Ladies and gentlemen, good afternoon. Welcome to the Sika Results for the First Nine Months conference call. I am Maria, the conference call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Should you need assistance, please press star and zero to call an operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Dominik Slappnig, Head IR of Sika. Please go ahead, sir.
Good afternoon. Welcome to the Sika Nine Months Results Conference Call 2014. This morning at 5:00 CET, we came out with a set of figures. Our CEO, Jan Jenisch, and our CFO, Adrian Widmer, will give you now more details on the nine months results. Afterwards, they will be ready to take your questions. With this, I hand over to our CEO, Jan Jenisch.
Good afternoon, everyone. Thank you for joining us today. We are, of course, very excited to hear you all and especially to present our results in more detail. As you can imagine, we are very pleased with the Q3 results and the results for the first nine months. Especially the Q3, as we have a lot of negative messages in the world markets. We are quite proud that we could, again, be a double-digit growth overall. Maybe for us, even more important, we had a double-digit growth in all our regions. Currencies were a bit more favorable, we only had 3.7% points of exchange loss. We had a very strong 8% sales growth in the CHF.
As you have noticed also from the margin side, we are very pleased that we could translate the sales growth, combined with some efficiency measurements into an overproportional increase in profitability. When you look at the first nine months combined, I think it's, from my side, excellent to see that we were able to integrate our acquisitions successfully. We have bought five companies with significant sales in 2013, another three in the first half year. I'm very proud of the people, how they integrate the businesses, and more than 7% of our growth came from acquisitions in the first nine months. At the same time, our investments in the new factories and into the launch of new products has paid off with an organic growth rate of more than 8%.
Overall, I think we had quite a stunning first nine months with almost 16% growth in local currencies and 9.6% in hard CHF. Again, same as for Q3, we are very pleased how this translates into overproportional increase in profitability from our stable gross margin to some efficiency improvements, we have posted 21% increase in operating profit. I think this is the set of numbers which Adrian will comment shortly in more detail. From my side, I am even more excited when we look into the investments we made into the future. You have seen we have six new factories opened in the first nine months. We continued our build-up of the emerging markets with new factories in Brazil, Indonesia, India, and Serbia. Also, we had the opportunity to open new factories in the U.S.A., in Denver and Atlanta, two fast-growing regions in the U.S.
I think overall, our Strategy 2018 is well on track. We are quite proud of all the new products our labs bring out. We are proud of the acquisitions and of the contribution of the new factories. With this, I would like to pass over to Adrian, who goes a bit into details.
Very good, and good afternoon. Following Jan's business summary and presentation of the highlights, I will give you now further insight on the financials. The strong growth momentum in the first nine months was driven by an organic growth of 8.6% but also by a sizable contribution from acquisitions, adding 7.2% growth to the top line and leading to a local currency growth of 15.8%. On the negative side, foreign exchange translation effects continued to have a significant negative impact of -6.2%, resulting in a growth in CHF of 9.6%. In looking at a quarter-by-quarter development, growth momentum has continued to be very dynamic in the third quarter, with a growth of 11.7% in local currencies, albeit lower than in the first two quarters, which were partially driven by a high acquisition contribution and favorable weather conditions in Europe in Q1.
We used negative foreign exchange translation impacts in the third quarter of -3.7%. This is versus 7.5% in the first half year. Has led to a strong growth in Q3 of 8% in CHF. Acquisition growth will now significantly reduce in Q4, as acquisition impact of the transactions consummated in the second half of 2013 will phase out, and also organic growth will be measured against a very strong fourth quarter 2013. As already mentioned, all regions contributed to our strong growth in the first nine months, with Q3 growth being double-digit in all the regions. Strongest contributor to overall growth in the first nine months, both in absolute as well as in percentage terms, was the region EMEA, with a growth of 17.4% year-on-year in local currencies.
