Ladies and gentlemen, welcome to the Sika Half Year Report 2023 conference call and live webcast. I'm Andre, the Chorus Call operator. I would like to remind you that all participants will be in a listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star one on your telephone. For operator assistance, please press star zero. 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 of Communication and Investor Relations of Sika. Please go ahead.
Thank you, Andre. Good afternoon, good morning, and welcome to our half year results conference call. Present on the call with me today is Thomas Hasler, CEO, Adrian Widmer, CFO, and Christine Kukan, Head of IR. 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. 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 welcome, everybody, to our half year reflection. Let me start first with a view on the markets. The markets have been challenging. The environment has been, let's say, challenged by the interest in the inflationary tendency. At the same time, no major disruption took place in the last six months. The main trends have been reconfirmed and are positive. Markets have learned to adapt to this environment more and more. If I look into Europe, which has certainly the biggest impact with negative volumes in the beginning of the year last year, is we see here a steady move upwards. It's less and less impactful as it has been. On our side, distribution is leading here exceptional growth patterns.
North America, another steady growth element in our market, led by infrastructure, commercial, industrial, manufacturing, giving a boost to the North American overall environment. China, after a rather tough first quarter with the relaxation of the COVID measure, started the Q2 rather softly. Now steady growing. Here, again, on our side, the distribution business is already back on its double-digit growth pattern. Finally, on our global business, business that is mainly the automotive manufacturing business. Here, we have a good base effect by the build rates that have a double-digit increase in the first six months. On top of that, we have our additional content on the traditional, but especially also on the electric driven vehicles, basically the battery business that is gaining traction.
Now most excited about the first six months is our acquisition highlights. Here, of course, after 18 months of pregnancy, we were able to close and bring home the MBCC transaction on the second of May. Since then, we have been working on our first 100-day reviews with the specifications on the implementation and the synergies. Amazing first two months included in our results, but also amazing in the potential that is visible through the first two months review. We have an accelerated integration effort here, which Adrian also will then refer to, with the, let's say, front-loaded costs that have been accrued in this regards. We have excellent feedback from the stakeholders of MBCC, customers, employees, you know?
We have clearly brought the message across that this is accretive for all the stakeholders, in particular, also our new 6,000 employees that are now part of the Sika family, the one big Sika family. They are excited about the, the untapped potential that we can now dive in and bring to realization. On the acquisition, also, beginning of actually the second semester, early July, we brought home the Thiessen Team USA, a mining expert in shotcrete and grouts, in the US, which we will be able to leverage into our Canadian as well as into our South American mine business very nicely. Here, maybe just a brief comment on, on the M&A side.
You know, it has been a bit slow since we had this, this, let's say, antitrust ongoing in Europe and in North America, but we expect now to be back into the game and more to come in the near future. All this altogether resulted in an outstanding first six months. We grew 7.9% in local currency. I think the material margin increased by 330 basis points, is most remarkable and is a result of our pricing discipline and excellence. The EBIT, if we leave out the, the one-time effects, has increased by 6.9% and is now at 14% margin level, and the cash flow has increased strongly to CHF 316 million. Also here, a strong improvement compared to the prior year period.
All in all, a solid set of performance numbers, but most excited about the acquisition and the possibilities that the MBCC acquisition is offering for the now even bigger Sika. With that, I hand over to Adrian to go a little bit further into the numbers and the details.
Well, thank you, Thomas, and good afternoon, good morning, to all of you. As our CEO said, I will now go into a bit more detail on the financial result of the first half-year 2023. In a challenging environment, we delivered sales growth of 7.9% in local currencies in the first six months of the year, which also marked the first time consolidation of MBCC and includes two months of results. Organic growth was 0.7%, while acquisitions, almost entirely related to MBCC, added 7.2% of additional growth in the first half 2023. Negative currency effects were significant, reducing local currency growth by 6.1%.
Currency effects were particularly negative in Q2, with a 7.7% negative impact, was driven by the strong Swiss franc against all major currencies, particularly the euro, the US dollar, but also the Japanese yen, as well as vis-a-vis the high inflation environment in many emerging markets. Corresponding growth in Swiss francs was 1.8%. All regions, with the exception of global business, benefited from the acquisition of MBCC. Growth patterns by region were quite different. Region EMEA grew 3.2% at constant currencies. Organic growth was -4.2%, although volume development showed an improving trend in Q2. The Middle East and Africa posted solid growth, Europe South showed a significantly improved development in the second quarter, whilst Eastern Europe and the DACH area remained very subdued.
MBCC added 7.4% of growth, and foreign exchange effects at -6.6% were also in region EMEA, significantly negative. Region Americas recorded a growth of 11%, also heavily driven by MBCC. Parts of the business in North America were somewhat negatively influenced by rising inflation and increasing interest rates, but particularly by destocking in the roofing sector. Key growth supporters were infrastructure projects and ongoing reshoring activities. Most markets in Latin America showed solid growth, particularly Mexico and Argentina. Acquisition growth contributed 11 percentage points of growth, and foreign exchange effects also turned negative in the second quarter, reducing growth in Swiss francs by 3.6%.
