Ladies and gentlemen, good afternoon. Welcome to the Sika Results for the 1st 9 Months Conference Call. I am Maria, the Chorus 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 and A session.
The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Dominic Slapnik, Head IR of Sika. Please go ahead, sir.
Good Good afternoon and welcome to the Sika 9 months results conference call 2014. This morning at 5 o'clock CET, we came out with a set of figures. Our CEO Jan Jensch and our CFO Adrian Zittmer will give you now more details on the 9 months results. Afterwards, they will be ready to take your questions. With this, I hand over to our CEO Jan Jellisz.
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 1st 9 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 double digit growth overall. And maybe for us even more important, we had a double digit growth in all our regions.
Currencies were a bit more favorable. So we only had 3.7 percent points of exchange loss. So we had a very strong 8% sales growth in the Swiss francs. 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 over proportional increase in profitability.
When you look at
the 1st 9 months combined, I think it's from my side excellent to see that we were able to integrate our acquisition successfully. We have bought 5 companies with significant sales in 2013, another 3 in the first half year. And I'm very proud of the people how same time, 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%. So overall, I think we had quite a stunning 1st 9 months with almost 16% growth in local currencies and 9.6% in hard Swiss francs. Again, same as for Q3, we are very pleased how this translates into over proportional 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'm even more excited when we look into the investments we made into the future. You have seen we have 6 new factories opened in the 1st 9 months. We continued our buildup of the emerging markets with new factories in Brazil, Indonesia, India and Serbia. And also we had the opportunity to open new factories in the U.
S. A, in Denver and Atlanta, 2 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 insights on the financials. The strong growth momentum in the 1st 9 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 continue to have a significant negative impact of minus 6.2 percent resulting in a growth in Swiss francs of 9.6%. In looking at a quarter by quarter development, growth momentum has continued to be very dynamic in the 3rd quarter with a growth of 11.7% in local currencies, albeit lower than in the 1st two quarters, which were partially driven by a high acquisition contribution and favorable weather conditions in Europe in Q1.
However, reduced negative foreign exchange translation impact in the Q3 of minus 3.7 percent, this is versus 7.5% in the first half year, has led to a strong growth in Q3 of 8% in Swiss francs. 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 Q4 As already mentioned, all regions contributed to our strong growth in the 1st 9 months with Q3 growth being double digit in all the regions. Strongest contributor to overall growth in the 1st 9 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 rollouts 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 1st 9 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, Zika succeeded in achieving double digit growth in the majority of countries, with an additional contribution by the Lourdes Kimica acquisition in Brazil. However, substantial devaluation of a number of currencies led to high negative translation effects in this region. In looking at the gross results, the gross results have increased slightly from 52.6% to 33%, which we're very satisfied about given the volatile foreign exchange environment and 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 continue 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 percent to €579,600,000 up from CAD 500,600,000 in the same period last year. Depreciation and amortization expenses increased by 10.6%, driven by additional intangible amortization from acquisitions of CAD 7,500,000 compared to the same period of last year. Resulting EBIT growth was a strong 17.2 percent year on year.
Net profit after tax again improved over proportionally by 21.2 percent to $310,200,000 on the back of lower financial expenses, while interest expenses increased by about $1,500,000 compared to the same period of last year due to temporarily higher level of outstanding bonds. The €300,000,000 bond issued in 2,009 was repaid at the end of June as scheduled. Other financial expenses decreased by about $7,000,000 compared to last year. And lastly, tax rate in the 1st 9 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, the both regions with mostly emerging markets, we have some hiccups in some countries as you know very well. And 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. And I'm very satisfied with the double digit growth and we also expect this to continue the next month.
North America, we also have quite a positive observation. We have this very, very cold weather. If you remember, there's snow even in Atlanta and some southern states in January February. And then we had a big positive effect after that and we see this now even continuing over the summer months. So 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. And 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 six quarters. And I think now we have to be realistic that quarter 4 2013 was the most exceptional quarter we ever had.
When you look at the sales growth 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 Zika. 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 2%, 3%, 4%, negative percentage points in Q4. And this also makes it an uphill battle for our profitability in Q4, because we have this extraordinary pension gain of CHF 16,000,000 due to a change of our pension scheme.
So also, please, we have to be realistic that we cannot expect that we can just make up for the CHF 16,000,000 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 and A. Yes, questions are open for the Q and A.
We will now begin the question and answer session. Anyone who wish First question is from Mr. Martin Frykiger 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. Then 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. But coming back to your specific quantitative guidance of 8% to 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 129,000,000 for Q4, which is some EUR4000000000 or EUR5000000000 down versus Q4 2013? Thank you so much.
Okay. That's a lot of questions. But let me start with the countries. We are again, I think we are 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.
We see 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 this pharma crisis countries, Portugal, Spain, Greece, where maybe we really sticked into the market. We didn't really close we didn't close any factories.
We didn't really make a big restructuring. And so we are able now to grow again in these markets. So that is maybe quite a positive momentum I would say. Latin America are the same. We have a good situation in most countries.
