Bathroom Newsletter May 07 International Market Strategy Topics Austria SENOPLAST Doubles Capacity in Mexico China 65% of China's Sink Manufacturers to Raise Export Prices in 2007 Egypt LECICO EGYPT S.A.E. Announced 1st Quarter Results Germany Squeeze-out Planned at KERAMAG Germany VILLEROY & BOCH Reports Rise in Profit India KOHLER Plans $200 Million Manufacturing Facility Poland EBRD Lends Euro 80.8 Million to Polish CERSANIT for New Factory Spain Imports/Exports of Bathroom Products in Spain Thailand SIAM Sanitary Ware Industry Cuts Production Amid Lower Consumer USA EPA Names NSF Partner to Certify Toilets USA AMERICAN STANDARD Reports First-Quarter Results USA HOME DEPOT Eyes Sale of Wholesale Operation USA MASCO Corporation Business and Financial Highlights First Quarter 2007 Monthly Special Spain The Spanish Bathroom Products Market International strategic market research and consultancy on building product and related markets
Austria: SENOPLAST Doubles Capacity in Mexico SENOPLAST USA Inc. will more than double extrusion capacity at its Queretaro, Mexico, production plant in a $9 million expansion due for completion in October. The Aurora, Ill., firm is installing a second coextrusion line and doubling floor space to 64,600 square feet, it announced on April 18. The new line will be able to make SENOSAN-brand sheet as wide as 120 inches, up from the 87-inch width capability of its existing coextrusion line, said SENOPLAST USA President Günter Klepsch in a telephone interview from Queretaro. Applications for coex sheet in sanitary markets such as bath and shower enclosures, whirlpool tubs and sinks are a key driving force for the expansion, Klepsch said. Typical constructions will be ABS/acrylic, ABS-polycarbonate alloy/acrylic and ABS/acrylic styrene acrylonitrile. Klepsch said the multilayer sheets also are aimed at automotive, transportation, appliances and other exterior and interior markets. The United States and Canada are the major destinations for such sheet, but Mexico's market is also developing, he added. SENOPLAST originally planned the expansion in 2005 but faced delays. Klepsch said his firm has bought 6 more acres of land in Queretaro for future expansion. The company, a subsidiary of SENOPLAST KLEPSCH & Co. KG, of Piesendorf, Austria, has been producing sheet in Mexico for six years. "This expansion in our capacity will help SENOPLAST respond more quickly to our customers, and help trim our custom manufacturing lead times,'' Klepsch said. SENOPLAST's product lines include coex sheets also sold for signage, furniture, agriculture, luggage and medical equipment. Most of what the firm sells in North America is manufactured in Mexico but it does import from Europe specialty films designed to replace painting. Source: Plastics News 2
China: 65% of China's Sink Manufacturers to Raise Export Prices in 2007 Sixty-five per cent of China's sink and basin manufacturers plan to raise export prices in 2007, according to Global Sources. Higher raw material costs and price competition are forcing manufacturers to enhance design capabilities and other competencies to achieve sustainable advantages, said Michael Kleist, Global Sources' general manager. This is a big step, especially for those companies that have previously competed mainly on price. Among the surveyed manufacturers' primary challenges for the next 12 months: - 37% cite higher raw material costs; - 33% cite price competition; - 19% cite design copying/piracy; - 9% cite labour shortages; and - 2% cite stricter overseas standards. Because of the industry's labour-intensive nature, product quality and the delivery of services depend heavily on the knowledge and skills of a company's workforce, Kleist said. Recognising this, many Greater China suppliers are investing in worker training and retention. Among the surveyed manufacturers' plans to improve capabilities in the next 12 months: - 52% plan to focus on staff training; - 25% expect to develop wider product lines; - 14% plan to shorten design/development time; - 5% plan to shorten delivery times; and - 4% expect to focus on obtaining approvals and certifications. Source: Global Source 3