Sales in Asia Pacific increased, also double digits by 10.1% in the first half, as organic growth in Q2 picked up significantly, particularly China, having emerged from COVID-related impacts at the end of Q1, recorded double-digit growth in Q2, primarily in the distribution business. Also, India was very strong, while Japan stagnated, and Southeast Asia showed a mixed picture. MBCC contributed 5.1 percentage points of growth on top of the 5% organic growth, while foreign exchange impact was the highest in this region, with a negative minus 9.2%, driven by a very weak Japanese yen, but also weak Chinese RMB. Finally, in the global business segment, Sika achieved a very strong growth of 16.2% in the first half year.
Underlying cargo rate growth was positive on the back of solid demand, particularly for e-vehicles and supply chain normalization. Sika sales outgrew cargo rate growth in spite of significantly negative production volumes in the market for white goods, which is also included in global business and accounts for about 10% of sales of that segment. Foreign exchange impact also here turned negative or more negative in the second quarter, reducing local currency growth by 4.3%. If we move down the P&L, where we, as heard, delivered a significant expansion of the material margin, with the growth result expanding by 330 basis points to 52.7%. This is up from 49.4 in the same period of last year.
Solid pricing, which includes pricing effects from 2022, as well as smaller additional pricing elements this year, in combination with declining input costs, led to the significant material margin expansion. Material margin continued to expand in Q2 quarter-on-quarter. As you can see in the EBIT bridge provided as part of the half year presentation deck, there was a small dilutionary effect coming from short-term purchase price allocation effects relating to MBCC of 15 basis points. Without this effect, organic material margin would have expanded even a bit more at around at 340 basis points. Reported operating costs, which includes both personnel costs as well as other operating expenses, developed over proportionally, but include significant one-off costs related to M&A, all reported in the other operating expense line.
These one-time costs are detailed in the EBIT bridge provided as part of the half year slide deck. I will allude to them in a minute. First, a word to personnel costs, to the personnel cost side, which increased by 8% versus a top line growth of 1.8%. The acquisition of MBCC was the main contributor, while organic headcount development was flat, wage inflation account for about 5% personnel cost increase on a like-for-like basis, leading to a negative cost leverage of about 100 basis points. Other operating expenses increased significantly, as mentioned, were impacted by an extraordinary one-time profit last year, resulting from the divestment of the Corrosion Protection business.
By last year's expenses in connection with the acquisition of MBCC Group were relatively moderate and in combination, resulted in a positive net impact last year of CHF 140 million Swiss francs. This was reported in other operating expenses. On the other hand, one-time costs related to the acquisition and integration of MBCC in the 6 months of 2023 were expedited and front-loaded and amounted to CHF 89.5 million in negative impact. Excluding these items, other operating costs increased by 10.8%, driven by MBCC, but also due to modestly higher marketing and travel costs, as we maintained high level of customer engagement and market-facing activities, leading to a negative cost leverage also here of 110 basis points.
Depreciation and amortization expense increased by CHF 26.9 million in absolute terms to CHF 220.7 million, or 4.1% of net sales, primarily due to MBCC and additional intangible amortization of CHF 17 million in the 2 months since closing. This corresponds to an MBCC amortization expense on a 12-month basis of about 100 million Swiss francs. As a result, EBIT decreased by 21.6% to CHF 660.4 million, and an EBIT ratio of 12.4% of net sales.
However, excluding mentioned one-time costs related to the acquisition and integration of MBCC, as well as the one-time gain last year, EBIT margin increased significantly by 60 basis points, from 13.4% in the previous period to 14.0%, or by CHF 48 million in absolute terms in the first six months of 2023. This on a broad basis, with three out of four regions, with the exception of EMEA, delivering strongly over proportional EBIT growth. On a pure like-for-like basis, also excluding initial dilution from MBCC, EBIT as a % of net sales increased by 110 basis points to 14.5% compared to the same period of last year. Also here, reference is made to the EBIT bridge provided.
Below EBIT, net, net interest expense increased significantly by almost CHF 18 million compared to the same period of last year to CHF 42.7 million. Increase is largely related to the refinancing of the MBCC acquisition and the three bond issuances in November 2022, as well as March and May of this year. Other financial expenses increased by CHF 32.9 million to CHF 51.6 million in the first half year of 2023, primarily due to higher hedging costs, driven by significantly increased interest differentials, as well as higher foreign exchange valuation effects, given the high volatility and MBCC. In addition, hyperinflation accounting impacts relating to the activities in Argentina as well as Turkey, weighed negatively as well.
The group tax rate in the first half year of 2023 increased from 25% to 27.5%, partially related to tax effects in connection with the MBCC acquisition, and in that sense, were also partially temporary or one-off, useful. We worked back to more sort of normal tax levels, but we also had a different, you know, country and profit mix in the first half year. As a result, net profit decreased to CHF 411.9 million, or 7.7% of net sales, down from 11.4% in the same period of last year. Lastly, operating free cash flow, as mentioned, saw a significant increase compared to the same period of last year.
In the first six months, we delivered CHF 316.5 million in operating free cash flow, which is up by more than CHF 270 million, from CHF 39.7 million in the same period of last year. Focused networking, capital management, lower inventory valuation, as well as a normalization of the supply chain, were the main contributors, as well as positive cash flow effects relating to intercompany financing and hedging activities. Cash taxes, on the other hand, were higher. With this, I conclude here my remarks on the result and hand back over to Thomas for the outlook.
