We published our half year figures this morning at 5:00 A.M. The presentation to the half year is as well published on our website. As this is a call only, we are not presenting the slides. These are a basis for our discussion. With this, Thomas Hasler and Adrian Widmer will provide further details on the results and the outlook. Afterwards, we will be ready to take your questions. I hand now over to Thomas to start with the highlights of the first half year.
Thank you, Dominik, and also welcome and good afternoon to the audience. It's my pleasure to provide you introductory comments to our past six months results. Overall, I would say it's an impressive performance despite very challenging circumstances. For the first time, we have reached above CHF 5 billion in a six-month period, very much in line with the CHF 10 billion year-end goal for the top line. More impressive, I believe also on the operating EBIT that we were able to achieve a very strong performance. I won't go into the details of the figures and leave that up to Adrian then further to guide us through this.
I would make the connection to some of our key highlights in 2022, which are, again, we were able to close two transactions, two acquisitions, both of them in North America, the one in Canada and the other one in the US. Also, in this period, we closed two divestments, which, as you know, for Sika, we are not divesting so many, so it is a bit an unusual picture, but it's part of our strategy, and we have, as announced last year, been able to sell our protective coating business, as well our injection equipment manufacturing unit in the first half of the year. This is also a connection to the figures, since we were able to gain here on the transaction quite some nice profit, which flows into our operating EBIT.
Other than that, I think it's very important to understand that these six months were far from being normal. We were challenged, especially in Europe, with the incidents and the war in the Ukraine, which brought many changes to the business. We see that the European business overall from a decent start has been challenged furthermore over the course of this six months. This is, besides Western Europe, the only region where we also saw that besides the fantastic price increase element, also the volume element had a negative trend. All the other regions, and here I would like to outline the Americas, have provided a very strong growth based on price, based on strong volume growth, and also some acquisitions in the regions.
This is also contributing to the excellent overall growth that Adrian will go deeper in details. We had challenges in Asia, which are related mainly to the lockdowns in China, which were giving us quite some difficult times in March, April. I can also state that our strong performance continued after the lockdown, actually also during the lockdown. China, in our business terms, is back on track. Here we have one important element of our strategy, especially contributing to this growth momentum, is that the further market penetration we are working on from 130,000 points of sale increasing to 165,000 points of sale, which is giving us a strong boost on the overall growth in China.
This is also relevant in the other markets where we still have a relatively fragmented situation, and the opportunities for us to gain market share and to build on this is everywhere available to us. Another element which I would like to outline in the first six months is that we see the strong resilience of our refurbishment and repair business, which is also in challenged markets, a solid contributor to baseline growth, since many of those activities are mandatory in nature and are not postponed at all, and for us, an important element of our overall top-line performance. We also invested further in our footprint globally, especially in Africa. We opened two factories to reinforce our strategic move to capture the potential or the huge potential of this continent.
At the same time, we also invested in Bolivia in a new plant and also for the huge American admixture market, we opened a new factory in the U.S.. We are planning to continue on this path, reinforcing our footprint to the markets and the customers, independent of the local challenges, being there and benefiting from those investments. This would conclude from my side the overall introduction. Maybe coming back to the acquisitions, I think we have highlighted also the MBCC progress in the half year report. Here, maybe just a notice, this transaction is progressing well. We have a strong interaction with the company. We are making progress on the antitrust approval list. Received many important unconditional approvals in countries like China, Japan, Brazil, and many more.
Here we are on track to reach our targeted closing by the end of this year. Overall, a very busy six months. Many challenges, unforeseen challenges. Sika style, we take them pragmatically and turn them into opportunities. As a result, we are able to deliver what we have communicated earlier today in the media and through the presentations shared with you. Adrian, further details.
Thank you very much, Thomas, and welcome to all of you. Following our CEO's summary and presentation of the highlights, we will now go further into details as to the financial result. Starting again with the top line, we delivered very strong double-digit growth in all regions in the first 6 months of the year, as you have seen with local currency growth of 19.5%. Organic growth was a strong 15.5%, strongly driven by pricing. While acquisitions added 4 percentage points of additional growth in the first 6 months.
This represents the net impact of the many bolt-on acquisitions we have closed in 2021, as well as in the first half of 2022, and the divestment of the corrosion protection business in Germany. Currency effects were relatively modest, reducing local currency growth by 1.5 percentage points. Negative currency development was primarily owed to weak euro. This all corresponds to a growth in Swiss francs of a strong 18%. In looking at the regions, region EMEA grew 12.9% at constant currencies. Organic growth was 13.4%, while the divestment of the corrosion protection business had a negative scope impact of 0.5%.
After strong growth in the distribution channel over the last two years, this part of the business saw softness, particularly in Western Europe and the U.K., and particularly in Q2. Conversely, growth in Africa and the Middle East has continued to be very dynamic at double-digit rates. Foreign exchange effects, as already indicated, were significantly negative at -5.3%. Overall, the Americas region recorded a very strong growth of almost 36%, particularly in North America. Key growth drivers were infrastructure projects and commercial construction. The mining sector also gained traction, particularly in markets such as Canada, Peru, and Chile. Acquisition growth, driven by six bolt-on acquisitions in the last 18 months, contributed 8.4 percentage points of growth in the region, while foreign exchange effects were also positive with an impact of 3.7%.
