European Market - Investor Desk

Business Strategy & Outlook

Geberit’s strategy is aimed at reinforcing its competitive advantage, which supports the group’s exceptional returns on invested capital and high profitability. Geberit’s “push-pull” sales model has successfully created long-term brand loyalty by educating and turning key decision-makers (wholesalers and installers) for sanitary products into business partners. Behind-the-wall products place particular importance on brand reputation and relationships with key decision-makers that are encouraged to sell higher-value products, which makes it extremely difficult for competitors to penetrate Geberit’s existing core markets. Continuous product innovation and product range extension justify price increases, which are ultimately passed on to the end consumer, who lacks understanding on behind-the-wall sanitary matters and relies on support of the intermediary.

Geberit has utilized a combination of extraordinary price increases in addition to its annual price increase to support profitability to combat significant raw material and transportation inflation. Consistent capital investment in the efficiency of production facilities and product innovation helps reduce the reliance of cyclical construction demand to support profitability. With the COVID-19-driven home improvement trend subsiding and a rising-interest rate cycle likely to put the brakes on a strong residential market, greater reliance is placed on product innovation to drive sales. Geberit is consistently investing in product innovation, reflected by 185 new patents having been registered between 2016 and 2021. Novel product innovation justifies the consumer paying premium prices. Slow adoption of new products generally means new product launches enjoy many years of runway. The Sanitec acquisition in 2015 allowed Geberit to accelerate the growth of concealed cisterns in underpenetrated markets. Since 2016 Geberit has returned over 80% of free cash flow to shareholders through dividends and share buybacks, without compromising reinvestment. The firm continues to provide shareholders with a regular source of income, maintaining its target dividend payout ratio of between 50% and 70%.

Financial Strengths

Geberit is in a comfortable financial position, which provides it with financial flexibility and the ability to make long-term investments throughout the cycle. The group has net debt of CHF 273 million on its balance sheet, translating into a net debt/EBITDA ratio of 0.3 times as at the 2021 financial year, a highly conservative level of leverage. Free cash conversion rates have averaged around 100% of net income, allowing Geberit to invest significantly in product innovation to help support price increases and maintaining strong relationships with key decision-makers, as well as generous capital return to shareholders.

Bulls Say

Geberit enjoys long-lasting relationships with its fragmented customer base of wholesalers and plumbers, the relatively price-agnostic critical decision-makers for behind-the-wall sanitary equipment, which helps protect profitability against rising inflation.
Regular investment into product innovation and productivity efficiencies reduces the reliance of demand on cyclical construction cycles.
Shareholder returns are enhanced by Geberit’s generous capital return policy that is supported by strong free cash flow generation.

Company Description

Geberit is a leading manufacturer of sanitary products, which include flushing systems, piping systems and bathroom ceramics. Products are primarily sold through the wholesale channel. Geberit has an extensive history in sanitary products, having filed a patent for its first flushing mechanism in 1912. The company generates sales in 118 countries and operates 29 production plants, the majority of which are in Europe. Geberit shares are listed on the SIX Swiss Exchange. The majority of sales are generated from residential and renovation activities.

(Source: Morningstar)

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