Thank you, Adrian. I would just quickly summarize the outlook. Our expectation for the next 6 months are no massive changes in the market, which means the positive trends, the momentum that I explained initially in Europe, in China, but also the steady market in North America and in Latin America, will give momentum in the second half, and therefore, we expect a sales increase of about 15%, including MBCC, for the full year. At the same time, we confirm our earlier guidance from February this year of over proportional EBIT increase. Here, this is excluding the MBCC effect, as we have done previously as well. Here, of course, the material margin recovery is a significant contributor to our confidence in this outlook overall. With that, I would now open up for the Q&A.
We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question or a comment may press star and one at this time. The first question comes from the line of Priyal Woolf with Jefferies. Please go ahead.
Afternoon. Thanks for taking my questions. I'll just ask two for now. The first one is just clarification on the local currency growth guidance. In the presentation, in the release, it says, "Now expected to be over 15%." Slightly pedantic, but should we interpret this to be around 15%, or is that a 15% of floor, and you could come in a few percentage points above? The context for that is that MBCC alone looks like it could be a substantial proportion of that 15%. Presumably, there's a couple of extra points from pricing and bolt-on M&A to come through as well. The second question is just with regards to gross margin. Obviously, it went up substantially in H1.
Is it fair to assume that pricing stays fairly flat in the second half, while raw materials continue to fall? And if so, should we assume the gross margin uplift year-on-year in the second half will be even higher than in the first half? And if so, could the gross margin exit rate actually get to back within that 54%-55% range? Thank you.
Well, thanks, Priyal. Let me maybe clarify your, your, your questions here. On, on, on the top line, growth, I mean, it is clear that obviously, you know, MBCC will have here a major impact as part of this guidance, given also here prevailing exchange rates, this will, you know, come in probably rather at sort of around CHF 1.4 billion or, or a bit and below. That's one element. You know, pricing will continue to play a role. I think we have also seen here some, let's say, improving trends, while obviously, you know, China a bit slower than anticipated, you know, quite strong destocking activities in the U.S., which was also a bit higher than anticipated.
At the same time, we continue to be positive that there will be a clear improvement here also on the organic side overall, while maintaining quite some strong discipline here on the material margin side. The 15% should not read 15.0. Obviously, the exact amount we will have to see, but it's clearly a 15% or, or, or more overall, in terms of this guidance. On the material margin, I mentioned obviously there has been sort of a continuous increase here of the material margin, you know, throughout the first half of 2023. Yes, pricing is rather going to be flat or there around.
Uh, um, as always, there is selected, uh, continued price increases. Some of the, uh, raw materials, uh, um, for example, cement, uh, also continue to, uh, to increase, but overall, uh, they will not be sort of a, a broad additional pricing element going forward. And, uh, um, I think there is a likelihood that obviously, material margins, uh, will, uh, also increase in, in, in the second half year, although we have typically sort of a negative, uh, seasonality in, in this regard. I think to, uh, look for sort of an exit rate of, uh, fifty, uh, four percent, uh, is probably on the, on the high side. But, uh, um, you know, we're working towards that to, uh, that eventually again, be in our sort of, you know, target, uh, range.
I don't, I don't necessarily see this for, let's say, the, the end of the year or, or early next year.
Thank you.
The next question comes from the line of Martin Flueckiger with Credit Suisse. Please go ahead.
Yeah, afternoon, gentlemen. Thanks for taking my question. two as well from my side. Now, thanks so much for your elaborations on your growth outlook, particularly with regards to the specific markets. You know, I was just wondering whether you could dissect that a little bit more, because, you know, we, we know that residential markets are the most hit, and I was just curious, you know, how you see the various mar- market segments, i.e., resi, non-resi, and infrastructure or civil engineering, as you make wanna call it. Just wondering whether you have some more flesh on the bone with regards to your market outlook here, particularly for Europe and North America. That would be my first question. Then, the second one, I guess, is for Adrian.
I, I, if I understand Adrian correctly, he's talking about pricing around flat in the 2nd half, on a sequential basis, or, is that, is that, a guidance in terms of year-over-year comparisons? Thanks so much for clarifying.
Okay, let me, let me start with the first question on, on the markets and what we see and expect also for the next six months. You are absolutely correct. I mean the, the residential market is much more affected by the high interest rates, and we see this clearly in the, in the segment reporting. But nevertheless, it is, it is a lesser, let's say, relevance to us than the, the non-residential. And here I would like to start in Europe, where we have seen a huge impact by the, by the inflation and interest rates coming in. And on the commercial construction here, we see a tendency that the pipeline is full, but projects are still, let's say, delayed or postponed for the insecurity that the geopolitical situation offers.
We see here a certain delay that especially, let's say, in the manufacturing countries like Germany or Central Europe, are clearly visible that there this momentum is not kicking in, even so projects are lined up but not executed. On the other hand, in Europe, we have this positive trend on the distribution side, which is fueled by incentive programs that are still kicking in in southern part of Europe, in France, Italy, and Spain, where we are back to a double-digit growth in distribution. These investments are going mainly into residential refurbishment, energy upgrades that are driven by the subsidies from the Green Deal. This is a bit offsetting, let's say, the general residential difficulties that also in Europe are very clearly visible.