Sales in Asia-Pacific increased by 17%, driven by China, which in spite of COVID-related lockdowns in Q2, grew double-digit in the first half of the year. Particularly the distribution business, as indicated, in China, benefited from continued strong growth dynamics, while the direct business was more significantly impacted by the lockdowns. Also, the Indian market was very dynamic at double-digit growth rates, while Southeast Asia, has been exhibiting an improving trend at high single-digit growth rates. Acquisitions contributed 5.5 percentage points growth, while foreign exchange impact was mildly positive as well at 0.7%. Finally, in the global business segment, Sika achieved a growth of 13.2% in the first half year, with an acceleration in Q2.
Most notably, versus a negative car build rate growth in the first six months, particularly in Europe, which continued to be impacted by supply chain constraints. Acquisitions contributed 5.7 percentage points of growth, while foreign exchange impact remained negative, -1.2%. On gross result level, material margin contracted by 390 base points to 49.4% of net sales. This is down from 53.3% in the previous year. While strongly increasing pricing impact of around 14% for the first six months started to overcompensate continued absolute raw material cost increases during Q2. Relative material margin in percent still decreased due to the base effect related to the strong pricing component in the top line. Dilution from acquisition accounted for 30 base points on material margin level, while ongoing formulation efficiency initiatives contributed positively.
On operating costs, which include both personnel costs as well as other operating expenses, these developed strongly under proportionally. On the personnel cost side, an increase of 8.8% versus a top line growth of 18% was under proportional due to a solid operating leverage and contained personnel cost increases. Other operating expenses decreased by 2.7%, supported by a profit resulting from the divestment of the corrosion protection business in Germany, but was negatively affected by expenses in connection with the acquisition of MBCC Group, with a positive net impact of CHF 140 million. Contribution of the many operational efficiency projects continues to be in line with the targeted 50 basis points of profit improvement, while higher logistics and travel costs, as well as initial impact from the recently consummated bolt-on acquisition weighed negatively.
Overall, EBITDA margin increased to 19.7%, up from 19.5% in 2021. With CapEx modestly above depreciation rate and the higher amortization due to acquisitions, depreciation and amortization expense increased by about CHF 13 million in absolute terms to CHF 194.2 million, but under proportionally, providing further leverage. As a result, EBIT increased strongly by 22.7% to CHF 841.9 million, and an EBIT ratio of 16% of net sales compared to 15.4% in the same period of last year. On a like for like basis, excluding one-offs and the initial dilution from acquisitions, EBIT as a percentage of net sales decreased by 120 basis points compared to the same period of the previous year.
In looking at the items below the EBIT, here net interest expense increased by 18.5% compared to the same period of last year to CHF 25 million. The increase is related to the bridge facility for the MBCC acquisition. Other financial expenses increased as well by about CHF 14 million in the first half of 2022, primarily due to higher hedging costs and hyperinflation accounting impacts relating to our activities in Argentina. Group tax rate in the first half of 2022 remained virtually flat at 25%, about the same level as in the previous year. As a result, net profit increased by 21% to a record level of CHF 598.8 million or 11.4% of net sales.
This up from 11.1% in the same period of last year. On the back of higher capital expenditure, back to more normal levels after the reduced CapEx during the pandemic, as well as higher seasonal net working capital build up, given the strong top line development and higher inventory values relating to significantly increased raw material costs. Operating free cash flow was CHF 39.7 million, a decrease of CHF 278.7 million versus an exceptionally high previous year period. The balance sheet at the end of June 2022 show the healthy cash balance of CHF 693.5 million, which seasonally is lower than at year-end due to the aforementioned net working capital build-up and the dividend payment of CHF 446 million in April.
However, net debt only increased by CHF 251 million compared to year-end 2021 to CHF 2.8 billion, supported by an additional partial early conversion of our outstanding convertible bond of CHF 123 million. As a result, financial leverage based on net debt compared to EBITDA of the last 12 months is unchanged at 1.45 times on a reported basis. With this, I conclude my initial remarks and hand back to Thomas for the outlook.
Thank you, Adrian. Here, despite all the volatility that we have observed in the first six months, and which we also expect to continue, for the remainder of the year, we can reconfirm our statements from February that we are going to achieve our targets well above 10% net sales growth, 10 billion CHF for the first time in 2022, and an over proportional EBIT evolution for the full year. This would then lead back to you for eventual questions, and we are happy to answer.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their 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. Questioners on the phone are requested to use only handsets and eventually turn off the volume from the webcast. Anyone who has a question may press star and one at this time. The first question is from Yassine Touahri from BNP Paribas. Please go ahead.
Good afternoon, gentlemen. Thank you for taking my questions. My first one is on the guidance. I just want to understand whether you think you can reach an over proportional increase in EBIT if it was not for the one-off gains in H1 2022. My second question is, if you can help us to understand the difference in gross margins between Q1 and Q2, and what we should have in mind for H2 in terms of price cost spreads. Are we moving closer to parity? Last but not least, can you help us to give us some granularity on the financing structure for MBCC? Do you completely exclude equity as an option?
If debt is the preferred scenario, how committed is the interest rates on, for example, I think you're drawing some of the RCF and other type of debt structure that you may need to take further? Thank you very much.
Okay. Thank you, Yves. On the guidance, we continue to look at the overall performance, and here all the elements play a role, including the one-offs, which we have outlined in the first half to have quite a positive push from the divestments, which of course won't happen in the second half of the year. We will have still, let's say, one-offs in relation to the MBCC transaction. This will certainly balance a little further over the course of the year. In total, we expect an over proportional growth of the EBIT. How much and how far this goes, it's too early to outline now, but we are confident that this will be the final result, and also leaving some options in there beyond the one-offs.