In addition to the contribution of last year's acquisitions, namely Everbuild and the building adhesives business of AkzoNobel, as well as product roll-outs, growth in the Middle East and Africa, and the moderate recovery seen in Southern Europe, had a positive impact on the region. North America saw a further increase in momentum and recorded an 8.5% increase in sales. Projects delayed at the beginning of the year due to the inclement weather conditions are now under construction, and investments are being made in infrastructure projects and commercial buildings. The region Asia-Pacific continued to show strong double-digit growth of 15.6% in the first nine months. This on the back of strong growth in China, Japan, Southeast Asia, and Australia. This positive performance is driven by market share gains, entry into new markets, and continuing investments into the supply chain.
With an increase of 17.1%, sales growth remained consistently high in Latin America. In a very demanding business environment, Sika succeeded in achieving double-digit growth in the majority of countries, with an additional contribution by the Lwart Química acquisition in Brazil. Substantial devaluation of a number of currencies led to high negative translation effects in this region. In looking at the gross result, the gross result has increased slightly from 52.6 to 33%, which we're very satisfied about given the volatile foreign exchange environment. This is reflective of a solid and disciplined margin management and pricing throughout the group. On top of this, controlled cost management led to an under proportional operating cost increase of 8.9%. Particularly, personnel costs continued to increase at the modest rate of 5.3% only, as organic increase in personnel is modest and largely in emerging economies.
In addition, translation effect works in a positive way here. Other operating expenses increased slightly disproportionately on the numerous growth initiatives. In consequence, EBITDA increased by 15.8% to CHF 579.6 million, up from CHF 500.6 million in the same period last year. Depreciation and amortization expenses increased by 10.6%, driven by additional intangible amortization from acquisitions of CHF 7.5 million compared to the same period of last year. Resulting EBIT growth was a strong 17.2% year-on-year. Net profit after tax again improved over proportionally by 21.2% to CHF 310.2 million on the back of lower financial expenses. While interest expenses increased by about CHF 1.5 million compared to the same period of last year, due to temporarily higher level of outstanding bonds. The CHF 300 million bond issued in 2009 was repaid at the end of June as scheduled. Other financial expenses decreased by about CHF seven million compared to last year.
Lastly, tax rate in the first nine months was also marginally lower than in the previous year. With this, I conclude my comments on the financials and hand back to Jan for the outlook.
Thank you, Adrian. The outlook, maybe just a brief comment on the regions. I think Asia-Pacific and Latin America, they're both regions with mostly emerging markets. We have some hiccups in some countries, as you know very well, I'm very satisfied how our people locally are handling all the challenges from Forex to difficult political situations, also to some downturn in the markets. I'm very satisfied with the double-digit growth. We also expect this to continue the next months. North America, we also have quite a positive observation. We have this very, very cold weather. If you remember, we have snow even in Atlanta and some southern states in January and February. Then we had a big positive effect after that. We see this now even continuing over the summer months.
We expect a high single-digit growth to happen for this year in North America. EMEA, I would say nothing really special. We have our high acquisition impact. Also in most markets, we have quite stable and slightly growing results. I think for the full year outlook, I would like to say that we had such a fantastic momentum in sales growth over the last 6 quarters. I think now we have to be realistic that quarter four 2013 was the most exceptional quarter we ever had. When you look at the sales growth in our quarterly slide, with around 18% sales growth last year for the quarter. I really don't believe that we can expect any growth in Q4 for Sika. We believe it will be maybe a flat quarter.
Maybe if the weather turns into the winter soon in November, we may maybe even have to face a two, three, four negative percentage points in Q4. This also makes it an uphill battle for our profitability in Q4, because we have this extraordinary pension gain of CHF 60 million due to a change of our pension scheme. Also, please, we have to be realistic there. We cannot expect that we can just make up for the CHF 60 million, especially considering that sales will be flat for us in Q4. Okay, Dominik, I think that's our quick go through. Maybe we go to the Q&A.
Yeah. Questions are open for the Q&A.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. First question is from Mr. Martin Flueckiger of Kepler Cheuvreux. Go ahead, sir.
Thank you very much. Good afternoon, gentlemen. Martin Flueckiger from Kepler Cheuvreux. Two questions, please. First one on the market environment, particularly in Europe and Latin America. You've already mentioned a few highlights, but I was wondering whether you could provide a little bit more color here. Particularly, I'm interested in the market feedback you're getting from customers in Germany and in Latin America from countries like Colombia, Argentina, Chile, and Brazil. That's my first question. Secondly, coming back to your EBIT guidance, which you've also just mentioned, and many thanks for highlighting the one-off item last year in Q4. Coming back to your specific quantitative guidance of 8%-12%, am I correct in calculating that this is, or implies actually a margin decline and an actual absolute decline in EBIT for Q4? Could you just clarify that, please, just to be certain about that?
