Substantial negative foreign currency effects in the income statement

The strong Swiss Franc continued to exert its influence in 2011 compared to all major currencies of the Group. On the whole, currency fluctuations precipitated a sales loss of approximately CHF 230 million. By far the greatest effect was felt in conversions from Euros. In 2011, Geberit generated 69% of its sales in the Eurozone. 5% of all sales were invoiced in US Dollars and 3% in British Pounds. The cumulative currency effects narrowed sales development by 10.6%. Operating profit (EBIT) was reduced by about CHF 55 million as a result of the strong Swiss Franc.

Further negative effects on consolidated results were prevented with an efficient, natural hedging strategy, according to which costs were accrued at the same ratio in the currencies in which sales were earned. This strategy was very nearly perfect, especially in Euros and US Dollars. However, the disproportionately high – in comparison to sales – costs in Swiss Francs yielded smaller deviations. Consequently, currency losses resulted primarily from conversion effects (currency translation effects) and only to a small degree from transaction effects.

In terms of a sensitivity analysis, the following adaptations can be assumed if the Swiss Franc is 10% stronger:

For additional information on the management of currency risks, refer to → Financial Statements of the Geberit Group, Notes to the Consolidated Financial Statements, 4. Risk Assessment and Management, Management of Currency Risks and → Financial Statements of the Geberit Group, Notes to the Consolidated Financial Statements, 16. Derivative Financial Instruments.

Operating profitability maintained at a high level

The Geberit Group again closed out 2011 with operating results at a high level despite slightly declining sales and considerably negative foreign-currency effects and effects from raw-material prices. Consistent cost management and further optimized processes helped to keep operating costs in check.

Operating cashflow (EBITDA) decreased by 7.3% compared with the prior year, to CHF 532.0 million. Despite a challenging environment, the EBITDA margin reached 25.1% (prior year 26.7%), exceeding the target range for the medium term. The average EBITDA growth of 7.4% has markedly exceeded the corresponding rise in sales (6.2%) over the last decade. The operating profit (EBIT) dropped by 7.6% to CHF 449.2 million. The EBIT margin reached 21.2% (prior year 22.6%). Compared to the operating results, net income fell by a marginal 5.6% to CHF 384.0 million with a return on sales of 18.1% (prior year 18.9%). Earnings per share declined by 4.8% to CHF 9.82.

Higher materials prices negatively impact operating expenses

Customer bonuses and cash discounts increased by 3.3% to CHF 255.0 million; viewed as a percentage of sales, they increased from 11.5% to 12.0%. This increase can be attributed to strong sales development in local currency.

Total operating expenses in 2011 rose by 0.3% to CHF 1,418.4 million, or from 65.9% to 66.8% as a percentage of sales. As in prior years, all expense items benefited from positive foreign currency effects and thus offset a portion of the drop in sales caused by the negative currency development. Strict cost management and continued process optimization also had a reductive effect. After a significant increase in the first half of the year, the situation on the raw-materials markets eased slightly in the second half of the year – but remained on a high level. Accordingly, the cost of materials for the entire year increased by 2.6% to CHF 587.9 million; at a 27.7% proportion of sales, this was exactly one percentage point over the value for the prior year. In comparing the cost of materials to sales, substantial sales price reductions in the Swiss market as a reaction to the strong Swiss Franc had a negative effect. Personnel expenses decreased by 2.6% to CHF 435.6 million, corresponding to 20.5% of sales compared to 20.8% in the prior year. After currency adjustments, however, these expenses showed an increase despite optimized processes in production and logistics, which is a consequence of capacity adjustments in the plants to accommodate the sales growth, growth initiatives in various markets and collectively agreed salary adjustments. Depreciation lessened by 6.0% to CHF 76.9 million. This decline, however, can be attributed exclusively to the extraordinary currency situation. On the other hand, the consistently high investment volume of the previous years and extraordinary effects had an augmenting effect. The amortization of intangible assets rose from CHF 5.7 million to CHF 5.9 million. Other operating expenses increased by 1.9% to CHF 312.1 million. The major causes of this increase were newly intensified marketing activities, the effects of the organic growth initiatives, as well as surging costs for energy and indirect materials resulting from the volume growth.

The financial result was negative as in the prior year; the amount, however, shrank considerably as a result of lower currency losses and reduced interest expenses. Tax expenses declined by CHF 7.2 million to CHF 57.9 million, resulting in a tax rate of 13.1% (prior year 13.8%).

Free cashflow did not reach record value of prior year

Lower operating cashflow (EBITDA) led to a drop of 7.3% in net cashflow to CHF 494.7 million. Based on this figure, free cashflow also fell by 21.8% to CHF 386.0 million, as a consequence of increased investments in property, plant and equipment, but primarily because of negative effects from the change in net working capital (positive one-time effects in the prior year). Nevertheless, this is still the third-highest free cashflow ever achieved in the history of Geberit. The free cashflow was largely used to pay distributions of CHF 236.0 million to shareholders and to repurchase shares totaling CHF 192.5 million in the scope of the ongoing share buyback program.