When I look into the North American dynamics, the North American dynamics is very strong on the commercial infrastructure elements. Here we see full-fledged investments. Our concrete business, our waterproofing business, which is a precursor for the activities, is up to double-digit, and that's an indication that there the projects are starting to be executed, and more to follow. Here we have a very positive momentum. It is also fueled by the reshoring of industries. It's the chip industry, the E-battery topic that is coming more and more back to the North American manufacturing. This is very positive. The infrastructure investments, the refurbishment of infrastructure, a very healthy element, and very important for us, since this is the majority of our business.
The residential in North America is, for us, a rather small portion, and yes, we do see there there are tents in the volumes because of hesitation to invest. This would be kind of the two main markets and the trends that we see.
Okay, just to clarify-
Thank you very much.
Residential.
Yeah.
Sorry, just to clarify the residential assessment that you've just given on North America, housing starts have stabilized. You, you don't see stabilization on the residential side yet?
You know, the, the housing as, as mentioned, it is for us a very small portion of our business. That's not the, the key business. We see it indirectly through our big box business that goes mainly into the residential. There, we don't see a huge difference from Q1 to Q2.
Okay, thanks.
Maybe then the clarification on the pricing, as this is meant to be, you know, sequential, from, from here, basically, you know, a flat development. On the other hand, we also have seen last year sort of, in terms of the, the impact of incremental pricing, a flattening curve, curve, but, overall, yes, the comment was meant, basically sequentially from here.
Okay, great. Thanks.
The next question comes from the line of Markus Mayer with Baader Bank. Please go ahead.
Yeah, good afternoon, Thomas, Adrian, Dominik, and Christine. I have three questions this morning. One is a add-on question, for the question before and two other then. Firstly, the add-on question on Americas. We have elaborate on a different kind of trends, but as you have, have you already seen as a positive impact from the US IRA program specifically, as we have many companies who are reporting that many projects related to US IRA have been delayed? Secondly, can you give us a little more flavor on the underlying MBCC margin for modeling purpose?
Mark, sorry, can you repeat quickly there your first question? Somehow, the-
Sure.
Your voice is not, was not so clear.
Okay. My first question was a add-on question on the Americas business, in particular, North America. You, have you seen already a positive impact from the U.S. IRA program? As we have heard from many companies that they see a delay in related projects there, and just a clarification if this is also the case for you. I have 2 other questions, or maybe it's better to ask the questions 1 by 1.
Okay. I mean, the first one, I cannot refer to what others are seeing, but we have very strong feedback from our organization that they become real and that is driving our, our growth rates on the concrete and, and waterproofing. You know, the more concrete is poured and this in, in volumes goes into infrastructure, into main, main, commercial construction, and this is flowing. This, this, this is real, and this is related to projects that are kicked off from the government side, the IRA, as well as from private, investors, reshowing, takes place as we speak.
Okay, thank you. My second question would be on the underlying MBCC margin. If you could quantify it, at least, give a certain indication. Is it in line with the margin we have seen when we announced it, or has it changed? If so, what has happened there, that we also can get a feeling for modeling purposes, how the next quarters are looking like?
Yes, Markus, on the margins of MBCC, maybe hear two, two or three comments. If we look at material margin level, the slight dilution has basically all come from temporary effects. The material margins are at the very similar level as let's say, the rest of Sika to start with. On, let's say the profit margins here on EBITDA level, incoming EBITDA margin is about 15%. This has not changed compared to, let's say, the announcement progression given, you know, some of the pressure was a little bit less, but very broadly comparable. What we will see is obviously a higher element of amortization, which basically then translates into an incoming EBIT.
If you consider that the purchase price allocation amortization of around 8% overall, obviously increasing with, you know, the synergy realization and the amortization expense, let's say, not increasing in absolute terms. They will actually go down over the years, and in relative terms, they will have a lesser impact going forward as there will be growth.
The on your guidance with the closing of the MBCC, do you reflect the ambition to achieve over CHF 12 billion sales for 2023? Since then, the Forex effect has significantly worsened, and therefore, I guess you have not repeated this number or this ambition, or is it still, is there still internally the target to achieve this CHF 12 billion revenue target for this year?
It's also a bit the tricky thing with, obviously, absolute numbers given the strong Swiss franc overall. You know, we have all seen here the Swiss franc strengthening in the second quarter and continue to soon to do so. Let's say at this, you know, development, I think the CHF 12 billion will be challenging.
Okay, thank you so much.
The next question comes from the line of Ebrahim Homsi with CIC. Please go ahead.
Hello, everyone. Two questions, if I, if I may. The first question is about the working capital. It has improved in H1 compared to H1 2022. What to expect in H2, sorry, compared to H1? My second question is about personal expenses, which increased by 17% in H1. How do you explain this, please?
Mm-hmm. Yes, on the on, on the work, on the work, on the working capital, this... I get an echo here. Yeah, I think it's better now. On the working capital, here we -- you have seen that this, you know, has been one of the strong contributor to strong operating free free cash flow. I clearly see here more, let's say, upside coming from the working capital side as we continue to work through, let's say, the particularly on the inventory side, the normalization and going back to, let's say, the old efficiency, given the supply chain disruption, also the valuation side will have an impact.
