. Is it fair to assume that growth in Piping — because Piping was really mainly driven by FlowFit or — and how did the other products also contribute to growth in the fourth quarter or also for the full year?
Christian Buhl
No, there were three reasons for Piping, stronger growth. Number one is we did stronger price increases for pricing. So it’s a 9% average price increase last year was across all three product areas, for Piping will be double-digit price increases. That was one.
The second one, approach to business was going well. New build was very good, maybe even some catch-up effects from the non-resi side after COVID-19 last year, also a driver, which has a bigger impact of Piping business, because new — Piping is more exposed to new build than the other two product areas. And the third element then was FlowFit.
Stefanie Scholtysik
And then maybe a last one for Tobias, can you give us some indication on net working capital and development in H2.
Tobias Knechtle
No, at that stage not yet, however, the negative starting point which we had in accounts receivables, obviously, states — so the year-on-year effect will be impacted by that accounts receivable’s technical effect.
And the second indication I can give at that stage as well is obviously CapEx. As mentioned by Christian, we are at around CHF160 million, and therefore a bit lower than on the [indiscernible] at the Q3 conference.
Operator
The next question comes from John Revill from Thomson Reuters. Please go ahead.
John Revill
Just a couple of clarifications, if I may. Mr. Buhl, when you mentioned about the — you expected a challenging environment for the construction industry. Where do you mean that to be? Is that Europe or is that globally? That’s the first one.
Christian Buhl
That was mainly meant for Europe. Outside Europe, we have a couple of markets where we are rather positive.
John Revill
Right, excellent. Okay. And on the wage increases that you mentioned as well, was that a Geberit-specific, the 5% to 6% wage increases, was that Geberit or is that in the construction industry, was that?
Christian Buhl
No, I wouldn’t refer that to the construction industry. That’s just the manufacturing industry, maybe which is driving that. And more importantly, the geographical split of your operations, obviously. The largest wage inflation we have — if you look at the Geberit company is in Poland. And on the other hand of the side in Switzerland, where we have a disproportional high share of personnel costs, and in average, it’s [indiscernible].
John Revill
That was a Geberit figure, Fantastic. Okay. And then the other thing was, I’m quite interested in this home improvement trend, which you kind of benefited from. But then haven’t — see it come to an end now.
I just wondered how big was the share with the home improvement of your sales at its peak during the COVID period? And how much has it gone down to? And I just wondered, it was kind of — and also — is there kind of a norm, what was it previously? What was kind of a normal home improvement kind of level?
Christian Buhl
That’s difficult to answer. But maybe one way to approach the question is to look how fast we have been growing throughout the COVID-19 period when that tailwind supported our business. We were growing 2x to 3x faster than in normal times, partly driven by this tailwind. But also, I think, also driven bit by our decisions, how we manage the crisis. So also this proportion of market share gains, but we don’t have a sharp number.
John Revill
Right, okay. So I believe that was like a big — so you grew 2x to 3xfaster than normal, and a large part of that was the home improvement trend. And that’s now kind of gone then you think then, that will be pulled forward now because people have already done the home improvements?
Christian Buhl
Yes, we believe that we always communicated also that this tailwind from COVID-19, that people renovating their house will be over at this certain point in time. And I think that’s what we have seen in the course of last year. As expected, you could say that this is over at a certain point.
Operator
The next comes from Emrah Basic from Baader-Helvea. Please go ahead.
Emrah Basic
Actually, I just have one question. Based on your experience now over the past years and also not considering extraordinary price increases, do you think that wholesalers restock Geberit products in any case as soon as inventory reaches a certain lower level? Just to make sure having enough given that they probably don’t care about shelf life?
Christian Buhl
So first, we have to come to the situation where they are at normal levels before we maybe talk about restock. And now with the experience over the last two, three years, with this extraordinary — or the last two years, extraordinary price increases, the learning is that obviously these price increases, especially to the extent what we have seen over the last two years, have significant economic impact on wholesale. So in the future, whenever we would be in a similar environment again, I would expect massive stocking effects.
Emrah Basic
But maybe then not taking into account the last two years, like maybe the five years, 2015 to 2019, like how was it back then? Like as soon as normal level is reached, they restock right away?
Christian Buhl
We will always have stocking effects also in the future. We have always had stocking effects in the past when we increased prices. As of April, typically 1% to 1.5%, we have seen stocking effects.
The extraordinary element last year was that destocking effect is normally strong due to the extraordinary stock price increase. So once you are back to a normal inflation environment, I would expect that stocking effects will not be gone, but they will come down also again to a normal, historically seen activity level in terms of buildup stocks and destocks options.