Maybe here on the material margin, you know, somewhat, you know, similar answer here. Obviously, given the volatility not only on the input cost, but particularly also on the pricing, which has been very strong and increasing, obviously this base effect continues to play a large role. In terms of the general material margin development, I would say in a normal year, absent strong input cost increases, typically the second half year is marginally lower.
Obviously, given the trend and the dynamics and the very, you know, strong pricing development, actually, you know, starting to overcompensate absolute input cost increases, I think there is a likelihood that obviously the second half of 2022 will be showing higher material margins than the first half. This is not really our primary focus. As just alluded to, the target is clearly to deliver over proportional EBIT growth.
You know, whether there is then a relative dilution on the material margin driven by pricing is probably secondary, but obviously and clearly aiming at improving this margin going forward and also in the second half of 2022. Maybe if I can also take the next one on the financing. Here you know clearly our view has not changed. The takeout, the envisaged takeout of the bridge for the MBCC transaction continues to be based on a combination of cash existing credit facilities and bonds and you know does not include an equity element.
To do so with our strong deleveraging profile that will work also in this environment. Maybe talking about the environment, interest costs, you know, have increased over the last few months. We are still confident that we can actually put a good financing in place here at competitive rates. I would estimate probably the interest cost attached to, you know, the full transaction to around CHF 70 million on an annual basis.
Thank you very much. I'll jump back to the queue. Thanks.
Thank you.
The next question is from Elodie Rall from JP Morgan. Please go ahead.
Oh, hi. Good afternoon. Thanks for taking my questions. If I can come back first on your margin guidance for 15%-18%, including one-off. If we take into account H1 that you reported, it does imply that in H2 margins will need to be above 14%. That includes the negative one-off from MBCC costs, and I'm not aware of any other positive one-offs yet. That compares to 13.5% or more or less right on underlying for H1. I understand price cuts will be more favorable. But can you just summarize a bit the elements that make you feel confident to achieve this in H2? That's my first question. My second question is on Europe. We've seen volumes declining in Q2.
Could you give us a bit more color if it was just due to hard comps or if you do expect this to continue to decline in H2? A follow up on Europe as well. In terms of margin, this is the region where we've seen about 200 basis points decline, I think, in H1 on an underlying basis. Is it something that we should expect as well in H2, or you have a better outlook for H2 in Europe? Thank you.
Yeah. Well, thanks for the question. I'll take the first one. Yes, I mean, your sort of mathematical calculations here are correct, and there is indeed the different elements. Also what we're you know, typically talking about in terms of our you know, margin build up and evolution. I mean, clearly here on the input cost versus pricing element, we have a clear expectation in looking at also you know, how we're trending here towards the end of the second quarter. You know, a positive evolution in terms of continued overcompensation of absolute input costs.
This will clearly continue as we continue to also push pricing in an environment where at least some of the raw materials show some form of flattening. I think the situation will remain quite volatile and in that sense also unpredictable. But certainly the likelihood has increased that at some stage we will see an inflection point here. On that element, quite a positive dynamics overall. In terms of the one-offs, yes, we will have additional, you know, costs related to the acquisition of MBCC. Not expecting here additional one-off gains.
We will also continue to drive here our operational efficiency elements with the many initiatives that continue to deliver good results. Will continue to have positive synergies from the acquisition, most notably Parex, with another CHF 20 million on an annual basis. Also the initial dilution here from the many bolt-ons we have done over the last 12-18 months is rather getting smaller. All in all, confident that in spite of all the moving elements that we will achieve this over proportional EBIT growth for the year.
Okay. Then your second question related to Europe, or I would say Western Europe in particular, in regards to the volume trend in Q2. That's correct. We had negative volume trends in Western Europe. Here it must be noted that of course, the prior year still was benefiting very strongly from a backlog that was built up during the pandemic period, and we had very strong distribution sales and retail activities on home improvements post COVID. So this has been a very tough, let's say, benchmark in the first half. But we also saw last year that for the remainder of the year, this has more normalized.
Also now for the second half, we expect that the comparison level will be more in line with what is a normal business course. Therefore, we believe that the negative trend won't further, let's say, accelerate or be more pronounced, rather that it probably will also bounce back to some extent. On the margin side, it must be clearly noted that the current gap that you mentioned is going to be further, let's say, narrowed by the strong pricing elements that Europe has in place.
It has a certain delay, but here we also expect a catch up on the material margin overall, as Adrian has indicated, probably a little bit more in Western Europe than in other parts, since there we had this delay a little bit more pronounced. We will also have positive benefits from the operational efficiency gains where Europe early on has been addressing very strongly since this volume decline then unleashed also more potential to contribute from that side. We are confident that Europe will demonstrate a nice improvement in the second half and help the whole group to reach its targets in the 2022 year.
Okay. Thank you very much.
The next question is from Priyal Woolf from Jefferies. Please go ahead.
Thank you. Afternoon, it's Priyal here from Jefferies. I think I've got three questions. The first question is just to follow on to the discussions on gross margins. We're hearing quite a lot about Rhine River levels, you know, at sort of all-time lows, and I think that's quite an important supply route for some of your input chemicals. I know it's impacted you at the back end of 2018. Is that something that is causing issues for you yet, either in terms of input availability or input costs? If it isn't yet, I mean, how worried are you about this as we go into the second half of the year? The second question is just with regards to MBCC.