Secondly, I think also on, on the, on the receivable side, particularly now, with, with MBCC, having a similar, type of, seasonality, there will, be, more positive, working capital, effects, in the, in the second, in the second half, half year.
Thank you.
The next question comes from the line of Christian Arnold with Stifel . Please go ahead.
Yes, hello, everybody. I have a question on MBCC. If I look at the half-year report, page 16, here, we see that we have a net cash outflow of CHF 3.1 billion. In addition, you took over financial liabilities of CHF 1.9 billion, hence involved enterprise value is around CHF 5 billion for two-third of the MBCC you have now acquired. Back in November, you talked about CHF 5.5 billion enterprise value for the whole MBCC. Does it mean that you actually got some CHF 500 million for the disposed MBCC activities, or am I missing here something?
Thanks, here, Christian, for the question. This is not quite right. Obviously, here, the enterprise value of the business sold was higher than that. Obviously, there is a certain element of of tax leakage also related to then some of the transfers that need to be done, for example, on the IT side, which is usually a cash out that, you know, comes later and comes in future at an improved, you know, tax effect, as it's already in the right place, as with all the other, let's say, ownership of, let's say, the brands and the intellectual properties overall.
That's one effect. The other one is on, on the cash flow side, where similarly to ourselves, the, the cash flow build-up was a bit more significant compared to the, the original target, given the strong increase of, of, of cost and, and pricing. This, this is an opportunity going forward to reduce this, as I was talking about this just relating to the question before. Overall, we also have a positive element in future, you know, coming from this, this carve-out, which initially led to a, a somewhat higher cash outlay and, and was part of the, the overall acquisition cost.
Okay, thank you. Maybe, also in relation to that, you gave on your EBIT bridge this indication about the amortization, intangible amortization, on an annual basis of CHF 100 million. Is this linked to the intangible assets of CHF 1.3 billion you have acquired now, or will also the generated goodwill of some CHF 3.4 billion being reduced over time?
Yeah. No, this is entirely related to amortizable intangibles, which is the CHF 1.3 billion we took on the balance sheet. The CHF 100 million of annual expense are for the next 12 months. There will be a step down the year later of about CHF 8 million, then again CHF 7 million in the year, the year later in 2025, 2026, and would then remain at around CHF 85 million per annum for the next few years.
Next few years means next 10, 12 years?
Well, 6 or 7, yes, and then there is a sort of a gradual decrease.
Okay, thank you. The last question would be on the net debt. By mid-year, your net debt is around CHF 7.4 billion, and I'm fully aware that we have here some seasonality in terms of cash inflow, and also that MBCC has generated cash only for two months. The net debt level, of course, will be declined until year-end. Do you have here kind of a guidance where we should land at year-end in terms of nt debt? Maybe in relation to that, are you thinking of going for an early redemption for your convertible bonds, which actually is technically possible?
Yes, here on the, on, on the net debt level, I mean, this is, of course, very much related to, let's say, the, the pattern of, of cash flows, and yes, the second half will be, you know, a, a lot, a lot stronger. I clearly expect here the, the net debt level to reduce, you know, substantially here in the, in, in the second half year. The, the, the so-called soft call is, is clearly an, an option in this regard. We haven't taken a formal decision yet, but that's, that's a possibility, as you, as you say, as we're, you know, currently in that window where, you know, this, this is possible.
In terms of, let's say, the leverage, and this, I would see, you know, coming down and now without the soft call to around 3.3 times on a full year basis. If you were then to exclude, let's say, the one-time cost and allow for a 12-month EBITDA contribution, which will only be 8 months of MBCC, this would even be more below, you know, 3.3 times already, at the end of the year. The soft call would then reduce this by another, you know, 0.5 turns or thereabouts.
Okay. Thank you very much.
The next question comes from the line of Bernd Pomrehn with Vontobel. Please go ahead.
Good afternoon, Christine. Good afternoon, gentlemen. One question left, please. Again, on these financial liabilities of CHF 1.9 billion, which you took over with the acquisition of MBCC. What kind of financial liabilities are these? Are these mainly bank loans? Because I think MBCC had no bonds outstanding. So obviously I want to model your interest costs going forward.
Mm-hmm.
consequently, would appreciate some, some information about the nature of these-
Yeah.
financial liabilities. Thank you.
Yeah. Let me, let me clarify this. I mean, these financial liabilities, it, it, says here repaid at day one, so this is basically, with the exception of about CHF 100 million, which are ongoing, you know, leases on the balance sheet. They are all repaid and refinanced through, our, you know, takeouts we have, we have done. There is no, you know, other or additional debt. That's all included, here in, in, in, in our combined balance sheet and has been, has been fully repaid.
Okay. Okay, thank you, Adrian.
The next question comes from the line of Yassine Touahri with On Field Investment Research. Please go ahead.
Yes, sir. Good afternoon. Could you speak a little bit more about the development of MBCC, now that you are in control of the assets? Do you have any positive surprise, any negative surprise, anything you're excited about? Any added challenges that you see in the future? I'd like to also, do you have a view of the development versus last year? Are volume growing? Is the gross margin improving? What kind of outlook do you see for the concrete admixture on the cementitious for the second part of the year?
Would be very helpful to get some, some color about, the assets and your plan, and the perspective as well for the second part of the year and maybe midterm as well.