Egypt: LECICO EGYPT S.A.E. Announced 1st Quarter Results LECICO EGYPT announced consolidated results for the first quarter of 2007. Revenue for the quarter was up 49% year-on-year at LE 231.5 million driven by sanitary ware exports and the consolidation of SARREGUEMINES. Operating profit (EBIT) was up 22% at LE 35.1 million (margin down 3.1 percentage points at 15.2%). The drop in EBIT margins is largely the result of integrating SARREGUEMINES but also reflects destination and product mix. Net profit was up 37% at LE 23.4 million (net margin down 0.8 percentagepoints at 10.1%). Lecico Egypt Chairman and CEO, Gilbert Gargour, commented: 'It is with great pleasure, after two difficult years, to be able to come to you with good news. Our numbers for this quarter are much more satisfactory than they have been for a long while and are a continuation of the turn around trend that began in the second half of 2006. 'Our quarterly revenues are a new record for us and - more importantly - our profits are the best we ever recorded for a first quarter. We therefore are quite confident about 2007 and are heartened by the fact that our new capacities are coming on board. This should give us the wherewithal to seek further growth in the near future. 'We are also pleased with the early indications we have of the performance of SARREGUEMINES. The integration with LECICO FRANCE has gone well and the market seems to welcome our involvement and the strengthening of a traditional French brand.' Elie Baroudi, LECICO EGYPT MD, added, 'As our Chairman has mentioned, we feel good about our prospects for the year ahead. Our success this quarter is down to the great efforts made by our staff who continue to deliver despite the different challenges that they face. Our export markets also look better with strong demand for our products 'The consolidation of Sarreguemines also had a significant impact on our numbers adding 12% to our revenue for the quarter and over 10% to our gross profit. Nonetheless, the Sarreguemines business remains a little softer than we had anticipated as we rebuild customer confidence following its going into receivership prior to our acquisition. 'The coming year will still have its challenges particularly as we roll out new capacity and invest in people and processes so that we can better serve our customers. Of course the risk of external shocks as was seen in 2006 remains, but we can otherwise hopefully look forward to a good year.' The full statements for the period with analysis are available on Lecico's website. Source: AFX CNF 4
Germany: Squeeze-out Planned at KERAMAG Finnish group SANITEC, the majority shareholder in German bathroom ceramics manufacturer KERAMAG, is reported to be planning to carry out a squeeze-out at its German subsidiary. The Finnish company is now said to hold more than 95 per cent of shares in KERAMAG. The German company is to be delisted from the stock exchange following the squeeze-out. Source: Handelsblatt Germany: VILLEROY & BOCH Reports Rise in Profit VILLEROY & BOCH, the German ceramics manufacturer, increased its net profit by almost 30 per cent to euro 17.1 million in 2006, thanks to restructuring measures. The EBIT was up around a third compared with the previous year, at euro 33.3 million; the company was able to offset the cost of cutting over 200 jobs by selling properties, among other measures. In the first quarter of this year, VILLEROY & BOCH recorded growth of about 5 per cent in turnover to euro 247.9 million, while the EBIT was up around 12 per cent compared with the corresponding period last year, at euro 11 million. Source: Handelsblatt 5
India: KOHLER Plans $200 Million Manufacturing Facility Bath and kitchen accessories manufacturer, KOHLER India, plans to invest $200 million to build a manufacturing facility in Baroda. The factory, commencing production by 2009, will focus on manufacturing of sanitary ware. KOHLER India is the wholly owned subsidiary of the US company, KOHLER. David Kohler, promoter of the privately held $5.2 billion company and group president, is currently in India to finalise plans for the manufacturing facility and strengthen relationships with prominent property developers and other channel partners. Over the next two years, the company plans to expand its Indian operations, employing up to 1,000 people by mid-2008 from around 60 employees, at present. Until recently, KOHLER had a limited presence in India through its distributors. In May last year, KOHLER decided to focus on the emerging market and is now present in 26 cities across the country, with its range of bathroom products, ranging from toilets to faucets, bathtubs and showers. KOHLER said, "As Indian consumers are growing in affluence, they are demanding sophisticated and stylish products." The sanitary ware market in India is pegged at Rs 700 crore, plumbing (faucets) at Rs 1,200 crore and bathroom accessories at Rs 500 crore. KOHLER is positioned at the middle- and premium-end of the spectrum with prices starting from Rs 1,200 for a faucet and whirlpool spas going up to Rs 7 lakh. Source: Business Standard 6
