Good afternoon, and welcome to the nine months results conference call. Present from Sika with me here today is our CEO, Paul Schuler, our CFO, Adrian Widmer, and Christine Kukan, Senior IR Manager. We published our figures this morning at 5:00 A.M. Paul Schuler and Adrian Widmer will provide further details on the results and the outlook. Afterwards, we will be ready to take your questions. With this, I hand over to Paul to start with the highlights of the first nine months. Please, Paul.
Good afternoon, everybody. Thank you for joining our webcast today. I'm happy to inform you about our business development in the first nine months. Despite the severe impact of the coronavirus pandemic, Sika continues to grow by 2.6% in local currency and reach sales of CHF 5.8 billion. Currency effect of 6% led to a decline in CHF of 3.4%. Due to the impact of the coronavirus pandemic, organic growth was negative at 6.6%, but clearly improves compared to the first six months. With our local management structure and empowerment organization, we are able to adapt quickly to the changed market conditions in the different countries. There has been a clear focus on the safety of our employees, customers, and suppliers, but also on cost management and on expanding business activities and capture opportunities to grow and gain market share.
We continue to invest in innovation and to develop products and solutions that enable sustainable construction mobility. Despite lockdowns and restrictions in many countries, we have continued to gain market share in our regions. EMEA has been recording a slight organic growth since June. In the last few months, we saw the biggest recovery in Southern Europe, especially in Italy, Spain, Portugal, and France, and in the Middle East. In most countries in Eastern and Central Europe, as well as in Scandinavia, we saw a slightly stable business development. Growth in the U.K. is still affected by the pandemic. Sales development in Americas improved slightly, even with the high infection rates in Mexico, Brazil, and the U.S. A positive development, especially seen in Latin America, which returned to a positive growth in September for the first time since February. Here, Brazil, Chile, and Uruguay showed the best performance.
In the Asia-Pacific region, China showed an impressive performance, recording strong double-digit growth rates in recent months. The former Parex business, with its wide network of distributors, proved to be very resilient to the crisis. Also the project business in China is once again recording double-digit growth rates, thanks to infrastructure orders. Australia and New Zealand contributed to the positive development in the region as well. Other countries such as India, Japan, Southeast Asia, have only been recovering slowly from the impact caused by the pandemic. Global business was impacted. The strong decline in the global car build rates, which dropped by 23.2%, or 15.3 million cars in the first nine months. Even if production volumes in automotive area clearly recovered in the third quarter, it will take some time until volume are back to 2019 levels.
Despite the difficult environment with sustainable decline car production figures, Sika clearly outperformed the market, recording a negative growth of 16.1% in this sector. In China, we have been growing again since May, and in September, sales grew in Europe and in the U.S. Looking at the financial results, I am very pleased with the strong operating free cash flow of CHF 765 million. This exceeds previous year by CHF 200 million, and as a result of our profit improvement and the consistent focus on cash management, I also would like to highlight the strong margin development with EBIT margin reaching 17.7% in the third quarter. The integration of Parex continues to make excellent progress. The generation of synergies runs successfully, and we are ahead of our plan. So far, a run rate of more than CHF 40 million in synergies has been achieved.
This year, the contribution will mainly come from cost benefits to combined procurement activities and operation organizational efficiency. In China, we have launched 2,300 shop-in-shops with Sika products in Parex points of sales. Worldwide, more than 500 synergies initiatives are being tracked. The integration of other acquisitions, such as King in Canada or Crevo in China, runs according to plan. In the first nine months, we completed the acquisition of Adeplast in Romania and acquired Modern Waterproofing, a leading producer of waterproofing and roofing systems in Egypt. This year, our acquisition pace has been so much slower since the due diligence process has been hindered by COVID-19 and travel restriction. We continue to explore attractive opportunities for acquisition, and our pipeline is full. Now, I would like to hand over to our CFO Adrian Widmer. He will guide you through the financial information.
Thank you, Paul. Hello, good afternoon or good morning to all of you. Following our CEO's business summary and highlights, I will now give you further insights into the financials of the first nine months. In the first nine months of the year, Sika maintained its overall growth trajectory with a growth of 2.6% in local currencies. While acquisitions contributed 9.2% of growth, organic growth was a negative - 6.6% due to the repercussions of the pandemic. In addition, negative currency effects reduced local currency growth by - 6%, resulting in an overall sales decline of - 3.4% in CHF. Negative currency development only softened marginally in Q3, as a more stable euro-Swiss franc exchange rate was countered by a strongly negative development of the U.S. dollar. All geographical regions contributed to our growth in the first nine months of the year.
