Ladies and gentlemen, good morning or good afternoon. Welcome to the Sika Half Year Report 2014. I'm Alice, 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. Dominik Slutney, Head IR of Sika. Please go ahead, sir.
Good morning or good afternoon and welcome to the Zika Half Year Results Conference Call 2014. This morning at 5 CET, we came out with a set of figures. Our CEO, Jan Jennings and our CFO, Adrian Wittmer will give you now more details on the first half results. Afterwards, they will be ready to take your questions. So let's start.
Jan, please go ahead. Yes. Thank you, Dominik. Good afternoon, everyone. As you hopefully can imagine, we are very pleased with our half year results.
We have an excellent expansion of our sales in all of our regions and we could also translate this into an over proportional improvement of our margins. And therefore, we are very, very pleased with the half year figures. We have maybe more important than the figures is our ongoing investments and our execution of our Strategy 2018. We are also here very pleased with the initiatives for our market penetration, our push for an acceleration of our innovations and of course the accelerated buildup of the emerging markets. We had in the first half, we had 3 new factories in Brazil.
Then we have the second one in Indonesia and already the 6th factory in India. You will also see in the second half of the year, we will maybe have another 4 to 5 factory openings. So we still target to open around 8 new factories like we announced beginning of the year. We have as another cornerstone of our strategy, we have acquisitions. Here also we could close 3 acquisitions in Switzerland, Korea and Brazil in the first half of the year.
And also here we are happy that we continue to work up our pipeline for acquisitions. So ladies and gentlemen, overall, I am again I'm pleased it was not an easy year with the high translation losses we have in the foreign exchange rates. This is not only a bit of unpleasant for the top line figures, but also puts of course a lot of pressure for the bottom line. We have in many markets you can imagine we have a lot of inflated costs through weaker local currencies. And I'm very proud of our global team that we managed to increase our profitability over proportional under these circumstances.
I would like to hand over to Adrian at this point to go into more detail regarding our profit and loss statement.
Good afternoon. Following our CEO's business summary and presentation of the highlights, I will give you further insight on the financial results of the first half year. Strong top line growth was driven by an organic growth of 9.9%, partially helped by a mild winter in Europe, but also by a sizable contribution from acquisitions adding 8.2% growth to the top line. On the negative side, as mentioned, foreign exchange translation effect continued to be very significant in Q2, knocking off 7.5 percent or $180,000,000 of our growth, leading to an overall increase of 10.6% in Swiss francs. And looking at the quarter by quarter growth, growth momentum continued with a peak in Q1.
This was partially driven by a low base in the Q1 of 2013 and a high acquisition contribution of more than 9%. Acquisition content of 7.4% in Q2 will reduce further in the second half as the impact of last year's acquisitions will phase out. Organic growth of 6.6% in Q2 was solid, but organic growth will also be measured against the strong second half twenty thirteen going forward. Very positively, all regions contributed to our growth in the first half year with at least 6.5% organic growth. Strongest contributor to overall growth both in absolute as well as in percentage terms was the region EMEA with a growth of 21.7% year on year in constant currencies.
On top of the organic growth of 7% driven by a dynamic development in Germany, the Middle East and Eastern Europe, last year's acquisitions of AkzoNobel's Building Adhesives business as well as EverBuild contributed almost 15% of additional growth in the EMEA region. North America saw a marked increase in construction activities compared to last year. The housing construction market witnessed further growth and demand was considerably higher in the commercial and heavy industrial building sectors, leading to a sales growth of 6.5% in the first half year. In Latin America, some of the markets offered a slowdown in growth in the first half year, particularly Brazil and Mexico. In spite of this, Zika succeeded in taking market share and posted a double digit growth of 16.8% in constant currencies.
Close to 13% thereof was organic and 4% were contributed by acquisitions. Also the region Asia Pacific achieved a double digit sales growth and came in at a very strong 18%. This on the back of market share gains, expansion of the supply chain as well as new product launches. Organic growth of 14% was particularly strong and acquisitions contributed 4 points as well. On the negative side, currency translation effects were quite significant, particularly in Latin America with a negative impact of minus 19.2 percent, leading to a negative growth in Swiss francs of minus 2.4%.
