After ten years of growth (2.5% p.a.) in the Swiss construction industry, there are increasing signs that there will be a consolidation in 2019 with a cautious outlook thereafter. In addition to declining volumes, various drivers on the supply side are also causing prices to fall further. It is important to react to this vicious market environment. Companies in the Swiss building materials market should already draw up a contingency plan today in order to be optimally prepared for the expected slowdown.

1. Teaser
February 2019
Contingency
planning for Swiss
building material
players

2. 2201810_CH Building Material - Contingency Teaser_v12.pptx
Structural construction1) value Switzerland, 2008-24f [index, 2008=100]2)
Both major Swiss construction prognosis providers expect a severe
slowdown in construction activity
Source: BAK Economics, KOF / Euroconstruct, Roland Berger
80
100
120
140
160
2024f2020f2018e201420122008 2022f20162010
Total
1) In German: Hochbau; Underground construction (Tiefbau) excluded in this view 2) Based on BAK Economics figures
Recent boom New reality
Civil
Residential
Commercial
> BAK Economics forecasts the structural construc-
tion output in 2019 to be shrinking vs. the
previous year (-0.9%), for the first time since 2008
> No return to previous growth in following years
expected either (only 0.1% p.a. 2019-24)
> Slowdown particularly pronounced in residential
segment
part of
> The ETH KOF (part of the Euroconstruct network)
forecasts a severe drop in construction output
growth rates in the coming years vs. their reported
historical data (0.7% p.a. 2019-21 vs.
1.4% p.a. 2014-18; incl. underground)
> As BAK, KOF foresees slowdown to be most
pronounced in residential construction
+2.5% p.a.
+0.1% p.a.

3. 3201810_CH Building Material - Contingency Teaser_v12.pptx
Recent market and company news further indicate a cautious
outlook
Selected market and company news
466
374
Share price [CHF, 3.1.-17.12.2018]
16
42
Share price [CHF, 3.1.-14.12.2018]
-10%
> Corrected sales growth forecast for 2018
to 3% from previously targeted 4%
> Cautious outlook for sales in some of the
core markets, including Switzerland
> Overall, higher volatility of building
industry expected due to global
uncertainties
> Exit of its subsidiary Keramikland with
focus on bath and sanitary material,
communicated in October 2018
> Expected significant sales reduction for
2018 of 4.5 to 6 pp.
> Expected loss of CHF 25 to 28 m in 2018
-50%
11
18
-23%
Share price [CHF, 3.1.-17.12.2018]
> Overall, business development
according to management expectations
> But, increasing uncertainties detected
(e.g. due to trade conflict)
> And increasing vacancies in Swiss
market (26% of Arbonia sales 2018/1H)
expected to drive market slowdown
Source: Company information, Roland Berger

4. 4201810_CH Building Material - Contingency Teaser_v12.pptx
Decreasing prices
Next to expected demand slowdown, a vicious mixture of increasing
supply and decreasing prices is already in the making
Volume and price drivers
Overcapacities
With the construction boom ending, players will
seek to utilize capacities at the cost of lower
prices
Procurement professionalization
General Contractors' are increasingly searching
to integrate material markups at cost of
merchants and producers
Foreign
competition /
imports
Construction material
imports of foreign players
to gain foothold in Swiss
market are increasing
(e.g. cement: +33% 2017
vs. 2012; windows /
doors: +20%)1)
Increasing transparency
Increasing comparability of prices online is
further increasing price pressure in traditional
channels
Source: Swiss Impex, BAK Economics, KOF, Credit Suisse, Roland Berger
Decreasing
demand
Increasing
supply
Decreasing prices as a result of lower demand and higher supply. Further price pressure through:
Lower net migration
While still positive, net migration will not reach high levels of the
past (-11% 2017 vs. 2016; 2018 estimated at similar levels as '17)
Oversupply of residential properties
Pension funds and banks in search of returns heavily invested in
(residential) real estate, leading a.o. to the highest residential
vacancy rate since 20 years (1.6%)
Increasing interest rates
Expected higher interest rates (vs. today -0.75% LIBOR rate)
will dampen demand for residential construction
1) As measured in quantity (kg)

5. 5201810_CH Building Material - Contingency Teaser_v12.pptx
15% 10%
55% 20%
Swiss market depends on large-scale new-build projects which will
be impacted by downturn
Current construction volume split by segment [structural, %]
Large
projects1)
Small
projects2)
New-build Renovation
1) Large-scale construction, e.g. hospitals, hotels, multi-family houses, rental properties; only structural construction (Hochbau)
2) Private buildings / construction, mainly residential
Key considerations
> How will the downturn
impact market segments?
> What will be the likely volume
shift, e.g. increase in
renovation of older residential
stock to remain competitive in
rental market?
> Which building materials are
exposed to what segments?
> How will decision power and
route-to-market change?
Source: Roland Berger

6. 6201810_CH Building Material - Contingency Teaser_v12.pptx
Companies need to prepare for the expected slowdown – We
identified main lessons learnt from the past crisis in 2008
Lessons learnt from past crises
Topline
Bottom line
Balance sheet
Spirit/culture
Key lesson learnt:
Companies that act
decisively and early on
are able to not only
endure but even prosper
during a downturn
Four areas to be
considered: Topline,
bottom line, balance
sheet and spirit/culture
> Diversification: To reduce segment or region specific risks, winning
companies try to diversify their sales by product, segment and region
> Renovation vs. new build: Winning companies try to actively increase
their renovation share, which proves to be less volatile
> Cost responsiveness: Winning companies reduce value chain depth
to strategic core activities and outsource others
> Strategic cost cutting: Instead of cutting costs blindly across the
board, winning companies focus cost saving targets on SG&A, without
cutting strategic expenses such as R&D and marketing
> Flexibility: To exploit lower valuations during crises, winning
companies keep their balance sheet flexible for target acquisitions
> Strong cash base: Withstanding short-term investor pleasing, winning
companies reduce dividend payouts during downturns to maintain a
solid cash base
> Agility: Fast decision making in agile organization structures and lean
processes, allow winning companies to react quickly to changes
> (Re-)Entrepreneurship: A culture of entrepreneurship enables winning
companies to seize market opportunities, especially during downturns
Source: Roland Berger