Poland: EBRD Lends Euro 80.8 Million to Polish CERSANIT for New Factory The European Bank for Reconstruction and Development (EBRD) is providing a euro 80.8 million loan to CERSANIT Invest, a wholly owned Ukrainian subsidiary of the CERSANIT GROUP, the largest Polish manufacturer and distributor of bathroom fittings and ceramic tiles. "Loan proceeds will be used to finance the establishment of green-field production facilities for sanitary ware and ceramic tiles in Novohrad Volynsky, in the Zhytomyr region of Ukraine," states an EBRD press release. The loan will comprise an "A Loan" of euro 40.4 million from the bank's own account, and a "B Loan" of euro 40.4 million which will be syndicated to commercial banks. It is expected that the new plant, once in operation, will produce around 1 million units of sanitary ware and around 7 million square metres of ceramic tiles every year. "A manufacturing facility in Ukraine will significantly strengthen CERSANIT's market presence in the country and increase competition in the sector," states the press release. Source: Ukraine Business Daily Spain: Imports/Exports of Bathroom Products in Spain Exports and imports of bathroom furniture have declined in 2006 In 2006, exports of Spanish bathroom furniture reached 184.6 million, 3.3% less than in 2005, according to ANIEME. At the same time, imports dropped by 18%, from 188.6 million in 2005 to 154.6 million in 2006. France, Portugal, the UK and Russia were the major destinations of the Spanish exports. Italy was the main driver behind the significant fall in exports, buying only 2.5% of the Spanish exports, as compared to 4.8% the previous year. Exports of taps and mixers went up in 2006 With exports worth 105.1 million, the taps and mixers sector experienced a growth of 6% compared to 2005, according to ASCON. France and Portugal are the major destinations of the Spanish exports. Exports to the UAE boomed by 114%, exports to China went up 39%, underlining the importance of emerging markets. Source: I&M 7
Thailand: SIAM Sanitary Ware Industry Cuts Production Amid Lower Consumer Spending SIAM Sanitary Ware Industry, a manufacturer of bathroom products under the COTTO and TOTO brands, is reducing production by 10 per cent following a drop in consumer confidence brought about by the country's economic slow-down, The Nation reports. The strategy will allow the company to achieve 80 per cent of its total production capacity of 2.8 million pieces this year. Managing director Nibhondh Theeranartsin said the drop in production would not entail staff lay-offs. "We are not reducing our staff. Instead, we're reducing working hours, which will help us reduce production costs," he said. Nibhondh said the political uncertainty had had a negative effect on the country's economy, with consumers' purchasing power falling compared with last year. The market trend meant the company had to reduce its production costs to match falling demand, he said. In the first quarter, sales reached only Bt760 million - near last year's figure but lower than the company's target of Bt800 million. SIAM Sanitary Ware is targeting sales growth of 5 per cent to Bt3.2 billion this year, with average quarterly sales of Bt800 million. It sells 70 per cent of its products to the domestic market and the remainder abroad. Nibhondh said the company had not adjusted its sales target this year, because it believed sales in the second half would be better than in the first half, especially exports. The company plans to boost its exports to new markets, such as India, Australia, Japan and within ASEAN. This will make up for a shortfall in the US market, which has started to drop following a slump in the property sector there. Nibhondh said the baht's appreciation had negatively affected the value of the company's exports in terms of that currency. The company had to expand its export market in order to meet the sales target, although this year's net profit may be lower than last year's in baht terms. Last year, SIAM Sanitary Ware experienced a foreign-exchange loss of Bt100 million from exports after the baht appreciated from 40 to the US dollar to 35. It also recorded a foreign-exchange loss of Bt20 million in this year's first quarter. Nibhondh said his company could not adjust its export prices because of the strong baht, as the market had high competition. However, it would develop and launch new products on the market at an average of one per quarter. "When we introduce our new collection of designs, their prices will increase by an average of 10-20 8