But also Asia Pacific with a translation effect of minus 11.6% in North America had a strong impact. Gross result development has been stable, which we're very satisfied with in this volatile foreign exchange environment. On top of this, a continued disciplined cost management led to an under proportional operating cost increase of 8.7%. Particularly, personnel costs continue to increase at the modest rate of 5.2% only. As organic increase in personnel is modest and largely in emerging economies.
In addition, translation effect works in a positive way. Other operating expenses increased slightly disproportionately. In consequence, EBITDA increased by 18.5 percent to 374,700,000 dollars Depreciation and amortization expense increased by 11%, driven by additional intangible amortization from acquisitions. Resulting EBIT growth was a strong 21% year on year. Net profit after tax again improved over proportionally by 25.7 percent to $177,600,000 on the back of lower financial expenses.
While net interest cost increased by about $2,000,000 this is due to a temporarily higher level of outstanding bonds, €300,000,000 of which were repaid at the end of June. Other financial expenses decreased by about €7,000,000 compared to last year. Tax rate of 28.4 percent in the first half year was slightly higher due to country mix and timing effects. With this, I conclude my remarks and hand back to Jan Janisch for the outlook.
Thank you, Adriaan. We have as you have most of you have requested the last couple of weeks, we have lifted our sales growth for the full year Based on the fantastic results in the first half, we feel confident that our sales will grow 9% to 11% for the full year. Besides that, we are on track for our other targets of strategy 2018. Especially important for me is the buildup of the growth markets and we target to open a total of 8 new factories this year, all of them in the emerging markets. We have from the regional perspective, we are again we are a bit above our expectations in the European markets regarding volume and results.
And then Latin America was a bit harder hit from the currency. Nevertheless, we see us on full track in all of our regions. And for the margins for the full year, we expect to keep them on a stable percentage level. Okay. So I think we are ready to take your questions now.
We will now begin the question and answer session. The first question comes from Ben Polman from MainFirst. Please go ahead sir.
Yes. Good afternoon, gentlemen. First of all, congratulations, really strong results. Two questions if I may. Firstly, what exactly triggered your guidance upgrade?
You mentioned Europe did somewhat better than expected in the Q2. Was it just Europe? And if yes, which markets, which countries in Europe? And the second question, tax rate. I know you had some plans to bring your tax rate down.
Can you update us on that? Thank you.
Regarding the markets, I think it's clear that we are based with the first half year results and will over exceed our long term target of 6% to 8% in local currencies just from a mathematical viewpoint. Regarding the markets, we are, I would say, better than expected in the European markets. The crisis market, Portugal, Spain, Italy, but also Greece. We reported already last year that we see a bottoming out in the markets. And now we see that even some of these markets are back on a light growth rate.
So you can imagine we are quite pleased with the situation in these mature markets. We have a similar situation in the U. S. Where we were hoping, anticipating a recovery where you all know these long term trends where we're basically already 2 to 3 years too long at the bottom in these markets. And we see now a light recovery in these markets and you can also see that in our results for North America.
I think Latin America and Asia Pacific, we are also here on track. A little bit a slight change, but we are also here in some of the mature markets. We had an amazing performance in the first half. And maybe I want to point out Japan. Japan was talked into the crisis for so many years.
And it was interesting that nevertheless we invested the last 5 years in the Japanese market with acquisitions, but also with new production lines for our automotive products, for our roofing products and for our adhesive lines. And now we have a situation maybe based on Abenomics, maybe a little bit based on the upcoming Olympics, maybe based on the very low yen that we have a very high economic activity in the Japanese market. And our growth in Japan for the entire business was around 15% for the first half. So also, I would say well above our expectations. On the other hand, some of the emerging markets, Vietnam, Thailand, they have a bit of a political and economical maybe less stable or less dynamic situation compared to recent years.
Nevertheless, we are also here optimistic for the future.
I hand over to Avian for the tax question. Yes. Your second question on the tax rate, as I mentioned, this is more to do with country mix and certain timing effects. For the full year, we would expect a modestly lower tax rate than in the previous year.
Okay. Excellent. Thank you, gentlemen.
We had a question from Thorsten Biss from UBS. Please go ahead sir.
Yes. Thanks. I've got two questions basically. It's on the trend in China. If you are willing to share your knowledge in the course of H1 and potentially in Q2, what trend you see of the growth rate in China as there is mixed signals, but you seem to be doing an excellent job.