Okay. Yassine, I take this question. I have been traveling a lot and will again this weekend go to Saudi and Middle East. It's clearly a key topic for me to follow up on MBCC, and, you know, what, what we can see, let's say the underlying business is quite strong. You know, we, we see that the business has not suffered. You know, it was a long period of uncertainty, but we see that on day one, when it became Sika, and since then, you know, there is no disruptive element or there's a confusion. The organization is fully up to the task, is fully, let's say, excited and engaged.
You know, on, on the, let's say, surprise side, on a very positive side is that when the first two months have passed and when I was in Japan or India, you know, markets where we have, let's say, strong organizations on both sides, when the details came to the forefront, we could clearly see that the complementarity is even bigger and stronger than initially anticipated. Even in areas like the admixture business, where you would assume that the two leading companies would have a much stronger overlap.
For instance, in Japan, we saw that only 5% of the customers are really sourcing from, from the number one and two in the market, and, and therefore leave a, a huge room for further synergies on, on, on the sales side in, in this important market for us. Similar in, in India and in, in other regions. As I mentioned, I go to the Middle East, another exciting hotspot where economy is booming and where the concrete and admixture market especially is, is super strong. Also there, I expect to see a continuation of that very positive element, where this, this addition of the, the number one and two is leading actually to more opportunities than even anticipated.
Of course, that now the product offering in, in the segment of concrete admixture is super strong and is almost, you know, unchallenged or unchallengeable by, by others, because we have now really the full innovation pipeline for the future ready, and also very strong backup with the supply chain that is coming together. Maybe you ask specifically about the business mixture?
Yes. Yeah, I was asking specifically about like the development versus last year, if you've got a, if you've got a view on, on the margin side or the, the volume or the pricing.
Yes. I mean, you have seen that the material margin evolution from our side is also clearly visible on the MBCC side. You know, the material margin recovery has been a key for MBCC as well, and this is in line with our expectation. Also, profit line, I think Adrian mentioned it, you know, the incoming EBTA level is as expected and leaves further room for improvement. The markets on the admixture side, I would say, are probably the most attractive at the moment, globally speaking, since, as I mentioned, North America, concrete is high in demand, infrastructure is growing. We see also the same in China, we see the same in Asia in general.
We also expect that this will become more pronounced in Europe, even so with a certain delay, because of the mentioned, let's say, hesitation to commit to big projects, especially on the private side. On the public spending, I think that's not a huge difference to before.
Maybe just a very last question on the... You mentioned in your slide 12 short-term PPA impact of minus 0.2%. What does it mean? Is it something that is only visible in H1 that will disappear in H2? What, what is it related to exactly?
Yeah, it's a very specific element, relating to, the sort of the revaluation of asset liabilities, which includes the inventory, which you also have to basically revalue at market value as opposed to, to, to cost. There is a, a margin impact, but there will, only be, you know, a certain residual impact left for Q3, and then this impact will cease to exist and will also not exist next year.
Thank you very much.
The next question comes from the line of Pierre de Fraguier with Goldman Sachs. Please go ahead.
Hi, good afternoon. I have questions regarding the operational efficiencies. You've been targeting 50 basis points extracted on an annual basis. I was wondering, how did that actually play out in the first half? How do you expect that to evolve in the second half? Maybe if we step back and look to the longer term, what's the potential to continue to extract these operational efficiencies, especially with the now combined entity Sika plus MBCC? Thank you.
Yeah. Thank you, Pierre. Yes, here on the operational efficiency initiatives, they are very important initiatives. They're sort of continuous improvement areas across the value chain. In the first half year, we're pretty much tracking this, the 50 basis points on the OPEX level. And, I would, you know, clearly, say that in the second half, we, you know, should be very well on track to deliver those efficiency on a continuous basis. Going forward, and also here, we believe there is still lots of room, particularly on, let's say, on the operation side, on the footprint side, on the alignment, and in this regard, you're absolutely right.
The, let's say, alignment with the MBCC footprint, also on the logistics side, in production, but also including, you know, some of the products that are relatively similar and, and can be, can be, combined and made more efficient. There is, there's quite some room to come. This will continue to play a role in our overall, improvement of, of margins going forward.
Right. How much of that has been factored in the, the guided synergies for MBCC? i.e, would that be incremental, through to the guided synergies?
Yes, we will certainly not be double counting, are there specific initiatives where there is, let's say, major moves, but in terms of which will be counted as, as synergies. What we will be reporting out as ongoing operational efficiency improvements, you know, will, will then obviously not, not be the same as on the synergy side. I mean, at some stage, obviously there is a, a bigger, you know, pool to basically optimize, but the, the clearly identified moves will be, will be shown on the synergies.
Very helpful. Thanks a lot.
The next question comes from the line of Sebastian Bray with Berenberg. Please go ahead.
Hello, good afternoon, and thank you for taking my questions, please. The first one is on the raw materials basket of the company. I appreciate that a raw material tailwind becomes more pronounced as the company works through inventories that have been bought in at lower prices. If one were to compare the behavior of an aggregate basket of raw materials in August, let's say, versus July, would this be roughly flat? My second question is on personnel costs. I didn't quite catch the answer, I think it was a line issue, to the question that was asked on this earlier.
