Ladies and gentlemen, good morning or good afternoon. Welcome to the Sika Half Year Report 2014. I'm Alice, 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 morning or good afternoon, and welcome to the Sika Half Year 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 first half results. Afterwards, they will be ready to take your questions. Let's start. Jan, please go ahead.
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 overproportional improvement of our margins. Therefore, we are very pleased with the half-year figures. 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 build-up of the emerging markets. In the first half, we had three new factories in Brazil, we have the second one in Indonesia, and already the sixth factory in India.
You will also see in the second half of the year, we will maybe have another four to five factory openings. We still target to open around eight new factories like we announced beginning of the year. As another cornerstone of our strategy, we have acquisitions. Here also, we could close three acquisitions in Switzerland, Korea, and Brazil in the first half of the year. Also here we are happy that we continue to work up our pipeline for acquisitions. Ladies and gentlemen, overall, 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 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% or CHF 180 million of our growth, leading to an overall increase of 10.6% in CHF. In looking at the quarter-over-quarter growth momentum continued with a peak in Q1. This was partially driven by a low base in the first quarter 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 2013 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 suffered a slowdown in growth in the first half-year, particularly Brazil and Mexico. In spite of this, Sika succeeded in taking market share and posted a double-digit growth of 16.8% in constant currencies. Close to 30% 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 -19.2%, leading to a negative growth in Swiss francs of -2.4%. Asia-Pacific, with a translation effect of -11.6%, and North America had a strong impact. Gross result development has been stable, which we are 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% to CHF 347.7 million. 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% to CHF 177.6 million on the back of lower financial expenses. While net interest costs increased by about CHF 2 million, this is due to a temporarily higher level of outstanding bonds, CHF 300 million of which were repaid at the end of June. Other financial expenses decreased by about CHF 7 million compared to last year. Tax rate of 28.4% 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 Jenisch for the outlook.
Thank you, Adrian. As most of you have requested the last couple weeks, we have lifted our sales growth for the full year. Based on the fantastic results the first half, we feel confident that our sales will grow 9%-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 eight new factories this year, all of them in the emerging markets. From the regional perspective, again, we are a bit above our expectations in the European markets regarding volume and results. Latin America was a bit harder hit from the currency. Nevertheless, we see ourself on full track in all of our regions.
For the margins for the full year, we expect to keep them on a stable percentage level. I think we are ready to take your questions now.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star f one on the touch tone 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 hands-free while asking a question. Anyone who has a question may press star and one at this time. The first question comes from Bernd Pommer 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 second quarter. Was it just Europe? If yes, which markets, which countries in Europe? 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 based with the first half year results, we will over exceed our long-term target of 6%-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. Now we see that even some of these markets are back on a light growth rate. 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.
We are basically already 2-3 years too long at the bottom in these markets. We see now a light recovery in these markets. 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. We are also here in some of the mature markets. We have an amazing performance in the first half. Maybe I want to point out Japan. Japan was talked into the crisis for so many years. It was interesting that nevertheless, we invested the last five 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.
Now we have a situation, maybe based on Abenomics, maybe a little bit based on the upcoming Olympics, maybe based on the very low JPY, that we have a very high economic activity in the Japanese market. Our growth in Japan for the entire business was around 15% for the first half. 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 Adrian for the tax question.
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.
As a reminder, if you wish to register for questions, please press star and one on your telephone. Star followed by one. We have a question from Thorsten Beiss from UBS. Please go ahead, sir.
Yes, thanks. I've got two questions, basically. It's on the trend in China, and 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 a excellent job. That's the one question. The other question is you have changed the EBIT basically split or the contribution by region and in page 113. Holding costs went up and the divisional margins accordingly too. What is the reason for that? Perhaps another question, speaking about the base effect as Adrian already mentioned. Into Q4 2014, you're going to face a strong base effect into Q1 2015. It's going to be really tough.
Would you agree that latest in Q1 2015, if not in Q4 2014, one must assume organic growth rates turn negative? Thanks.
Thank you, Thorsten. These were actually three questions.
Yeah, true.
Let me answer to the market, then Adrian Widmer takes over for the more difficult question. 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. I cannot speak for the overall market. Just as a general comment, when I read the newspaper about China, the comments for me are always too general. 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 third biggest country organization in China. In the first half of this year, we had a double-digit sales growth in China with satisfying margins.
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. We are quite positive that China will be a very positive market for us also in the future. Regarding the base effect, 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 first quarter 2014.