Operator
All right. The next question comes from Christoph Dolleschal from HSBC. Please go ahead.
Christoph Dolleschal
And two follow-up questions, if I may. So the first one is on the shift from sanitary to heating, when do you think that is going to reverse again? And the second one, the high-level top-down view on the building activity because, as you said, nine months stable. But the last two or three months, at least in terms of early indicators saw a significant decline and then coming off in some markets. So can you share your overall expectations for new build and renovation activity in your key markets?
Christian Buhl
The first question is difficult to answer because — there is — as I said in my introduction, also, limiting factor to the shift because, as you might know, most of all, I think heat pump suppliers have issues to cope with the strong demand. So it also depends on the supply side, I think, on this — from this heat pump suppliers.
It also depends, I think, on a more higher level, what happened in general with the energy crisis in Europe going into the next winter. How dependent Europe, maybe also Germany, will remain to be from the Russian gas, so that’s also a driver. There are many unknowns. Therefore, it’s quite hard to have a view when that should be over. The only thing I know at a certain point, whenever it is, you need to renovate again your bathroom, that is quite clearly.
The second part of your question is difficult. I think the environment has become more challenging. As we said in the introduction, interest rates going up. However, most market participants expect stabilization in the declining interest rate environment.
Again, that might help and again. But it’s difficult to predict what happens with the building programs going forward.
Christoph Dolleschal
You simply say, just very roughly, say, a slightly decline in newbuild and flat renovation activity in your key markets?
Christian Buhl
So in building permits, the latest indications are going down. That will then trigger with a certain delay, obviously, a decline in new build environment. But as I said, during the first nine months last year, and this is, let’s say, the majority driving of the business this year, on a European level, it’s rather still a stable picture.
Christoph Dolleschal
Okay. And renovation, renovation activity?
Christian Buhl
Renovation is always much less cyclical, cyclical than new build. That’s typically the stabilizing factor. There — that is typically not that much volatile. However, you could argue the negative side, coming back to the COVID-19 topic in home improvement then, that was obviously only driving or mainly driving the renovation sector. So there is maybe a little bit a challenge from this pull-forward effect on the renovation sector from this COVID-19 home improvement trend.
Operator
The next question comes from Manish Beria from Societe Generale. Please go ahead.
Manish Beria
So I have just this one question. So what is the time lag, like could this new — slow new build activity will have an impact on Geberit? Because I think like in some time lag when the actual bathroom is done after the new building has been done. So what is the time lag? Like it’s like 18 months or something like that? Is this a fair assumption?
Christian Buhl
The time lag depends a bit on the product area between nine to 15, 18 months from an approved building permits to our business.
Manish Beria
So you mean to say now like you are seeing the decline in the building permits now? So that will only impact Geberit, I mean, that part, I mean, will only impact in 2024 because there is so much time lag there.
Christian Buhl
Yes. As you know, there are also stocking effects in between coming back to the wholesaler stocking I talked about before, though. There’s a day — that’s the reason why I said the first nine months of last year is maybe, at the moment, the best indicator for the new build activities this year really affecting Geberit.
Operator
We have a follow-up question from Andre Kukhnin from Credit Suisse. Please go ahead.
Andre Kukhnin
Can I just go back to piping, please, again? And could you give us a split on drainage versus supply for that business?
Christian Buhl
The majority, a little bit more than 50% is supply, a little bit, the smaller part is drainage, but it is well balanced. A bit more supply, a bit less drainage.
Andre Kukhnin
Great. And where was FlowFit rolled out already by end of 2022? And where are you planning to roll it out in 2023, please?
Christian Buhl
Two additional countries, to France and U.K. this year.
Andre Kukhnin
And that would complete the full Europe rollout?
Christian Buhl
Yes, most probably. We are not yet absolutely clear, but we are reaching more or less now — all the countries where we are — where we are rolling out. We’re definitely not rolling out outside Europe. But I think that there, we will add one or two other countries, but that’s not yet decided.
Andre Kukhnin
Great. And does it come within a kind of initial bump effect as the plumbers buy their tools for it? Or is that just not really meaningful in the scale of volume basis?
Christian Buhl
No, the tools are given for free to the plumbers, they don’t pay for them.
Andre Kukhnin
Okay. That’s good to know. And just a very final one on marketing to triple check, marketing is flat for 2023 and 2022, is that the message?
Tobias Knechtle
That is our — we don’t have yet the number, but that is our latest forecast, yes.
Operator
Ladies and gentlemen, that was the last question. I will now turn the conference back over to Mr. Buhl for any closing remarks.
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