Because according to my calculations, even 12%, which will be at the top end, would imply CHF 129 million for Q4, which is some CHF four or five million down versus Q4 2013. Thank you so much.
Okay. That's a lot of questions, huh? Let me start with the countries. Again, I would say the negative comments regarding certain countries maybe have increased over the summer period. However, I think we at Sika are quite positive with the outlook. To start with Europe, we see many markets quite stable. We say even in France, we don't have a decline. We are strong in Germany. I would say we have some positive effects now from these former crisis countries, Portugal, Spain, Greece, where maybe we really sticked into the market. We didn't close any factories. We didn't really make a big restructuring, we are able now to grow again in these markets. That is maybe quite a positive momentum, I would say. Latin America, the same. We have a good situation in most countries. Of course, we have Argentina, Venezuela is maybe a bit difficult.
In Brazil, we had an exceptional year with this late carnival to the football championship, to the national election, which has made the market clearly negative. We are struggling to reach last year's results. Asia, the same. Everyone talks, I would say, quite negatively about China. Of course, there are certain market segments which are not maybe booming double-digit anymore. For us, we are still in the double-digit growth mode in China, we are, I would say, lightly positive for China and also for Southeast Asia. When I look at the EBIT for the Q4, again, we have to realize that I don't think it will be possible for us to grow the sales line At all in Q4.
If you look at this 18% growth we achieved last year, there was no winter season in Europe last year until Christmas, it will be very difficult to achieve the top line, it's not possible really to grow the EBIT accordingly. Your calculation is correct. We don't expect to have a EBIT increase in Q4.
Thank you very much.
Next question is from Mr. Martin Hüsler of Zürcher Kantonalbank. Please go ahead, sir.
Yes, thank you. My first question is regarding the raw material price development. In all the slides you show the development of the gross profit margins month by month. I was just wondering how you see this trend developing for the rest of the year. More general, do you think you will see a relief from the raw material side? What do you do on your pricing strategy? Can you increase prices? Did you increase prices on your products? Do you have to give these benefits to the market, if there are any benefits at all?
Yeah. I personally think the raw material suppliers should all decrease their prices. However, until now, the reality is a bit different. I would call it we have stable pricing. In the past year, we had to do quite some sales price increases, especially in the markets with high inflation or with big drops of the currencies. You can imagine our people in India, our people in Brazil, they are quite busy to keep the margins at this level. We have quite some activities there. In addition, what always helps us is our continuous stream of new products. This helps us a lot to keep the margins on a healthy level. What you see in the margin at this point in time is driven by our own efforts for new product introduction and pricing, and not by input costs.
Now you are asking about the outlook for the raw materials. It's not easy. We see since two months, I think, the crude oil price is dropping by maybe around 20% until now. It's historically still very high levels, $80 or $82 today, I think. You have to see that all the big suppliers we have, all the big chemical companies, I believe they don't buy at these spot prices. They have contract prices, which means any change in crude oil price will only have an effect after three or four months in their cost calculation, and then maybe it needs even longer to put it out in the market system. However, even more important than this is simple demand and supply and capacity utilization of the raw material industry, and therefore it's very difficult for us to predict anything.
We, at the moment, we plan with stable pricing also for 2015 because we don't see any downturn yet in our raw material purchases. We have to see how the market goes, I would say, end of this year, beginning of next year.
Okay. Thank you. Maybe another question, if I may, to Mr. Widmer. I'm sure you made the calculations, but if the exchange rates stayed at the level they are at the moment, what currency impact would you expect in Q4 on sales?
If we look at the year to date with roughly a 6% negative impact, if the currencies broadly stayed at the same level, I would see this coming down to close to 5% for the full year.
Okay. This was also my expectation. Thank you.
The next question is from Mr. Tobias Loskamp of HSBC. Please go ahead, sir.