per cent compared with existing products. That will help our sales meet our revenue target this year," he said. To achieve its goal, the company has earmarked a Bt200-million marketing budget to promote its brand and new service this year. Of that, Bt150 million will be used for marketing events and Bt50 million for advertising. "We believe our marketing strategy for both the domestic and the export markets will increase sales by 5 per cent to meet our target this year," Nibhondh said. Source: Thai News Service 9
USA: EPA Names NSF Partner to Certify Toilets NSF International in mid-march announced its participation in a new certification program designed to verify the performance of high-efficiency toilets, which can save up to 900 billion gal. of water each year, according to the U.S. Environmental Protection Agency. The effort is a key part of EPA's new WaterSense program, which recently approved NSF's participation in the program as an independent, product-certification organization. EPA Administrator Stephen L. Johnson previously announced that the agency was starting a water conservation labeling program that would include plumbing fixtures. Johnson said the WaterSense program is similar in concept to Energy Star. The EPA launched the WaterSense program to focus on high-efficiency products and services designed to conserve water. The voluntary labeling program is available to all companies that partner with EPA and manufacture, sell or distribute household plumbing fixtures. The testing program is applicable to these toilets: single-flush, tank-type gravity; dual-flush, tank-type gravity; dual-flush, tank-type flushometer tank (pressure-assist); tank-type, flushometer tank (pressure-assist); and tank-type electrohydraulic as well as any other technologies that meet the performance specifications. By choosing products designated with the WaterSense label, consumers will be saving water for future use. According to the EPA, the average household adopting water-efficient products and practices could save enough water to supply a year's worth of drinking water to 150 neighbors. Certified products will be included on an EPA product registry and will bear the WaterSense label. In addition to authorizing label use and providing artwork, NSF will list all its certified products on its Website at www.nsf.org. A more detailed list of requirements can be found at: www.epa. gov/watersense/docs/spec_het508.pdf. During the initial phase of the WaterSense program, the EPA is focusing on high-efficiency toilets. The program is expected to expand to include requirements for high-efficiency bathroom sink faucets. Source: ContractorMag 10
USA: AMERICAN STANDARD Reports First-Quarter Results AMERICAN STANDARD Companies Inc. announced on April 19th first-quarter results. Sales from continuing operations, which include Air Conditioning Systems and Services and Vehicle Control Systems, were $2.166 billion. Sales for Bath and Kitchen were $657.9 million. In total, sales for the company's three businesses were up 10.7 percent. We had a very strong first quarter, said Fred Poses, chairman and CEO. Air Conditioning Systems and Services had excellent results, driven by strong sales of commercial equipment and services. Those sales more than made up for softer residential market conditions and difficult comparisons with residential sales a year ago, when distributors were stocking new products in preparation for the January 2006 change in energy efficiency regulations. We finished the quarter with strong commercial orders and backlog. Full-Year, Second-Quarter Guidance For the rest of the year, we see continued strength in global commercial air conditioning that should allow us to more than offset expected softness in residential markets, said Poses. We also expect healthy European market conditions and strong performance in Vehicle Control Systems as well as improving results in Bath and Kitchen. For the second quarter, we estimate sales for the company as a whole to be up about 10 per cent said Poses. First-Quarter 2007 Business Highlights BATH AND KITCHEN, now classified as a discontinued operation, had sales of $657.9 million, up 8.1 percent (up 2.7 per cent excluding foreign exchange effects) from the first quarter a year ago. Income from discontinued operations was $71.9 million net of tax, up from a loss of $7.9 million. Segment income was $105.9 million, up from a loss of $0.5 million in the first quarter 2006. The gain from the VENESTA sale, absence of depreciation and amortisation (following the decision to sell Bath and Kitchen), improved volume, pricing and mix as well as prior operational consolidations and materials productivity more than offset higher commodity and inventory reduction costs. Bath and Kitchen continued the rollout of the Imagine suite in Asia and expanded the successful Cadet 3 toilet line in the U.S. New commercial sales in the quarter included ones for Areeya Property (Bangkok, Thailand); Housing Hartlepool (Hartlepool, U.K.), a 15,000-unit housing project; Incheon Songdo New Town Project (Incheon, South Korea); Royal Pacific Resort (Orlando, Fla.) and Porta di Roma (Rome, Italy), the largest shopping centre in Europe. Source: The KBZINE 11