And that's the one question. The other question is you have changed the EBIT basically split or the contribution by region in Page 1, 2013. So holding costs went up and the divisional margins accordingly too. What is the reason for that? And then, yes, perhaps another question speaking about the base effect as Adrian already mentioned.
Into Q4 2014, you're going to face a strong base effect. And into Q1 2015, it's going to be really tough. So would you agree that latest in Q1 2015, if not in Q4 2014, one must assume organic growth rates turn negative? Thanks.
So thank you, Thorsten. These were actually three questions. Yes, true. Let me answer to the market and then Adrian takes over for the more difficult question. I think for China, it's very difficult always from industry to industry, market segment to market segment, from geographic area to geographic area.
It's actually a very complex huge market. So I cannot speak for the overall market. And just as a general comment, when I read the newspaper about China, it's the comments for me are always too general. So I just talk about our situation. Chinese market is very competitive.
So we have the toughest competition. And we are quite proud to at this point in time have our 3rd biggest country organization in China. And also in the first half of this year, we had a double digit sales growth in China with satisfying margins. We are for the future, we are positive for China, especially as our growth model is not only focused on new build or not only focused on industrial. We do infrastructure.
We do industrial real estate. We do residential, we do our adhesive for the car industry. And even more important, we are in the repair market. So we are quite positive that China will be a very positive market for us also in the future. Regarding the base effect, it's thank you for acknowledging.
We're going to have a little hill ahead of us. We don't know yet if it's a hill or a mountain, but of course, we had an excellent second half of 2014 and an excellent Q1 2014. So I agree, Thorsten, will be tough for us to beat the organic growth. But our troops are ready to go and it depends a little bit on the winter. Of course, if you get a very cold January, February, March then it will be difficult to beat the Q1.
But let's wait and see.
On your segment reporting question Torsten, this is really an IFRS driven change. We have made some changes to our management reporting, how we assess performance of the regions. And certain charges relating to central marketing and production support are not part of this segment EBIT anymore. And therefore, we had to adjust the segment reporting according to IFRS. That's really the reason.
The impact is about 1 percentage point of sales.
Okay. And if you allow me to add another question. Basically, thinking about BASF that published numbers yesterday, while it's not exactly the same business, their Construction Chemicals unit, there is coating and whatever stuff in there. But still it was minus 8%, they speak about FX, but they also mentioned to see a volume decrease. Do you basically know if it is really a decrease for BASF in the comparable competitive area they are competing with you, you would be gaining market share?
Or are they the question similarly, simply speaking, market share comparisons BASF comparing apples with apples. Do you have knowledge on that? Karsten, can you repeat the number of BASF again? It's minus 8% Construction Chemicals in Q2. It was minus 3% in Q1.
And I'm just not sure because they speak about the volume decrease of the Construction chemicals business. Is it really that they had a volume decrease in the same business compared to your business? Or is it just the coating completely collapsed and their Construction Chemicals was also up like yours? Do you
know that? Well, we are also I mean, what they call the coating business is also we are also in this market. Basically, the floor coats and other coats. So obviously, from the numbers you mentioned, they have some difficulties in the market. If I think you read our report we are very positive that we gained a lot of market share in the last 12 months.
And I think that might be the effect you see there. Okay. Thanks.
Next question comes from Jan Forster from Bloomberg News. Please go ahead, sir.
Yes. Hello. Just a quick question on the outlook. So you increased your sales growth outlook even between 9% and 11%, even though sales grew by 18% in the first half. Why are you being so modest for the sales growth outlook?
Are you sort of expecting a slowdown? That's the first question. And then the second question is on the recent M and A pickup in the industry sector. Are there any new assets on the market which might be interesting for you or which gives you M and A opportunities? Thanks.
Well, I think regarding the outlook, we have to be realistic. What we just discussed is the very strong second half of twenty thirteen we compare against and we really have to see how also the winter goes in Europe. And so that's why we don't want to be overconfident at this point in time. Regarding the M and A, we have our pipeline. We constantly work on.
I think again, we were very lucky last year to have 5 excellent companies joining us. We had in the first half year again another 3 companies. However, let me say that this is quite a high transaction number for us even the volume was not that high now this year. And we constantly work on it, but it's very difficult to make any prediction what deals will finally be signed. So you can expect from us further acquisitions in the next, let's say, 6 to 24 months, but we cannot make any forecast at this point what's going to happen.