I mean, today you're talking about closing the deal by the end of 2022, which I think is a slight pushback from saying the second half of the year previously. In light of this, is there a possibility that the scale of divestments to ensure that you get this through antitrust is potentially higher than what you were expecting a couple of months ago? Then the third and last question is just a follow-up on Europe. Given that volumes have been a little bit weaker and you're starting to see signs of normalization, particularly in the distribution channel, has this played out in terms of more difficulty in terms of pushing price increases through in that particular region? Thank you.
Okay. I understand the first question was to availability on the input side related to the Rhine level, which was an issue a couple of years back. Here, I mean, yes, that was quite a challenge at that time. We have so far no indication that we are facing similar struggles. I think the industry is better prepared in this regard and less dependent. It is one of the elements, I would say, nowadays where we say we have many challenges on the transportation side, cost side. At that time, let's say the Rhine level was kind of an extraordinary and had a huge impact.
I think the supply markets have been able to overcome many of these challenges at higher costs. Also this one here, I don't have on the radar, let's say, major changes. There are other elements that, I think are more relevant in this regard. Maybe on the MBCC side. Now, this timing has been targeted for the second half. We are in the second half. We don't want to raise the expectation that tomorrow we are announcing closing of the transaction. That's more, let's say, a more precise of the messaging than anything else. Also on the scale of the divestment, there is no fundamental change.
It's more, let's say, the administrative hurdles and the processes that we go through that require time. Here we need to be a bit patient, which we usually aren't. This is an official process, and here we need to be a bit flexible to allow room for this. We make progress. We just received last week two jurisdictions unconditional clearances. It's work in progress and nothing that really changes the attractiveness of the deal overall. Then the third question was?
The third question was just on European volumes and whether that's impacting ability to push through pricing.
Of course, there is a theoretical link to this, but I think we have demonstrated that our pricing power is a bit, let's say, beyond just the arithmetics. I think it's important to note that during these unavailabilities, the force majeures and so on, that we have been able to supply even under worse conditions. We were managing more than 50 force majeure from the supply side without having disrupted our supply possibilities. Customers look at all the elements, and of course, they are not excited. Especially when volumes turn negative, the pressure is on. But I think our proposition on the pricing is very strong, and therefore we are also successfully, let's say, decoupling from this short-term expectations.
Thank you.
The next question is from Matthias Pfeifenberger from DB. Please go ahead.
Yes, good afternoon, gents. Thanks for taking my questions. It's actually two. You hinted it a bit. Are you pushing more prices into the third quarter, or is this basically enough, you're catching up and you're seeing the input cost peak in the second quarter already?
Then related to that, in a recessionary environment, probably next year, input costs might normalize. If they don't, are you looking to recover your material margin to the previous, like, historic levels? Thanks.
Maybe, on the first one, material, what was material margin?
Pricing.
Hmm?
Pricing.
The pricing. Yeah. Unfortunately, on the input cost, and this is not just raw mat, this is also transportation, energy, which are still on the rise. We are not ceasing and we are not discontinuing. In Q3, this element will further be pushed. Has to be pushed. We cannot absorb. As I mentioned before, we have to also bring the message across. This is an absolute must. We cannot absorb this still rising cost on multiple elements. Pricing, of course, is still in Q3 a topic for the organization. Then about 2023, that's a bit early on to speculate what will happen. There are so many scenarios on the geopolitical front that is hard to predict.
I don't want to go down that path and make any forecast. What I can say is whatever comes, we will deal with, and we will turn this in an opportunity to demonstrate that we can perform better than the market and better than our peers. That's my aspiration. What the weather will look like next year, we will take it, and we will take the measures required in an agile, pragmatic, and timely fashion.
Maybe just a theoretical question on that point. You still have an 18% margin target in place for the medium term. Can you reach that without restoring or partially restoring the gross margin via price increases?
Within the range, this is the target range. Of course, within this range, you can say if the gross margin, if the markets are, let's say, in good shape, then it's probably going to be on the upper side. If the conditions are less, let's say, positive, then it's more on the lower side. We always guide it for a range. It's not a progressive increase.
Yeah.
from 15% to 18%. Here, of course, if we would see that on the input side, the margins are recovering faster, it will also then contribute to the overall EBIT margins.
Okay. Fair enough. Thank you.
The next question is from Dow Harry from Redburn. Please go ahead.
Hello. It's Harry Dow from Redburn. Three questions, please. First of all, it's just a bit more color around your exposure to gas at a group level and particularly in Europe. There's quite a lot of concern at the moment around the availability of gas going into the winter and just maybe a bit more color on. I know it's a small percentage of cost, but if you physically can't get hold of any gas, how does that impact the manufacturing process? And can the processes be adapted to another fuel source? The second question is just on sort of other operating and employee costs. I think both of them are down now quite materially as a percentage of sales, you know, I think down 200 basis points.
That's, you know, to do with a mismatch between the top-line price inflation and operating cost inflation. Do you think that mismatch can be sustained into the future, or should we expect as a relative, you know, percentage of sales for those costs to rise? Then just thirdly, there's been quite a big hit to margins in the global business, and I understand that's because of long-term fixed contracts of pricing. Do you have any idea of how long it will take to sort of cycle out of those contracts and how long it will take to bring the margins back up in the global business? Thank you.
Yeah, thanks for the questions. I'll take the first two here. In terms of, let's say our, you know, energy, you know, cost or importance as part of, the conversion cost or the cost in general, they're relatively small. I mean, energy costs, you know, accounts for less than 1% of sales. From that point of view, our exposure is not that big. Talking about Europe and in the production process, we also have in most places, let's say, backup and alternatives to basically replace, you know, gas as a fuel.