USA: HOME DEPOT Eyes Sale of Wholesale Operation HOME DEPOT announced on February 12 that the company and its board of directors have decided to evaluate strategic alternatives for its HOME DEPOT SUPPLY business, including a possible sale, spin off or initial public offering of the business. The company said it neither could give assurance that any transaction would occur nor predict its possible terms or timing. The company said that it does not expect to update its progress or announce any developments during the process unless the board of directors has approved a definitive transaction. Reasons given for the possible sale, besides the usual optimising shareholder value, is that HOME DEPOT is at its core a retailer and the wholesaling business is a distraction. HOME DEPOT SUPPLY is HOME DEPOT's wholesale distribution business and has nearly 1,000 locations in the USA and Canada. It employs more than 26,000 people. HOME DEPOT has been in the wholesale business since the late 1990s. In 2002 HOME DEPOT SUPPLY opened its first standalone store in Mesquite, Texas. The company expanded considerably in 2006 when it bought HUGHES SUPPLY for $3.47 billion, adding 500 stores and doubling the size of its turnover to $12 billion. A number of private equity firms have reportedly been interested in acquiring HOME DEPOT SUPPLY. Source: ContractorMag 12
USA: MASCO Corporation Business and Financial Highlights First Quarter 2007 Net sales from continuing operations declined nine per cent, with North American sales declining 15 per cent and international sales increasing 21 per cent. Sales changes by segment in the first quarter of 2007 versus the first quarter of 2006 were: - Cabinets and Related Products sales declined 19 per cent; - Plumbing Products sales increased seven per cent; - Installation and Other Services sales declined 21 per cent; - Decorative Architectural Products sales increased seven per cent; and - Other Speciality Products sales declined 13 per cent. International sales were strong, particularly for plumbing products, due to stronger European economies, market share gains and the favourable effect of currency translation. As part of its profit improvement programmes, the company has been focused on the rationalisation of its businesses, including sourcing programmes, business consolidations, plant closures, headcount reductions and other initiatives. Outlook for 2007 Results in the first quarter of 2007 were substantially below the strong first quarter of 2006, reflecting a decline of approximately 30 per cent in housing starts. Economic conditions, however, remain uncertain in the company's markets, and certain commodity costs, which had stabilised or declined, have recently increased once again. Housing starts have declined dramatically in the last 12 months due to previous excessive speculative buying, rapidly rising home prices in recent years reducing affordability and less attractive mortgage terms. Even with the recent decline in new home construction, the inventory of unsold new and existing homes has remained at unprecedented high levels. As a result, the company has lowered its 2007 housing starts estimate to between approximately 1.4 million to 1.5 million. In addition, we continue to see a moderation in consumer spending for certain big ticket home improvement items, such as cabinets, and currently estimate that 2007 full-year sales will decline low-to-mid single digits compared with 2006. The company believes that the negative impacts of its downward revision in estimated housing starts to a range of approximately 1.4 million to 1.5 million from approximately 1.5 million to 1.7 million, assumed in its original guidance given in February, and increased commodity costs will be largely offset by a combination of the stronger-than-expected first quarter results, the continued strength related to international operations, including the favourable effect of currency translation, share repurchases and the profit improvement programmes we are pursuing. Source: The KBZINE 13