Of course, we have Argentina, Venezuela is maybe a bit difficult. And 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 and also 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 and 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 and there was no winter season in Europe last year until Christmas. So it will be very difficult to achieve the top line. And then it's not possible really to grow the EBIT accordingly.
So your calculation is correct. We don't expect to have an EBIT increase in Q4.
Thank you very much.
Next question is from Mr. Martin Husler of Zurcher Tandonal Bank. 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 for month by month. I was just wondering how you see this trend developing for the rest of the year? Or more general, do you think you will see a relief in from the raw material side?
And what do you do on your pricing strategy? Can you increase prices? And did you increase prices on your products? Or do you have to give these benefits to the market if there are any benefits at all?
Yes. That's a good well, I personally think the raw material suppliers should all decrease their prices. However, until now the reality is a bit different. We have I would call it we have stable pricing in the past year. We have 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 marshals at this level. So we have quite some activities there. We have in addition, what always helps us is our continuous stream of new products and this helps us a lot to keep the markets at the margins on a healthy level. So 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 were asking about the outlook for the raw materials.
Is not easy. We see since 2 months, I think, the crude oil price is dropping by maybe around 20% until now. It's historically still very high levels, dollars 80 or $82 today, I think. And 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 3 or 4 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 And we don't we have to see how the market goes, I would say, end of this year beginning of next year.
Okay. Thank you. And then maybe another question if I may to Mr. Wietmer. 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?
Yes. I mean, 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 is also my expectation. Thank you.
The next question is from Mr. Tobias Loscamp of HSBC. Please go ahead, sir.
Yes, good afternoon, gentlemen. And my first question is on the European business. We're looking at the numbers, it seems that there has been kind of a slowdown in the growth rates from Q1 and Q2, obviously partly due to the weather. But I was wondering whether you can give us a bit of a feeling whether this it has been a steady deceleration of the growth rate or whether that's something that has recovered in September, let's say, after a very after the summer months, as some companies have commented? 2nd question that I would like to ask is, you have opened 2 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? Or do you see what do you have, let's say, indications that in these regions the markets will grow more strongly over the next few years? Or what is the rationale behind it?
Maybe you can give us more insight here. And then 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 until this will continue or is this a steady process at Zika?
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 20 3% 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%.
So we are actually quite positively with how strong the European markets remain despite all these crisis talks and the difficulties in from the Ukraine to Russia and other elements. And the second question regarding the efficiencies, I would say we have used the volume growth, which we achieved in the last 2 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. So 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.
So 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. And 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.
And we do this for the local products. So 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. But these mortar products and the liquid products, we are very happy to open new factories to capture the full potential of a local market.
And maybe a follow-up on this one. Are these in markets where you have been present beforehand already or is it just the market 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. So we have which is a good thing.
So we have the sales organization. The warehousing is basically in place in these zones. And then we add a factory and we have quite short period till breakeven with these new factories.
All right. Thank you.
The next question is from Mr. Thorsten Viss, UBS. Please go ahead, sir.
Yes, thanks. I've got a question on the top line guidance, the 9% to 10% to 11% local currency growth guidance you're maintaining. If I did the calculation correctly and use the FX assumptions you have just stated, which seem reasonable. It ends up with a Q4 organic decrease of 3% to 11%, but
I'm really wondering if I might
have made an error here. But 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. So I mean my question ends up with what you expect in organic terms for Q4 given the strong base effect last year?
And Torsten, are you talking local currency for your organic?
No, organic, real organic. Organic.
But in local currencies I assume?
Yes. Yes excluding acquisitions and FX.
I think in fact we are hoping that we will be flat in local currency for Q4. This is our target at the moment, which then in Swiss francs will give you a minus however big that's going to be.
Okay. Thanks. And then just a few other questions on the other operating expenses might be for Adrian, which had been up again on the basis of last year's Q3 with already special charges due to the integration of Akzo. 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 the one off and should rather come down again or if we speak about new higher levels going forward for the other operating expenses.
And then I have 2 other questions please.
On the operating expense, I mean, this is really largely driven by the many growth initiatives here 5 new companies opened, new factories, sort of ramp up costs. We are also or have invested in marketing and branding. I mean really sort of ongoing, it's a bit of higher level than normal. So this is one thing. Secondly, also with the region EMEA having quite over proportionally contributed this year to growth with a somewhat higher other operating OpEx share if you compare it to the average of the group.
So I would not say this is a trend that is continuing. So it's really sort of many measures contributing to that, but not really specific one off elements.
Okay. So as long as you keep that extraordinary high pace of new factories being set up that might stay at a higher level, but then should go down again? Yes. Okay. And then just 2 other ones, please.
On North America where you seem to be quite positive, but then again you speak about catch up effect. I guess I'm right understanding that this is not a one off in 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? And then on OXXO Nobel, 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 Okto Okto Nobel, just Okto. And on the synergies, just to give us some flavor of that acquisition, that important acquisition.
And lastly, perhaps you allow us to see get some idea about you started into Q4 please?
All right. So the Q4 has just started, Thorsten. We have the 30th October. So we have no indication. No seriously, we have no we are very fast.