I agree, Thorsten Beiss, it will be tough for us to beat the organic growth, our troops are ready to go, it'll depend a little bit on the winter. Of course, if you get a very cold January, February, March, it'll be difficult to beat the Q1. Let's wait and see.
On your segment reporting question, Thorsten Beiss, this is really an IFRS-driven change. We have made some changes to our management reporting, how we assess performance of the regions, certain charges relating to central marketing and production support are not part of this segment EBIT anymore, we had to adjust the segment reporting according to IFRS. That's really the reason. The impact is about one percentage point of sales.
Okay. If you allow me to add another question. Thinking about BASF that published their 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 -8%. They speak about FX, but they also mentioned to see a volume decrease. Do you know if it is really a decrease for BASF in the comparable competitive area they are competing with you, so you would be gaining market share? Or the question simply speaking, market share comparisons, BASF, comparing apples with apples. Do you have knowledge on that?
Thorsten, can you repeat the number of BASF again?
It's -8% construction chemicals in Q2. It was -3% in Q1. 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 that coating completely collapsed and their construction chemicals was also up like yours? Do you know that?
Well, what they call the coating business, we are also in this market.
Basically, the floor coats and other coats.
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 Ian Foster from Bloomberg News. Please go ahead, sir.
Yes, hello. Just a quick question on the outlook. You increased your sales growth outlook between 9%-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 the second question is on the recent M&A pickup in the industry sector. Are there any new assets on the market which, yeah, might be interesting for you, or which give you M&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 2013 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&A, we have our pipeline we constantly work on. I think, again, we were very lucky last year to have five excellent companies joining us. We had in the first half year, again, another three companies. However, let me say that this is quite a high transaction number for us, even the volume was not that high this year. We constantly work on it, but it's very difficult to make any prediction what deals will finally be signed.
You can expect from us further acquisitions in the next, let's say, six to 24 months, but we cannot make any forecast at this point what's going to happen.
All right. Appreciate it. Thank you, sir.
For any further questions, please press star and one on your telephone. Star and then one. 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 6-12 months. Thanks.
Okay. Yeah, thank you. I think for Latin America, the market's 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. We see some slowdown. We have now the national election coming in October. Brazil is actually quite a slow market in 2014. Nevertheless, we keep investing. We believe in Latin America, and this year and the past two years, we will open a total of 24 new factories in just three years with quite a heavy focus on Latin America. 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. I'm a bit careful because we had this record mild winter in the Q1. The growth continued in the second quarter also for us in Germany. I'm a little bit reluctant to make a party here, the first half was very satisfying for us in Germany, with a low double-digit sales growth.
Got it. That's very useful. Thanks.
Next question comes from Remo Rosenau from the Neue Helvetische Bank. Please go ahead, sir.
Good afternoon. I would like to turn back to the Southern European countries where you
Starting in last year, saw a stabilization. You see growth in countries like Portugal, Spain, Italy, and Greece. Could you probably go a bit more into the details, which market do you feel sees a real recovery or a fundamental recovery? There are a bit mixed developments. 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 a bit differentiate between these four problematic countries in the south?
Yeah. With the state of the European Union and the monetary system, I just want to make no comment on the overall economic situation. It's maybe just better to keep to our own facts. 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 %. This is always, I think, one strength of our company. We don't make 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." 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. We are a bit more concerned with Italy, but we have quite a strong first half, which makes us quite positive.
Okay. A totally different question. For years, it affected in the Western developed world, the ready-mix concrete is by 100% enhanced by chemical additives. In emerging market, however, this 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? Is the penetration rate in that sense has increased already quite a lot in the last years?
I think this is one wonderful aspect of the industry we are in. I fully agree with you. I think these penetration rates, they increase in these countries ongoing. This whole trend for urbanization is huge for us. Everything of this population growth is happening in the cities, and a city needs much more Sika solutions than you would need for buildings on the countryside. We are very pleased with this trend. It's ongoing. However, it's not a trend which brings you 5%-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. It means that if, let's say, five years ago, only, just to mention a number, only, let's say, 30% of all ready-mix concrete was produced with chemical additives like, say, in India, now it's probably 35%. We talk about a very slow but steady development.
It's like this, yes. Mm-hmm.
Okay, great. Thank you.
Once again, for your questions, please press star and one on your telephone. Star followed by one. Gentlemen, there are no further questions at the moment.
Okay. No more questions. Thank you for joining our conference. We end this call now. Thank you very much for the interest in Sika. Bye. Thank you.
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