Region EMEA grew sales at the rate of 3.8% at constant currencies and showed a slight organic growth again in Q3. Year-to-date organic growth was - 5.2%, while acquisitions contributed nine percentage points. Foreign exchange effects, in this region, mostly related to the weak euro, had a negative impact of - 5.2%, although effects were not as severe in Q3. Region Americas recorded a growth of 0.9% in local currency, supported by acquisitions which contributed 7%, while organic growth was a negative - 6.1%. Many of the major cities in North America remain affected by the pandemic, but as mentioned by Paul, Latin America showed a slight improvement. However, foreign exchange effects for the region were strongly negative at - 7.7%, again, mostly owed to the weak U.S. dollar, but also continued weak emerging market currencies. Growth in Asia Pacific amounted to 13.9%, significantly supported by the acquisition of Parex.
Organic growth was -4.6%. China was a clear driver, having recorded double-digit organic growth in recent months. Foreign exchange impact in this region, -5.6%, year-to-date also remained strongly negative. Global business recorded a sales decline of -16.1% year-to-date, while at the same time, the automotive sector reported a decline of car build rates of -23% in the period of review. Sika has been recording growth again in China since May, and in September, also the U.S. and Europe were able to report growth. Very similarly, foreign exchange impact was strongly negative at -5.3%, as in all the other regions.
Moving down the P&L, we have been able to continue to expand material margin in Q3 with a year-to-date increase of the gross result level of 110 basis points from 53.5% to 54.6% in the period under review, driven by a combination of reducing material costs, disciplined pricing, and various procurement and formulation efficiency initiatives. Excluding acquisition-related dilution effects of 20 basis points, material margin increase was 130 basis points organically, a slight improvement from the 120 basis points in the first half-year. Operating costs, which include both personnel costs as well as other operating expenses, decreased in line with the sales decline in CHF of - 3.4%.
Strongly negative operating leverage during April and May, as well as a slightly higher cost ratio of acquisitions, was compensated by a disciplined cost management, fast adaptation of the cost base where necessary, continued efficiency initiatives, as well as increasing synergy contribution from acquisitions. On a like-for-like basis, excluding acquisitions and one-offs, non-material costs decreased slightly over proportionally compared to organic sales growth in the first nine months. Consequentially, EBITDA increased by 3.1% to CHF 1,071.7 million, resulting in a strong EBITDA margin of 18.5%, up a full 120 basis points from 17.3% in the same period last year. Depreciation and amortization expenses increased by 17.3% versus the previous year to CHF 274.3 million in the first nine months. This was driven by additional fixed asset depreciation and intangible amortization from acquisitions relating to the first five months of the year, while the development since June was virtually flat.
As a result, EBIT declined only slightly by 1.1%, or CHF 8.5 million in absolute terms to CHF 797.4 million, representing an over-proportional EBIT development of 13.7% net sales. This compares to 13.4% in the same period of 2019. Below EBIT, also here, a positive development. Net interest expense decreased slightly compared to the same period of last year by CHF 2.5 million. Here, the residual impact of our Eurobond issuance in April last year was more than offset by missing pre-financing costs related to the acquisition of Parex last year, and overall decreasing financial debt in recent months. Other financial expenses decreased by CHF 4.5 million from CHF 21 million in 2019 to CHF 16.5 million this year. Group tax rates increased modestly from 23.8% in the previous year to 24.4% in the first nine months of 2020, due to country mix and shift in relative profitability.
Underlying expected group tax rate remains unchanged. As a result, net profits decreased only marginally, by 0.9% to CHF 561.5 million, down from CHF 566.8 million last year, while increasing net profit margin to 9.7%. This is an increase of 30 basis points. Cash generation continued to be very strong, with operating free cash flow in the first nine months exceeding the prior year figure for the same period by CHF 200 million to CHF 755 million. The strong cash generation was driven by lower working capital build-off, a positive cash impact from hedging transactions, as well as lower CapEx. The continued strong cash generation in the third quarter also led to a net debt reduction of more than CHF 400 million since the end of June. With this, I conclude my remarks and hand back to Paul for the outlook.
Okay, thank you very much, Adrian. Outlook for 2020, despite the pandemic and its impact on our business, we confirm our strategic target 2023. This means that we aim to grow by 6%-8% a year in local currency until 2023, and the target on EBIT margin of 15%-18% from 2021 onward. With the execution of our growth strategy, we will continue to deliver sustainable, profitable growth. Since June, business activity started to come back to more normal levels, and the dynamics in the construction sector picked up, thanks to the opening of construction sites. For 2020, we expect slightly lower sales in Swiss francs, with EBIT broadly in line with last year, implying an over-proportional rise in EBIT in the second half.
Our forecast assumes that the market will not longer be hit by the almost complete lockdowns that we saw in March, April, and in May. Now, we are ready to take our questions.
The first question comes from Priyal from Jefferies. Please go ahead.
It's Priyal here from Jefferies. I've got two questions on margin. The first one is that, in Q3, obviously your EBIT margin went up quite a lot by over 300 basis points. With the guidance that you've given today for the full year, it's sort of implying Q4 margin will go up by less than 100 basis points year-on-year. I just wondered, are there any sort of one-off benefits coming through in that Q3 margin which won't repeat in Q4? Are you factoring in more raw material inflation as we go into the end of the year? Just what's driving that? The second question, I know you don't give us profit by division, but I just wondered if I could push you on that in Q3. Just any sort of divisional color, and in particular, if that global business margin is starting to come back as well.