Geography BRG Consult Newsletter Monthly Special: The Spanish Bathroom Products Market Spain has a total land area of 505,900 km², 2.4% of which are the Balearic and Canary Islands. Spain is divided into 17 regions, called Comunidades Autónomas, and 50 provinces. Most of the regions have some kind of independence from the national government and are able to legislate at a regional level. Spain also owns two enclaves in Northern Morocco. Demographics The Spanish population is showing moderate demographic growth, mostly due to high rates of immigration from Latin America, Africa, and more recently and to lesser extent from Northern Europe. However, Spain holds one of Europe s lowest fertility rates. The total population reached over 44.7 million inhabitants on 1st January 2006. Households As in 2005, an estimated 14.5 million households were recorded in Spain, with a private dwelling stock of around 23.2 million dwellings. The number of persons per household is 2.8, but with strong regional disparities. There is an increasing number of single person households. The Spanish dwelling structure is characterised by the fact that 85% of the population owns their primary dwellings. Key Economic Trends/Drivers Since 1997, the Spanish economy has been one of the most active in Europe with an average GDP growth of 3.7%. This has been sustained by a strong internal demand, excellent housing construction industry and a continuously declining unemployment rate (from 16.3% in 1997 to 8.4% in 2006). 60% of the population is now employed in the service sector. Construction Trends Construction has been one of the main drivers of the Spanish economy. In the residential sector and the civil engineering sector, growth has been considerable and has compensated for the relatively poor non-residential construction activity. In 2006, the construction industry represented over 18% of the country s GDP and employed over 2.3 million people. Housing Starts/Completions In 2006, it is estimated that there were 864,000 new dwelling starts. According to INE, housing completions reached 600,000. Most of the dwellings completed were flats in urban areas. However, the construction market is expected to slow down. Demand is seen to be falling down because of the growth in interest rates and price levels. This slow down in the building sector has been long feared by a large number of industries, as it could mean tougher competition and less demand. 14
Overall Trends in the Bathroom Products Market The overall bathroom products market in Spain has experienced a good year in 2006, with an overall growth of 3.4%. However, not all segments experienced this growth. One of the characteristics of the Spanish bathroom markets is the slow down in the baths market, due to a change in how people perceive the bathroom area. Consumers now prefer to have their bathroom equipped with a shower (sales of shower trays rose by 4.1% in 2006), rather than a bath (+0.7% only). This especially occurs during the renovation of the bathroom. The ageing population can also partly explain this trend, for understandable access reasons. The shower enclosures market, including cubicles and baths screens, is therefore taking off strongly, with baths being replaced with shower trays. The trend in the materials used for shower screens has changed over the past years, moving away from plastic to glass. Glass is now used in the large majority of shower enclosures sold, to answer the population s requirements for quality products and to block Chinese imports. This logically leads to relatively high selling prices. A large number of companies are present in this segment and no clear market leader has been identified (see graphs on the following page). The sanitary ware market is one of the main drivers of the bathroom market, with a growth rate in accordance with the overall market growth (+3.6%). This is due to the growing sales of ceramic products, especially to the dynamism in the washbasins market. On the other hand, bidets and pedestals are losing market shares. The Repair, Maintenance and Improvement Market (RMI) accounts for most of the investment in bathroom products. This is due to the fact that when a house is built, the products installed are usually medium-low quality, and soon need to be replaced. People also like quality products and have more budget available to spend after a few years living in their home. Moreover, a new bathroom adds more value to the dwelling. If you wish to receive more detailed information on the development of the Spanish bathroom market, please e-mail Yann Rueff (yrueff@brgconsult.com) or call +44 1227 766 810. 15
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