From that point of view, also exposure relatively small with obviously alternatives also in terms of, you know, factories, particularly outside of Europe. Obviously the element of, you know, gas being important for some of our suppliers on the raw material side. I mean, that is, you know, certainly an element we, you know, do not have under control ourselves, but the direct exposure and alternatives relatively small.
On the employee cost side, yes, I mean, overall, the operating leverage, particularly also related to the strong pricing element as part of the top line, is quite pronounced. If we look at the underlying employee cost increases, also here we see a certain inflationary element, although it's relatively, let's say, contained, as I was alluding to. If you look at and compare it to sort of a normal year, what we have seen here in the first six months, there is probably about 1.5 percentage points of, let's say, increase on top of sort of a normal year.
Obviously not to forget that we have been operating for a long, long time in many countries with a more inflationary environment. I would still expect this rather to continue to increase to some extent, but within the range which we can manage.
I answer your question 2B, which was related to global business and pricing and margin recovery. It is very clear that in global business with the automotive key accounts, let's say, the delay in adapting the prices is more pronounced than in other market segments. Here, the long-term contracts, which for some parts of our business apply, which are model-dependent products or parts, to open up such contracts is very time-consuming discussions.
We have achieved, let's say, major concessions, which are very often, let's say, also a part of an overall strategic decision-making, providing, let's say, retro payments for delivery of the past to adjust, also adjusting ongoing business and also combining with new business awards that come then in our direction. Here, yes, it is stressful to see that the gap is slowly catching up, but this is a more longer-term catch-up that will take place. The relative power that we have in the relation is quite strong. We just need to be here a bit more, let's say, conscious in the way we reach this. This is not a straight one-on-one discussion.
It has all the strategic elements that must fit. We get concessions there, which make me feel confident that over time, this gap will come back to or will close and come back to the level. It won't be fast, but it is also combined with, let's say, an acceleration on deepening the business relation with these type of customer.
That's helpful. Thank you.
You're welcome.
The next question is from Cedar Ekblom from Morgan Stanley. Please go ahead.
Thanks very much. Hi, guys. Just two follow-ups for me. In terms of European volumes in the second half, should we be thinking about volumes being down year-on-year? I appreciate that in the second quarter, you obviously had a difficult comp effect, but it sounds like the project business is actually softening quite a lot, and you're talking about the sort of repair, remodel, distribution chain also under a bit of pressure. Is it actually underlying growth here that we need to think of as down year-on-year in 2H? And then secondly, on the remedies to get MBCC over the line, are the competition regulators requiring that you agree the asset sales, or are they allowing you to get that deal confirmed on the anticipation that assets will be sold? Just to think about timeframes. Thank you.
I think on the European volume, as I mentioned before, you know, the trend still is negative, but the baseline will improve. Here we expect that this will level out. At the same time, I would say here the volatility probably are the highest, looking at the global volume evolution in the second half. You know, we are very positive about the Americas outlook, at least far into the second half. Also in China, we see this and also in other parts. It's correct. Europe is a bit of a question mark. We expect it to be not, let's say, a continuation of the negative trend, but it could be. That's not excluded.
It would, of course, also then require us to adapt our working model and be in line with that. So far, the signs are still in line with our expectation. Yes, this may also to come back to the question that were asked before.
About the supply guarantees on energy and gas, which would have quite an impact on the economy here in Europe. We are not as negative as others, but we are cautious and we believe there will be also some upside on the volume side. Then your question in regards to NBTC, that was the deal structure and, fundamentally to have a difference there.
No. The question is, if you need to sell assets in order for the competition regulators in relevant countries to approve that deal, are the regulators requiring that you actually find a buyer for those assets before they are willing to approve it? Or are you being allowed to sort of commit to selling assets in the future and then they will approve the deal?
Okay. Now we are.
Because that can delay the deal, right?
Of the deal. We are dealing with many regulators. The one thing I can share with you is they are certainly not aligned and have all a different opinion. But in short, you know, the closing will not be substantially delayed because there may be obligations to keep separate or to allow for the closing. We have different requirements that we have to fulfill, but they are known and they are taken into consideration when we make our overall judgment.
Great. That answers the question. Thank you so much.
You're welcome.
The next question is from Manish Beria from Société Générale. Please go ahead.
Hi. I just have this clarification. You said the underlying margins are down 120 basis points, but I calculate 200 basis points. Just trying to understand. This 90 basis points is just coming from the scope impact, right?
Yes, Manish, to confirm. There are different elements here. What I have been referring to is basically a true like for like, which also excludes the initial dilutive impact of the new acquisitions, which is also about, you know, 70 basis points on EBIT level. That's basically a large part of the difference. Then there is, if we were to go into a true like for like, some additional smaller elements. You know, this is also exactly the reason why we don't go into this in general. I think being quite transparent on the big elements so that you can make the math.
Many of these elements are just ongoing parts of our business and how we execute our strategy. That's probably the bigger element that you're missing in sort of your calculation compared to what I've alluded to.
Yeah. No, this 70 basis point dilution means like CHF 35 million impact on the group. The acquisition revenue, I mean, this first half was CHF 200 million. So I mean 15% margin normal, so CHF 30 million. You have this difference. That means the acquisition was contributing negatively to the first half or something like that?
Yeah. You're certainly contributing on the proportionally, and you also have to take into consideration that, you know, the business we sold off, you know, is also included here, which obviously also provides an EBIT gap. Yes, that's actually quite a typical picture of, let's say, newly acquired companies. On the one hand, incoming profitability is lower, but particularly in the first few months, there is quite significant purchase price allocation effects, particularly impacting the first few months of the transaction.