All right. Appreciate it. Thank you,
Next question comes from Benjamin Moore from Goldman Sachs. Please go ahead sir.
Hi, good afternoon. Just two quick questions related to Germany and to LatAm. If you could give a bit more color on what you're seeing there, particularly in LatAm, you're seeing continued very strong growth there. It would be interesting to understand what your expectation is for the region maybe on a country by country basis over the next 6 to 12 months? Thanks.
Okay. Yes. Thank you. I think for Latin America, we are the markets got a little bit slower, especially in Brazil and Mexico. I think in Brazil, we saw some effects from a late Carnival in March to the World Championship in June, which also didn't have a perfect outcome for the Brazilians.
So we see some slowdown. We have now the national election coming in October. So Brazil is actually quite a slow market in 2014. Nevertheless, we keep investing. We believe in Latin America.
And we have this year and the past 2 years, we will open a total of 24 new factories in just 3 years with quite a heavy focus on Latin America. So we believe the market will be good for us. And we also believe that we can gain further market shares like we just talked about before. In the German markets, we were very pleased with the first half of the year to be honest with you. However, I'm a bit careful because we have this record mild winter in the first in Q1.
Even so the growth continued in the second quarter also for us in Germany. I'm a little bit reluctant to make a party here. But the first half was very satisfying for us in Germany with a low to be with a low double digit sales growth.
Got it. That's very useful. Thanks.
Next question comes from Guaimo Rosenau from Neuhausenat. Please go ahead sir.
Yes, good afternoon. I would like to turn back to the Southern European countries where you already started in last year, saw stabilization. Now you see growth in comps like Portugal, Spain, Italy, Greece. Could you probably go a bit into more into the details? Which market do you feel has sees a real recovery or a fundamental recovery?
Because there are a bit mixed development. For instance, in Italy, some companies are having still a pretty tough time. Spain, however, looks like it's really getting better. What is your view of it differentiated between these 4 problematic countries in the South?
Yes. With the stage of the European Union and the monetary system is I just want to make no comment on the overall economic situation. So it's maybe just better to keep to our own facts. So we have a good situation. We have a light growth again in countries like Spain, but also like Portugal.
Maybe even more impressive for me is that in countries like Greece, where we decided not to stop our activities to keep pushing in the market. We had market share gains in such a magnitude that Greece is growing quite dynamically in the high double digit percentage. So this is always I think one strength of our company. We don't make this big this short term portfolio analysis and say, oh, the market turns down or turns sour. We cut or we close down factories.
We almost never do that. We say this is just a normal cycle. Let's use the cycle to gain market shares. And I'm really very, very pleased to see now that this is also happening for us in Europe South. Italy, I think, went in the crisis a little bit later than the other countries.
So we were we are a bit more concerned with Italy. But we have quite a strong first half, which makes us quite positive.
Okay.
Then a totally different question. For years, I mean, there was I mean, it's a fact that in the Western developed world, the ready mix concrete is by 100% enhanced by chemical additives. In emerging market, our penetration rate is lower. Some of the ready mix concrete is not produced with any of the chemical additives. What would you say?
Is this penetration now increasing visibly in countries, for instance, like India or Vietnam, Thailand and so on? Or is the penetration rate in that sense has increased already quite a lot in the last few years?
I think this is one wonderful penetration rates they increase in these countries ongoing. Also this whole trend for the urbanization is huge for us. Everything of this population growth is happening in the cities and a city needs much more secret solutions than you would need for buildings on the countryside. So we are very pleased with this trend. It's ongoing.
However, it's not a trend which brings you 5% to 10% growth each year. I think if this structural growth gives you 1% or 2% tailwind a year, I think this is what we have in our plans.
Okay. So it means that if let's say 5 years ago only just to mention a number only let's say 30% of all ready mixed concrete was produced with chemical additives like say in India. Now it's probably 5%. So we talk about the very slow but steady development.
It's like this, yes.
Okay, great. Thank you.
Gentlemen, there are no further questions at the moment.
Okay. No more questions. Thank you for joining our conference then. We end this call now. Thank you very much for the interest in Sika.
Bye. Thank you.
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.