... Did personnel costs largely develop as the company had been anticipating at the start of the year, or were they more inflationary? My third one is just a more theoretical question. Much of the acquisitions that Sika have made over the last 3, 5 years have been targeted at the infrastructure space, and I imagine it might start to run up against hard barriers when it comes to market share in certain areas. For future M&A, is it possible we see an increasing precedence of residential? Thank you.
Good. Well, Sebastian, thanks for these questions. Let us answer them one by one. On the, on the raw material side, in terms of the overall basket, obviously sort of week on week, sort of difficult to exactly, you know, answer, answer this or even month on month. We clearly have seen lately a continued decreasing trend, which is continuing. Now, obviously it also takes a certain while until this has filtered through in terms of the, the, the PNL. Yes, it is correct that the input cost trend on the raw material side continues to go down, in that sense, is having a positive, positive effect. On the personnel cost side, there is not really a difference compared to expectation.
I said in my initial remarks that there is about a wage inflation of around, you know, 5% across, let's say, the group as we operate also traditionally in quite a high inflationary environment. This is clearly a bit higher than what we typically see, also higher than last year. As already indicated, this is not a surprise, and obviously here we're working also on as part of the efficiency measures to here improve efficiency across the board. This wage inflation will probably not be this similar in the second half as in the first half- year. The third one was on the acquisitions.
I guess I would slightly disagree here that the, the acquisitions in the past were particularly targeted on the, on the infrastructure side, and we had a lot of acquisitions. Then here, you know, Parex is a, is, is a clear, and, and the biggest one, here on the, on the building finishing, on the building finishing side, also sort of heavily going through, you know, the distribution channel. This will continue to be a mix going forward as we continue to see, you know, opportunities in, in, in many, many areas. I don't think it will, you know, become prohibitive in, in any way, to continue to make acquisitions also, let's say, in the, in the, in the, in the infrastructure space.
That's helpful. Thank you. Just a small technical question. Tax rate post MBCC, on an underlying basis, leaving aside one-offs in 2023 is low 20s%, roughly on a going forward basis?
Yeah. We'll probably, for the full year, also, leaving sort of a one-off side be, you know, slightly higher than in the, in the previous year. As we sort of, you know, continue, to, to progress, basically this will come down to sort of, you know, similar, you know, Sika, Sika levels overall. You, you can assume that this will, let's say, come back to sort of the levels we have seen in the last, you know, two, three years.
That's helpful. Thank you for taking my questions.
The next question comes from the line of John Fraser-Andrews with HSBC. Please go ahead.
Thank you, good afternoon, everybody. First question for me is on EMEA sales. Thanks for the comments, flagging what's going on there. Do you see that the strength in Southern Europe, Middle East and Africa, and the lower base in the second half is enough to have a positive outcome in the second half on volumes in EMEA? That's the first one. Secondly, synergies. The 200 million, I believe the integration costs will be front loaded. Perhaps, Adrian, you could just sort of flag out the timing of the integration costs of 200 million. Likewise, will the synergies also be more front loaded on the cost side than you originally anticipated?
Perhaps you could sort of put some numbers on those in 2023 and 2024. Then on the third question is on the MBCC margin. The EBITDA comes in at 15%. You've reported 16.5% within the overall business in half one, which is down for reasons you've set out from sort of usual at 17%-18%. How quickly can that MBCC margin assimilate with a Sika margin, and what needs to be done there? Thank you very much.
Thank you, John, for the questions. Let me sort of tackle, you know, some of them, and I leave the EMEA one to Thomas. On the acquisition of the one-time cost, the CHF 200 million, we have also indicated that, you know, we see about CHF 120 million of one-time costs this year, so there will be another CHF 32 million to come, which would then pretty much conclude the overall, you know, cost.
There, there may be, you know, some, you know, smaller elements in 2024, which means that sort of, you know, the CHF 200 in total may be slightly exceeded, but only slightly, given, given the carve-out activity and all the elements we have done. We have very much advanced this and then had to advance it, but also had the benefit that, you know, synergies in some areas are materializing earlier. We believe we can already achieve about CHF 25 million this year in 2023.
Although here that the phasing has not been fully concluded, so I can't give you a detailed figure, but the lion's share of, let's say, the remaining, you know, synergies will then materialize in 2024 and 2025, with the phasing then communicated a bit, a bit later. We need a few more, a few more weeks on that. On the EBITDA margin and sort of the question when will the MBCC 15% sort of live up or move up to, let's say, the normal Sika margins, and clearly the 16.5% is impacted by one-offs, which is not representative. Going back to, let's say, normal levels, we see this by 2026.
Okay, John, I try to answer your first question on Europe, here, can the positive trend in Europe South, Middle East, Africa, offset and bring, let's say, the organic growth, which is at -4% in the first 6 months, to a break-even? I think here, you know, we, we clearly see that there's, there's a good momentum there. It is double-digit in growth now also in Europe South on the distribution side. That's, that's very reassuring, and we also see that the Middle East is further booming and growing. Also, Africa has very solid double-digit growth, and Turkey is contributing.