Okay, understood. Out of these 70 basis points, just to confirm, 30, this come from the gross margin, this acquisition dilution.
Yes.
Liquidity. Okay.
Yes.
Now if I look at the other OpEx that you report, I mean, even if I exclude this what you have talked about, the dilution from the scope, it still looks like double-digit growth, no? Why, if I exclude the gains and things like that, exceptional there. Just trying to understand why it is growing so fast because we thought, I mean, because of leverage and things like that. Now the leverage that you are getting is just from the price. Underlying is rising very fast. What is the reason this other OpEx line is rising so fast?
Yeah. Yeah, there is some smaller one-offs in here as well. That's one element. The second one is indeed as I had mentioned in my summary, there is certain cost elements obviously that are you know increasing compared to the previous year. For example, you know, travel which is pretty much back to pre-COVID level. You have on the logistics costs certain disruptions. Again, circling back to the comments Thomas made, obviously that's also elements we put into our you know pricing offers to efforts to basically pass on to our customers. In this slide, this is also included.
Yes, there is some underlying, let's say, cost developments, which we have to pass on and are doing.
Okay. Yeah. Thanks a lot for your answers.
The next question is from Arnaud Lehmann from Bank of America. Please go ahead.
Thank you very much. Good afternoon, ladies and gentlemen. Two questions on my side, please. Firstly, have you seen an update on MBCC performance year to date in the first half? Do they have similar pricing momentum as you have? Have they been able to manage the cost inflation and protect their margins? Are the trends at MBCC, as far as you can tell, consistent with the trends at Sika? That's my first question. My second question is a bit general, and I apologize for that. Obviously a lot of talks around, you know, recession in Europe, maybe in the U.S. as well. We keep referring to how the business behaved back in 2009.
Obviously, I'm sure you remember there was a good level of resilience. If my model is correct, the top line was down like mid-single digit, excluding currency, so quite a good resilience. What, how has Sika changed since 2009 in terms of, penetration of the products, in terms of the exposure to distribution, obviously in terms of size that would make it behave similarly or differently in the next recession? Thank you very much.
Yes. Well, thank you, Arno. Maybe starting with the first, you know, question here, obviously without being able to go into too much detail, but in terms of, you know, development, a very similar picture in terms of, you know, solid top line development. Also, similarly, impact on material margin, for example, as obviously in the quite the same environment. I mean, as we have also reported upon signing of the acquisition, you know, some of these elements are, let's say, less strong as in our case.
In terms of, you know, directionally actually going very much in the same direction also in terms of performance according to forecast or budget, pretty much in line with this. In terms of your second question, you know, as to, you know, how would you or how would we view the business today versus, I'd say the financial crisis you mentioned. Where indeed we had quite a small impact on the top line and recovered this within 12 months and at the same time, you know, actually improved relative profitability in this year.
I think if you compare, you know, Sika today, and this goes to the comments Thomas has made, a very strong resilience, very balanced on the one hand geographically, but very importantly, you know, a high share of repair and refurbishment business, more than 50% in mature markets, even a rate of 70% or more. What part of it you cannot actually just push out. You have to do. This part has rather increased compared to 10 or 14 years ago. In that sense, I would say resilience has rather increased in many ways, you know, how our business is set up and the geographical spread.
The other thing that typically goes with a recession environment is obviously that input costs come down quite quickly. Here our price stickiness is quite significant on the one hand from a let's say time lag point of view, but particularly also fundamentally that due to the fact that we're selling you know systems and solutions here the pressure is not that big, which allows us to then also you know address the fixed cost element in such an environment. I would say in summary very much the same at least as 10 or more years ago in terms of how we would view such an environment.
Maybe to add to that, I think also some of the markets have a different dynamics. In 2008, 2009, for instance, the automotive market was saturated and had a huge impact by the change. This time, I think the market is very short and the backlog is huge and the transformation to e-mobility is very high in demand. This will be very different than 10 years ago. Also on the incentive programs, the stimuli that have to go together with the Green Deal, they will not dry out. These incentives to convert the energy saving initiative in the countries will also stay and the demand there will also be less impacted by a general recession.
There are multiple parameters also in the market that are quite different than 10 years ago beyond what Adrian just said with the portfolio and our let's say multiple leg presence in the market.
Very helpful. Thank you very much.
The next question is from Remo Rosenau, from Deutsche Bank. Please go ahead.
Yes, thank you. At some stage in your presentation, I heard the sentence that China is back on track. Did I mishear that or was that correct? Could you elaborate a bit on China in particular? Because listening to Schindler this morning, which of course is a totally different industry, the outlook on the property developers and housing was pretty bleak. Of course, again, that's not your main field of action, still. Could you elaborate a bit on China?
Okay. Thank you, Remo. Yeah, I won't comment on Schindler's business. I'm not into that segment so much, but our business had quite an impact with the lockdown. It was going very strong last year and also the beginning of this year. Then the lockdown had quite an impact. It never stopped. Our direct business had a more pronounced slowdown because construction sites were limited and the projects were stalled. On the distribution side, our growth momentum, which is far above 25%, came down to double digits, still well above 10%, double digits. It was able to find additional sales points and access to the market, and it was well distributed over China.
This has been lifted in the beginning of May. When I say back on track, means that we now see that both divisions, the distribution as well as the direct business, have come back to sales growth as prior to this lockdown period and driving overall a strong China performance. We are also optimistic that this will continue. The segments we are in are of course different than the, let's say, the business of others. We have here a lot of infrastructure activities. We are in selected market in the direct business and less, let's say, exposed to the residential market condition.