Yes. Good afternoon, gentlemen. My first question is on the European business, where looking at the numbers, it seems that there has been a kind of a slowdown in the growth rates from Q1 and Q2, obviously partly due to the weather. I was wondering whether you can give us a bit of a feeling whether it has been a steady deceleration of the growth rate or whether that's something that has recovered in September, let's say, after the summer months, as some companies have commented. Second question that I would like to ask is, you have opened two factories in the U.S. Maybe you can give us a bit more insight on what is the reason for that. Are the current capacities now basically fully used? Do you see indications that in these regions, the markets will grow more strongly over the next few years?
What is the rationale behind it? Maybe you can give us more insight here. Finally, I would like to ask about, you mentioned some of the efficiency measurements that have helped to improve the margins also in Q3. Just wondering whether this will continue, or is this a steady process at Sika?
All right, Tobias, thank you. Regarding the markets in Europe, I think if I take out this very warm weather beginning of the year, where we had also a Q1 result with something like 23% growth. We are quite pleased to see that even after May, the organic growth rate somehow stabilized, and even in the EMEA region in Q3, our organic growth rate was 2%. We are actually quite positively with how strong the European markets remain despite all these crisis talks and the difficulties from the Ukraine to Russia and other elements. The second question regarding the efficiencies, I would say we have used the volume growth, which we achieved in the last two years, to make our factories more efficient, which basically means we have more optimization. We don't have to increase the headcount when we introduce the higher volumes.
We are also happy to do that. We have special programs, nothing big, but just we try to focus also on the efficiencies of our factories, which obviously we were quite successful. Regarding the U.S., we are totally excited with the market opportunities. I think when you look at the construction market, the U.S. has, what we say, hotspots. They have Chicago, they have New York, they have Florida, Atlanta. They have Texas, California. They have certain regions with a very high growth momentum and growth potential for the future. We made a plan, I would say, the last couple of months or the last year, how to better benefit in these areas, and this is why we also intensify our supply footprint in the U.S.
We do this for the local products, we do this for our mortars and for our liquid products, which need to produce in a certain distance to the customer. We don't do this for the membranes or for the adhesives. Here, we prefer to have large regional factories. These mortar products and the liquid products, we are very happy to open new factories to capture the full potential of a local market.
Maybe a follow-up on this one. Are these in markets where you have been present beforehand already, or is it just the markets that you're newly attacking?
I think it's fair to say that we are fully present in all parts in the U.S. market. However, you need these local factories to really have a volume approach and satisfy the customer in all aspects. Which is a good thing. We have the sales organization. The warehousing is basically in place in these zones, then we add a factory, and we have quite a short period till break even with these new factories.
All right. Thank you.
The next question is from Mr. Thorsten Wis, UBS. Please go ahead, sir.
Yes, thanks. I've got a question on the top-line guidance, the 9%-11% local currency growth guidance you're maintaining. If I did the calculation correctly and used the FX assumptions you have just stated, which seem reasonable, it ends up with a Q4 organic decrease of 3%-11%. I'm really wondering if I might have made an error here, which doesn't sound reasonable. The other thing you have stated, if I understood you correctly, is to be or to expect to be flat year-over-year in Q4 on the top line. I mean, my question ends up with what you expect in organic terms for Q4, given the strong base effect last year.
Thorsten, are you talking local currency for your?
Organic, real organic.
In local currencies, I assume.
Yes. Yeah, excluding acquisitions and FX.
I think, in fact, we're hoping that we will be flat in local currency for Q4. This is our target at the moment, which then in CHF will give you a minus, however big that's going to be.
Okay, thanks. Just a few other questions on the Other Operating Expenses, might be for Adrian Widmer, which have been up again on the basis of last year's Q3 with already special charges due to the integration of ACT. I remember you had due diligence consultant costs, and you still have an increase of the Other Operating Expense line this year in Q3 of 80 basis points. Could you give us a feeling if this is, again, a one-off and should rather come down again, or if we speak about new higher levels going forward for the Other Operating Expenses? I have two other questions, please.