On the brighter side also, we see after a very harsh start, that Eastern Europe is slowly moving upwards from, from a very negative trend into more neutral ground, and we expect also that probably in the next 6 months to contribute overall. The, let's say, and the dark region, Germany and, and the Central European may then also see that it is offset by those elements, when we go into Q4. This is a bit speculative. This is not yet, let's say, secured, but our optimism that, optimism that this, this trend will further accelerate. We don't see any reasons why not, but at the same time, we haven't yet seen how the markets are then really evolving in, in the near future.
We expect, and that was always my expectation, that given also the tough comparison, Q1 in EMEA is the toughest one. Q2 is probably the low point compared to last year, and now we see Q3 and Q4 further improving. Ultimately, yes, I'm quite optimistic that EMEA will be on the positive side, contributing to the group towards the end of the year.
Thank you, Thomas. One more, actually, Adrian, set out the purchase price allocation timeline of cost. Could you just rehearse that, please? That there's CHF 100 million in the next 12 months, I didn't catch all the other numbers. Yes. The 12 months thereafter, going down to CHF 92 million, the next 12 months would then be CHF 85 million, and then we will see a plateau for about 6, 7 years at CHF 85 million. Thank you.
The next question comes from the line of Stefanie Scholtysik with Mirabaud Securities. Please go ahead.
Yes. Hello, everyone. I have an additional question on your sales guidance. I mean, you're guiding 15%, including MBCC, and at your full year, you were so kind and broke the 6%-8% down on what was bolt-on, what was pricing and what was volume. Does this also includes bolt-on acquisition to 15%, and how much would be coming from bolt-on? Speaking about bolt-on, how much of your growth in the first half was coming from bolt-on?
... Yeah. Yes, Stephanie, I'm happy to give you a bit of color. Yes, there will be bolt-ons, given, let's say, the phasing and given the almost zero impact, as we still had a bit of a divestment impact. I mean, the actual sales impact was a near 5, sorry, CHF 4 million in the first half year. So we are sort of assuming that, let's say, the bolt-on impact for the full year will this year not be more than 0.5 percentage point of growth. This is not to say that there will not be, let's say, more, you know, M&A transaction coming, but they will not have, let's say, given the timing, a significant impact this year.
Okay. I mean, in fact, it is a lower sales guidance, and this lower sales guidance is mainly coming from lower bolt-on because you're busy with, with MBCC and had no time to go for bolt-on, or were there no targets around, or?
Yeah. No, I mean, we continued to have quite an active pipeline. What Thomas was also alluding to, obviously, there was a number of antitrust processes running here in the background. It was, let's say, more difficult to navigate, obviously, additional acquisitions on top of this. This is certainly not, let's say, changing in strategy or slowing down our, you know, acquisition pipeline remains quite robust, and there will be more to come.
Okay, great. Thanks a lot.
The next question comes from the line of Yves Bromehead with Societe Generale. Please go ahead.
Good afternoon, everyone. Thank you for taking my questions. My first question is just on the comments that you've made on the OpEx, Adrian. I think you've flagged that you had a dilutive impact of 100 basis points on personal expense and 100 and on the other OpEx line. I'm just wondering, for the second half of the year, do you expect a similar magnitude of dilution, or should we anticipate some improvement with regards to the OpEx line? My second question is on the automotive business. If I look at where you stand today in absolute revenues in H1, you're not too far off from 2018, 2019, albeit the volume may be still quite below that. You've also taken quite significant cost savings in the time being.
I just wanted to understand the gap of margin that still is the case today between H1 2023 and the historical of 2017, 2019, and how should we think about that going forward, please? Is there any way where you could get back to sort of the 2019 levels by the end of H2 on an exit rate, or is that too early? Thank you very much.
Yep. Thanks, Yves. Let me talk about here the cost on the personnel cost and the OpEx side and the development first. In terms of the personnel cost, and let's say the inflationary element I was alluding to before, this is probably not going to, you know, change significantly in the second half-year, neither to the worse nor to better. We will see a bit more efficiency elements also with, let's say, increasing volumes, lower dilution. On that line it will be a bit less so, but I would clearly see on the other OpEx, you know, an improving picture in terms of negative leverage in the second half, in the second half-year.
Then on the, on, on the global business side, I think in terms of margin improvement, yes, we're making good progress. I mean, the cost side is one, and we have also taken here the time, obviously where sort of volumes were impacted by, you know, various factors, particularly on the supply chain side of our customers to also here optimize, you know, pricing and reestablishment of the material margin, is an important element as well, on top of obviously, here, the volume leverage. I would see here an improvement, a further improvement in the second half, clearly with the ambition to, you know, go back to, let's say, the levels of 18, 19.
This will not yet be for, for this year, as we're still sort of, you know, working through some of the elements, but there will be more, you know, upside next next year.
Thank you very much, Adrian. Sorry, when you say an improving picture on negative leverage, just so my, just so I understand correctly, you mean less of a dilutive impact in 2H 2023?
Yes.
versus what you've seen in 1H. Okay. Very clear.
Yes.
Thank you very much, Adrian. Have a good weekend.
Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Sika for any closing remarks.
Thank you, this brings us to the end of our call. We take this opportunity to highlight the date of our next Ca pital Markets Day. It will be in Zurich on October third. With this, we thank you for listening to our call and for your interest in Sika. We wish you all the best and a very great summer. Bye-bye. Thank you. Bye-bye.
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