So we have next week Tuesday, Wednesday we have sales figures already. At the moment, we don't bother the countries with like forecasts on a monthly basis. So please allow us not to we have no information on this. Now regarding the U. S, there was a catch up because we have this very almost a breakdown of the transportation system in the country Monday Tuesday and they remember the reports where people cannot go to the mall because it's icy outside on the roads.
And even our people there, we have closed down our factory in Atlanta because of snow. Imagine this. And so we had a couple of hiccups in I think January February and then there was a catch up I think then March April May from this slowdown in demand and supply. And now we are very pleased to see how strong Q3 was, because Q3 is then free from that and 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. And again, we have a double digit growth in Q3 in North America, which we think is excellent.
And we believe that this will continue for next couple of months in North America.
And Akzo?
Akzo, we are again, we are very pleased with our acquisitions. I think also you're right from your analysis that they contribute and also that our acquisitions overall are even growing in the 1st 1 or 2 years of acquiring them. I think I don't want to comment too much on single acquisitions, but all of them are running really, really above expectations.
Okay. Thank you.
The next question is from Mr. Christian Arnold, Bankfrontobel. Please go ahead sir.
Yes. Good afternoon, gentlemen. I have two questions from my side. On the one side, a follow-up question on EMEA and the Q3. 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. So have you also seen positive growth in EMEA for the construction activities? That's my first question organically. I'm talking organically in the Q3 2014. And my second question would be a little bit outlook and not only for Q4, but maybe looking into next year.
I know it's rather premature. But nevertheless, if we 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 and then assume some normal growth based on your positive outlook for Asia for North America. So normal organic growth rate of 4%, 5%, 6%. Your acquisition activities somewhat slowed down, so you should have less integration costs. So 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. So 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 3 years in the growth markets.
And we have many new products in the pipelines. I think our people are staying on board. They are fully motivated. So this is what makes me very positive. Now 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 if what Russia and the conflict with Europe going to be like. We have many problem zones in the world. So I'm not so optimistic with the markets for next year. I'm optimistic with our strategy and our initiatives.
And so I believe we will deliver along our strategy 2018 with 6% to 8% growth also in the next year.
Okay. And in terms of operating leverage, I mean, you're also guiding for I think, EBIT margin above 10%. I mean, above 10% is quite a wide range. But 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. We also have to I think we have to keep the feet on the ground. This year is only going to be the 3rd year in our history that we achieved a double digit EBIT margin. So I think we should remain a little bit cautious with the outlooks for next year. We also had I would say our initiatives for efficiencies to grow what we saw the last year were all quite successful.
So we didn't really have a big negative activity or something. So I'd just rather keep it a little bit the feet on the ground at this point, because I think the market is will not be so great next year. So we will have a lot of effort to achieve our growth rates. And so I don't want to make an outlook at this point. I think we talk about at the beginning of next year, I think, what our target shall be for 2015.
Thank you very much.
We have a follow-up question from Mr. Thorsten Wiese, UBS. Please go ahead sir.
Yes. Thanks. Just on the regions briefly again on Asia Pacific and Latin America. On Asia Pacific first, I mean you have stated to grow nicely in China, Japan, Southeast Asia and Australia. Then again, however, the growth rate in Asia Pacific came down to 7.7% in organic terms, somewhat lower than Q3.
So there must be some regions which have been growing under proportionally. Perhaps you could elaborate on that. And specifically staying at the Asian Pacific region, speaking about China, did you have any impact of this Chinese Golden Week? How did this affect you? And was this even something you felt speaking about this sequential organic slowdown of growth in Asia Pacific?
And then just on Latin America as the other question, as you have been maintaining your 12% organic growth in Latin America, it seems to be I mean that is quite astonishing because Brazil as you have stated has gone negative for obvious reasons. So which countries have been doing so fine to compensate entirely for Brazil? Some regions must have been countries must have been doing extremely well, which is astonishing I believe. Thanks.
I think Latin America's question is answered very fast. All but Brazil have done excellent. And 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 Swiss francs.
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. And again, it was exceptional year with the late carnival and the football championship. I think they were the market is a little bit worse this year than it really is.
So again, we are quite happy Latin America. Asia Pacific, your observation is correct. We maybe there was 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. And the Chinese the Golden Week in China, did this really materially impact your Q3 organic growth? Or is this just rounding air? Did you do the analysis? Perhaps you didn't do that.
It might be a silly question for you. I don't know.
You have to you'll talk to me on this one. I cannot do it in front of everyone. But so I assume the gold week last year was in October. Is that the question?
Yes. I mean this year there was I think a combination of 2 factors that made it really difficult that week. I'm not sure.
But what about the gold make? I don't what's different to last year? It's every year, right? So
Yes. 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 that this year versus the last year, but it might be an excuse and there was no special impact. If this is the message, that's
fine. I'm 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. So 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 is making a difference for us this year.
Okay. That's fine.
So maybe I'm going to use that next year.
That's a good excuse for next year.
There are no more questions at this time.
So thank you very much for joining our conference call. We end this call now. And thank you again for your interest in Zika. Goodbye and thank you. Bye bye.
Bye bye.
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