On the operating expenses. This is really largely driven by the many growth initiatives here. Five new companies opened, new factories, sort of ramp-up cost. We have invested in marketing, in branding. I mean, really sort of ongoing. It's a bit higher level than normal. This is one thing. Secondly, also, with the region EMEA having quite over-proportionately contributed this year to growth with a somewhat higher other operating OpEx share, if you compare it to the average of the group
I would not say this is a trend that is continuing. It's really many measures contributing to that, but not really specific one-off elements.
Okay. As long as you keep that extraordinary high pace of new factories being set up, that might stay at the higher level, but then should go down again.
Yes.
Okay. Just two other ones, please. On North America, where you seem to be quite positive, but then again you speak about catch-up effects. I guess I'm right understanding that this is not a one-off in Q3, like catching up what you haven't done in Q1 and Q2, that you rather believe or hope that this is an ongoing structural change of the end market, and we might be seeing a nice growth into 2015 as well. On AkzoNobel, please, you might be able to tell us, because I believe it has been doing quite nicely looking at the acquisitional impact in EMEA, how the integration goes on. Perhaps you can give us an indication on the growth rate you achieve on Akzo, AkzoNobel, just Akzo, and on the synergies, just to give us some flavor of that important acquisition.
Perhaps you allow us to get some idea about you started into Q4, please.
All right. The Q4 has just started, Thorsten. We have the 30th of October. We have no indication. No, seriously, we are very fast, we have next week, Tuesday, Wednesday, we have sales figures already. At the moment, we don't bother the countries with forecasts on a monthly basis. Please allow us, we have no information on this. Regarding the U.S., there was a catch-up because we have this almost a breakdown of the transportation system in the country Monday and Tuesday. Still remember the reports where people cannot go to the mall because it's icy outside on the roads. Even our people, we had to close down our factory in Atlanta because of snow. Imagine this.
We had a couple of hiccups in, I think, January, February, there was a catch-up, I think then March, April, May, from this slowdown in demand and supply. Now we are very pleased to see how strong Q3 was. Q3 is then free from that, we see quite a pickup in the construction activities. Not only residential, which is less important for us, but also in infrastructure and industrial segment. Again, we have a double-digit growth in Q3 in North America, which we think is excellent. We believe that this will continue for next couple of months in North America.
Mm-hmm. Akzo?
Akzo, again, we are very pleased with our acquisitions. I think also you are right from your analysis that they contribute and also that our acquisitions overall are even growing in the first one or two years of acquiring them. I think I don't want to comment too much on single acquisitions, but all of them are running really above expectations.
Mm-hmm. Okay. Thank you.
The next question is from Mr. Christian Arnold, Bank Vontobel. Please go ahead, sir.
Yes, good afternoon, gentlemen. Two questions from my side. On the one side, a follow-up question on EMEA and the third quarter. You mentioned the organic growth rate you reached in Q3 in EMEA of 2%, and I wonder if you could split that up somehow in your activities related to construction and activities related to industrial applications. Have you also seen positive growth in EMEA for the construction activities? That's my first question. Organically, I'm talking organically in the third quarter 2014.
Yeah.
My second question would be a little bit outlook, not only for Q4, but maybe looking into next year. I know it's rather premature, but nevertheless, if you just take your assumption of stable raw material prices for next year, which is, I believe, a rather cautious assumption at this point in time, then assume some normal growth based on your positive outlook for Asia, for North America. Normal organic growth rate of 4, 5, 6%. Your acquisition activities somewhat slowed down, you should have less integration costs. Is my assumption right that we should see actually a nice operating leverage next year? Thank you.
Okay. I think the organic growth rate in the Q3 for EMEA is about the same for industry and for construction. Again, we were quite pleased to see that the markets or our business is, I would say, quite in good shape. Outlook for next year, I think what makes me positive for next year is our investments. When you look at our new factories, I think by the end of this year, we will have opened 23 to 24 new factories in the past three years in the growth markets. We have many new products in the pipelines. I think our people are staying on board. They are fully motivated. This is what makes me very positive. On specific market situations, I don't think the markets will be easy next year. You see the problems we have in various markets.