7. 7201810_CH Building Material - Contingency Teaser_v12.pptx
Companies need to prepare topline, bottom line & balance sheet
levers now – But currently, missing sense of urgency
Implementing levers
in a peaking market is
challenging due to
missing sense of
urgency of key
stakeholders and
resulting low buy-in
for implementation
Key hurdle for lever implementation
KeyhurdleSource: Roland Berger
Topline
levers
Bottom line
levers
Balance sheet
levers

8. 8201810_CH Building Material - Contingency Teaser_v12.pptx
Thus, any contingency plan needs to be preceded by awareness
creation – We propose a two step approach
Two step contingency planning approach
Objectives
> Understand today why we need
to prepare for tomorrow
> Create sense of urgency among
key stakeholders
> Ensure buy-in for later implementation
Approach
> Analysis of the market and
company's position within (prior to
project start based on RB industry
expertise)
> Workshop with management team
and key stakeholders (1.5 days)
Objectives
> Identify and prioritize levers
> Quantify levers and develop
contingency plan connected to KPI-
based trigger points
> Define detailed implementation
schedule for preparatory levers
Approach
> Market slowdown readiness audit
> Cost analysis, benchmarking, lever
identification, prioritization, detailing,
and linking to KPI based trigger points
> Implementation set-up & kick-off
1 2
Create awareness Prepare contingency plan
Source: Roland Berger

9. 9201810_CH Building Material - Contingency Teaser_v12.pptx
In an initial awareness workshop we help to create the sense of
urgency and start to discuss major areas for improvement
Participants
> RB experts with
consulting and
deep industry
experience (C-
Level)
Awareness creation – Workshop
Source: Roland Berger
One day workshop
Agenda
Introduction to the team and workshop agenda
Roland Berger presentation on market development &
outside-in view on company vulnerability
Best/worst practice examples for companies that did not
prepare for crisis (early enough)
Identification of areas for optimization, incl. high-level
quantification (ambition level) and prioritization, quick-wins
Discussion on next steps, project scope and approach
> C-level
> Key stake-
holders for later
implementation
Key results
> Sense of urgency created and buy-in for later
implementation safeguarded – Participants persuaded
that the right time to act is now
> Most important improvement areas identified, quantified
(ambition level) and prioritized
> Quick-wins identified – These can serve as spearheads
for change, as teams can start working on it the next day
Venue & set-up
> Neutral location
> Open set-up with
collaborative feel
and possibilities
to interact and
speak up
Your company
1 Create awareness

10. 10201810_CH Building Material - Contingency Teaser_v12.pptx
Lever list
The final contingency plan will connect prioritized levers to KPI-based
trigger points
Contingency plan – Result
1 KPI Preparatory
lever?
(Prior to
crisis)
ToplineBottomlineBalancesheetSpirit/culture
Trigger point (by intensity/
EBIT contribution target level)
Normal Ambitious High
Aftermarket/service sales push
…
SG&A cost reduction
…
Divest of plant A, B, C (or all)
Acquisition of target Z
…
Change management
…
... - - -
...
Utilization
... ... ... ...
2
3
4 Pre-defined lever list,
categorized in topline,
bottom-line, balance sheet
and spirit/culture levers
1
Corresponding KPI,
whose level will define
whether lever will be pulled
or not
2
Definition of whether lever
will be pulled preparatory
(i.e. before crisis), or will be
pulled based on KPI level
during crisis
3
KPI trigger point levels
which will cause the
corresponding lever to be
pulled at corresponding
intensity/ EBIT contribution
target (normal, ambitious,
high)
4
… … …
<80% <75% <65%
… … …
… … …
Illustrative
2 Prepare contingency plan
Source: Roland Berger

11. 11201810_CH Building Material - Contingency Teaser_v12.pptx
Agile processes
Aligned strategy & vision throughout organization
Meaningful incentive system
High data/KPI transparency
Sense of urgency
Business model innovation power
Supporting,
traditional
methodologies
> Cost analysis
> Benchmarking
> Lever
identification,
detailing &
prioritization in
workshops
> Business planning
> Implementation
planning
Contingency planning – Approach
A market slowdown readiness audit could kick start contingency
planning – Traditional methods supporting
2 Prepare contingency plan
1 2 3 4 5
Resilient
sales
Responsive
cost
Flexible
balance sheet
Agile
spirit
Order backlog
Exposure to different market segments (e.g. renov.)
Geographical diversification
Product diversification
New business models
High negotiation power towards customers
Procurement excellence
SG&A excellence
Scale down flexibility
Low degree of vertical integration
Partnership based delivery model
High negotiation power towards suppliers
Asset light production / light footprint
Solid cash base
Divestment options
Best-practice M&A set-up
Working capital excellence
Capital raising ability
Market slowdown readiness audit
Source: Roland Berger
Illustrative

12. 12201810_CH Building Material - Contingency Teaser_v12.pptx
Please get in touch…
Senior Partner
Zurich Office
Sven.Siepen@RolandBerger.com
+41 79 792 73 74
Sven Siepen
Senior Partner
Munich Office
Kai-Stefan.Schober@RolandBerger.com
+49 (160) 7448372
Kai-Stefan Schober