Would you say that the growth in China, which is very good to hear that it continues, is mainly based on increasing your penetration in the market, still together with Terex, or is it still more the overall market?
I think it's both very clear. The market penetration that the distribution is demonstrating is just it's a continuation of what has been established several years back, and we are reaching more and more cities in more and more rural areas. Our market position is strong. We have a leading position in this segment. It's the tile setting segment. This gives us great opportunities to go further and build up more sales points. Also on the direct business, on our infrastructure business, engineered refurbishments business, we are seeing positive volume trends.
Here, we see the market also in our favor coming back and eventually also going to benefit from further incentive programs by the government to push, let's say, the overall recovery of the economy past the lockdown period.
Okay. Sounds good. Thank you.
You're welcome.
The next question is from Jaideep Pandya from On Field Investment Research. Please go ahead.
Thank you. I actually want to follow up on the last question. There is a fair amount of backlog right now of these unsold or rather pre-sold buildings that have not been completed in China, almost 40% since, like, few years now. It's got to a point now where there's social revolution going on, and there is a very high degree that these, you know, local governments will push these developers to complete these buildings. In that scenario, do you see a chance for acceleration in growth in sort of Q4, 2022 through 2023 if a lot of these unsold or uncompleted rather buildings are completed? That's my first question. The second question is around your raw materials. You know, what do you see with regards to availability of raw materials from a regional point of view?
'Cause a lot of the raw materials that you buy, especially North America, have been very tight. Has the availability significantly improved for your business? Thanks a lot.
Okay. The first question is related to the residential market in China, and will this further increase our growth momentum? That's a good question. You know, when you grow 25%-30%, you know, how much more can you really relate to a single element? You know, to say now we go into 40% growth, if that happens, it's just not real. I mean, we have a tremendous momentum there. It is fueled by many elements, but also it is also a question what the capacity is of the organization to grow. I think with the 25%-30%, we have demonstrated that we can build on our model, and that's healthy.
If there are more elements helping us to grow, we will capture as much as we can. Also here, I mean, this is a growth mode that's hardly seen in any other industries where we are in, and we have to be realistic. We are building factories almost in a six-month period to catch up with the demand, and we are talking here about large-scale factories and soon to be announced more factories are following. This is, of course, all playing together and just to opportunistically take everything in and at the end, and not being able to fulfill, we have to be a bit cautious. We see these elements, but at the same time, you know, we don't want to overload and speculate on such elements.
Your second question on the availability. The availability has somehow improved. North America, as you outlined, still tight. The overall costs haven't come down, so the availability has improved in general. Cost level has, let's say, kept at very high levels. This is a volatile situation which may then very quickly change again. At the moment, I would say it's not on the top three of the concerns that we would see on the supply chain side. It's rather what was mentioned before, that the energy collapse, if there would be a shutdown on gas in Europe, that would be a concern we would have and other elements. But the availability was last year very much. That's when I referred to the 50 force majeure.
We still have force majeure. That's not gone, but it's of a different magnitude. It's more down to probably a dozen or so that we are dealing with currently.
All right. Thanks a lot.
The next question is from Markus Mayer from Baader Helvea. Please go ahead.
Yeah, good afternoon, Thomas, Adrian, and Dominik. I have three questions, if I may, or three questions kind of area. First one is on your order book. If you compare your order book versus the past months or quarters, has the order book improved or remained unchanged or even worsened? Also, has the volatility of the order pattern increased? That would be my first question. My second question, I took a comment that you said you expect the second half margin be higher than the first half margin this year. Was this comment made on the underlying EBIT or on the reported base? That's just a clarification question. The last question part, it's an add-on question, is again on the portfolio effect.
This divestment one-offs, am I right that they are mainly in EMEA? This M&A cost, your or the MBCC integration cost basically or add-on costs, are they also mainly in EMEA, or how are they spread, and also what magnitude of further MBCC costs to expect for the second half? Thank you.
Okay, maybe I take the first question on the ordering pattern and the order book. I think this is of course very different from segment to segment. As I mentioned before, the order book for instance in automotive is long-lasting and is very healthy and is demonstrating also the need for e-mobility solutions. That's very positive. That's in comparison to last year a substantial increase in magnitude. Others are more short-term, the distribution business here. This is somehow within weeks and months that the pattern may change. The Q2 in Europe, in Western Europe, where we had negative volume trends, this comes with relatively short notice.
And then of course, the typical direct construction order book, when we have roofing projects, when we have flooring projects, that's somewhere between 9-12 months, going into when we look at infrastructure projects where we have a visibility of the next two years. In reality, the booking for our components starts probably 12 months ahead with the specifications then going into first 12 months. This is a wide variety. There's no change in the pattern. You know, this is nothing substantial. That's the nature of the business, of the segments. The overall order book, I would say, is healthy. That is not giving us any concerns. There is no artificial delay or hold on any of these elements visible so far.
That makes us also confident that short and near term, we are going to be able to deliver what we have outlined in the outlook.
Marcus, here the next two questions on, let's say, the margin topic. What I was alluding to, that there is a likelihood or a good likelihood that material margins in the second half year are going to be higher than in the first one. In terms of obviously overall EBIT, I just can again confirm that we are confident and committed to an overall over proportion EBIT growth for the year. Obviously taking into account these various variables and components we have been talking about. To the one-offs, the largest part of, let's say, the divestment gain is in region EMEA.