We don't know what Russia and the conflict with Europe going to be like. We have many problem zones in the world. I'm not so optimistic with the markets for next year. I'm optimistic with our strategy and our initiatives, I believe we will deliver along our Strategy 2018 with 6%-8% growth also in the next year.
Okay. In terms of operating leverage, you're also guiding for, I think, EBIT margin above 10%. Above 10%, that's quite a wide range. Would you agree that next year's margin from today's point of view will be higher than this year's margin?
To be honest, I think if we are at the lower end of this growth rate, if there's no tailwind from the raw material markets, I think it will be rather difficult to increase the margin, to be honest. I think we have to keep the feet on the ground. This year, it's only going to be the third year in our history that we achieve a double-digit EBIT margin. I think we should remain a little bit cautious with the outlooks for next year. We also had, I would say our initiatives from efficiencies to growth, what we saw the last year, were all quite successful. We didn't really have a big negative activity or something. I'd just rather keep it a little bit, the feet on the ground at this point, because I think the markets will not be so great next year.
We will have a lot of effort to achieve our growth rates. I don't want to make an outlook at this point. I think we talk about it beginning of next year, I think what our target shall be for 2015.
Thank you very much.
As a reminder, if you wish to register for a question, please press star and one on your telephone. We have a follow-up question from Mr. Thorsten Wis, UBS. Please go ahead, sir.
Yes, thanks. Just on the regions briefly again on Asia-Pacific and Latin America. On Asia-Pacific first. You have stated to grow nicely in China, Japan, Southeast Asia and Australia. Again, however, the growth rate in Asia-Pacific came down to 7.7% in organic terms, somewhat lower than Q3. There must be some regions which have been growing under proportionally. Perhaps you could elaborate on that. Specifically, staying at the Asia-Pacific region, speaking about China, did you have any impact of this Chinese Golden Week? How did this affect you? Was this even something you felt, speaking about this sequential organic slowdown of growth in Asia-Pacific? Just on Latin America as the other question, as you have been maintaining your 12% organic growth in Latin America, that is quite astonishing because Brazil, as you have stated, has gone negative for obvious reasons.
Which countries have been doing so fine to compensate entirely for Brazil? Some countries must have been doing extremely well, which is astonishing, I believe. Thanks.
I think Latin America question is answered very fast. All but Brazil have done excellent. Again, we are very pleased. Of course, the currency effect is a little bit painful. It's a pity we cannot show a better result in CHF, but in local currency, we are very happy with all markets. Brazil, let's see how Brazil does next year. I have hopes that they put their things together. Again, it was exceptional year with the late carnival and the football championship. I think the market is a little bit worse this year than it really is. Again, we are quite happy, Latin America. Asia-Pacific, your observation is correct. Maybe there was a little bit of slowdown of the organic growth rate in Q3. We have markets like Korea, but also like Vietnam, which are not in such a good shape at the moment.
Okay. The Golden Week in China, did this really materially impact your Q3 organic growth, or is this just a rounding error? Did you do the analysis? Perhaps you didn't do that. This might be a silly question for you, I don't know.
You catch me on this one. Can you not do it in front of everyone? I assume the Golden Week last year was in October.
Yeah.
Is that the question? For the Golden Week?
Yeah. This year there was, I think, a combination of two factors that made it really difficult that week. I'm not sure. Yeah.
What about the Golden Week? What's different to last year? It's every year, right?
Yeah, no, I think it did impact this year as far as I've heard from many companies, but might be an excuse, that it did have a special impact this year versus the last year. It might be an excuse and there was no special impact. If this is the message, that's fine.
Okay. Honestly speaking, I don't think we saw that. They have the Chinese New Year is every year in January or February, and the dates are quite changing. You have an effect month to month. That's correct. This is a heavy impact. This is an impact of 20% or 30%, but then you recover the next month or depending how the comparison period is. That's a huge impact, but it's the same for us every year, so I don't really see that.
That this made any difference for us this year.
Okay. No, that's fine. Thanks very much.
Maybe I'm going to use that next year, huh?
That's a good excuse for next year. Yeah.
There are no more questions at this time.
Thank you very much for joining our conference call. We end this call now. Thank you again for your interest in Sika. Goodbye, and thank you.
Bye-bye.
Bye-bye.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.