There is about CHF 20 million of the whole in the other segment or in the services segment as well as all the acquisition-related one-time costs. It's also in this other segment overall CHF 28 million. The expectation for the full year is around CHF 50 million.
Okay. Thank you.
The next question is from John Fraser-Andrews from HSBC. Please go ahead.
Thank you. Good afternoon, everybody. I'll have two, please. The first one, Adrian, you're very clear about the expected trajectory of gross margin in half two. Have you already seen an inflection point in Q2? Have you seen the gross margin actually pick up from its trough? Your confidence for the second half, is that based on pricing increases that you've already announced yet to impact, or price increases to come or both? That's the first question around gross margins. The second one is the scope of the business, these points of sale and distribution, which is obviously an engine in China.
Just to clarify on that, Thomas, did you say you're back to sort of 25% sales growth in China on the back of that from the dip to double-digit in the first half, I think you said. Are there any other regions? Is the pickup in Southeast Asia down to these points of sale rollouts that was part of the Parex strategy? Thank you.
Yeah. Thanks, John, for these questions. I'll take the first one as you have addressed it to me. In terms of the inflection point, obviously it's a bit the question what you're referring to. I was commenting that in absolute terms, we have in Q2 basically reached a point where we are now basically overcompensating absolute input cost increases. Now, due to the strong pricing component of the top line, this is not yet true for the relative material margin development. Here we have not seen basically a material you know uptick from the trough. This is to come, and again, will depend on the relative developments of input costs, but particularly also continued pricing. Yes, here we continue.
This is not obviously something which is planned on group level. That's really executed, but also, you know, planned and implemented in the local organizations. I can just tell you that there is continued, you know, price increases on a monthly basis. Many already announced and to be implemented. Others, if the situation warrants it, will come. These are the elements that will be here ultimately driving then also material margin in relative terms, again, in the other direction.
Okay. John Fraser-Andrews, to your second question. Yes, it's correct that the growth rates have reestablished at a 25% rate at the distribution business in China, very much driven also by the expansion in the market. This expansion model or this distribution model is exported into Southeast Asia. That's correct, reflected. Also there, for instance, in Indonesia, we had 1,500 points of sale a year ago, and we are currently at 3,500 points of sale. That model is copied and will also drive further the growth momentum. It's just, let's say on a magnitude level, of course, that's very significant for Indonesia.
This 2,000 points of sale more in China in a year, it is 35,000. This is just-
The traction is there in Southeast Asia, in the Philippines, in Vietnam, in Indonesia, in Malaysia. We are copying this and it contributes, but of course not as visible as the Davco business in China.
Very clear. Thanks, Jan Jenisch.
Thanks, John.
The next question is from Patrick Rafaisz from UBS. Please go ahead.
Yeah, thank you for taking my three questions, Jan Jenisch. Good afternoon, everybody. The first one is on pricing. I think you've been pretty clear on the magnitude here in the second quarter, around 15%. Just wondering, are there any notable differences across regions, or is this a pretty consistent number? That's the first question. Then two questions on MBCC. The first one, I'm just wondering, with the market having derated, of course, year-to-date, is revaluing the assets an option you might have before the closing, or is the price fixed? The second question is, with what you've learned in the meantime and year-to-date developments for the business and potential remedies, can you update us on your thinking on the timing of the synergies and the integration costs?
Specifically, has your view on the synergy mix changed in any way? I think it used to be a bit more top line and less cost or the other way around. Has any of that changed? Thank you.
Good. Well, thanks, Patrick, for the questions. In terms of pricing, there is indeed. I mean, obviously the trend is very similar, but in terms of the magnitude, there is differences across regions. This is also pretty much to do in most cases with underlying input cost increases. I mean, here clearly, let's say pricing as well as impact on the raw material cost side is the biggest in the Americas as well as in Europe, whereas Asia is actually quite a bit lower on both levels.
This is at least partially to do, let's say, with supply, particularly also out of China, with a lot of disruptions, when it comes to sea freight and the whole logistics chain that actually, also availability in the Asia markets, you know, has been better than in other areas, and therefore also less, push on input cost side. That's the general picture. Obviously, also somewhat, you know, different, elements depending on the business and the country. On MBCC, maybe firstly, here important, I mean, we really don't see any, let's say, change to, you know, the long-term value of that business.
I think this also goes very much for the synergies. Here, no change in basically perspective. You know, contractually, I mean, there's no element of, you know, renegotiation and valuing, but again, also not necessary as, you know, this is a very strong business and also in this environment, this has certainly not changed. In terms of, you know, the synergy composition or basically the timing of it, obviously all a bit dependent when exactly we close. In terms of the progression, also here, no change from today's perspective.
We continue to feel very, you know, confident and comfortable with the guidance, CHF 160 million-CHF 180 million. We have also been quite transparent about it. I mean, there is an element of either, let's say, attrition or then, you know, reduction due to a potential sale included. Also here, depending on the eventual scenario, no change. In terms of the actual one-time cost, and as said, we will have about, you know, CHF 50 million this year.
We would see the lion's share of the total CHF 200 million basically next year to the tune of about CHF 80 million and then the rest of it in the two years to follow.
Thank you. Very helpful.
There are no more questions at this time. Gentlemen.
Okay. Thank you very much. This brings us to the end of our call. We take this opportunity to highlight that the date of our next Capital Market Date will be the fourth of October, excuse me, and it will be held in Zurich. With this, we thank you for listening to our call and for your interest in Sika. We wish you all the best and have a great summer. Bye-bye.
Bye-bye.
Bye-bye.
Take care.
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