Thank you.
Good afternoon. This is Adrian. On your question, maybe first on special one-time impacts in Q3. There was really no, let's say, one-off impact in Q3. If you look at the material margin, and I was elaborating on this, we had a slight expansion on organic material margin. The dilution actually decreased because in previous year we had this one-off inventory write off regarding to the PPA. This somewhat affected positively the dilution effect. Really, in terms of the overall profitability development, it's all these elements as higher synergies, also these efficiency programs, some leverage due to a reduced cost base and recovering volumes. All the operating measures. Therefore, in Q4, we should also be exceeding quarter by quarter compared to the previous year.
Obviously, the EBIT, you mentioned here, somewhat lower exceedance, if you will. Here clearly, we have also said that on the top line, the situation obviously is not as linear and clear, particularly now with infection rates going up, how strongly this will develop. On the material margin, I would also expect this not to expand further as some of the raw materials show now, again, increasing tendency, which obviously we will counter with price increases. It's not as, let's say, dynamic in terms of cost reductions as in, let's say, previous quarters on the material side. Does this answer your questions?
Yes. That's great. Thank you.
Thank you, Priyal.
The next question comes from Thomas Wrigglesworth from Citi. Please go ahead.
Good afternoon. Thanks very much for the presentation. Two questions, if I may. The first one is, thinking about 2021, and as we lap the COVID-19 impacts, if you could share your thoughts with us as to how much of that lost business in 2Q you will recoup. Do you think the run rates that you're seeing now in your markets imply that there should be a full recovery of the kind of lost COVID revenue from 2020? Second question is on global. Could you give us a bit of an update there? We're hearing noises of auto recovery, 1% negative organic was very strong, and I think much stronger than the underlying markets. If you can give us some kind of sense of how performance will be going forwards and from the global business, your order book? Thank you.
Okay. Thank you, Tom. I take the first one. I think the biggest challenge we have is there is a total lockdown as we had in March, April and May. If the lockdown is not there, we should benefit from the big investments they do now in infrastructure. Many countries announce big potential projects, we should start to benefit already in 2021. Also, we see a lot of renovation work. We see also our strength position now also in the building merchant market. We expect if the second wave not really close country down, we should benefit from infrastructure investments and from refurbishment. On the car manufacturing, we see some improvements there. We estimate this year they will build around 73 million cars. We expect, or the forecast is to go to 78 million around. If that will happen, we see a turnaround.
As I said in the beginning, to go back to the old levels where they produce 90 million car will take a while. More positive on the automotive market year to date, where I see if there is not a big change with the pandemic. Does that answer your question, Tom?
Yeah. We should be back into what low single digit organic sales growth for 4Q. Is that kind of a realistic assumption for global?
Yes.
Okay, great. Yes, thanks, Paul. Very helpful.
Okay, thanks, Tom.
The next question comes from Cedar Ekblom from Morgan Stanley. Please go ahead.
Thanks very much. Hi, guys. I've got some questions on pricing. We've obviously seen raw material prices go up quite a lot over Q3. I wonder if you can give us some color on what pricing you've realized so far in 2020, and if you have any idea on the types of price increases we could be thinking about into 2021, if you've had discussions with customers yet. Thank you.
Yeah, challenging situation there. From the raw material side, we see some pressure in certain materials, but not everywhere. With our corporate purchasing, we could keep that on a very low level. We haven't seen the price increases yet, but we are ready to do this. On the pricing side, I think with our innovation, we launched several new product also in this year and for next year. We are quite good in bringing advantage to the customer, so we have a little bit improvement there on the pricing side because we switch to new materials. We will increase our prices for next year in several countries up to 4% 04% to up to 8%, depends a bit on the region. It's clearly, we want to increase the prices, and in the past, we could deliver the results quite good.
Sorry, just to clarify, did you say you're increasing prices by 4%? Sorry, I missed that.
Yeah. It's different throughout the world. It depends a little bit where. In general, I would say, 06% should be the target which we could see to bring through. It will obviously depend on also the dynamic on the input cost side. Currently, it's very much supply driven, as we understand it with, let's say, more force majeure. How prolonged this will be, we'll have to see. Obviously that's something we're watching very closely, and the reaction will be according to this. This level is basically the price increases we would normally do in connection also with new products we introduce, and let's say general price increases.
Okay. Would it be fair to say that based on the raw materials that you've seen so far, you feel that you could pass all of that on to the customer at the moment?
That's fair to say, yes.
Yeah. Okay. Helpful. Thank you very much.
Okay. Thank you, Cedar.
The next question comes from Markus Mayer from Baader Helvea. Please go ahead.
Yeah, good afternoon. Three questions from my side as well. Coming back to this margin improvement, this is a significant margin improvement. Could you elaborate how the split, which came basically from cost savings and in particular from temporary cost savings, and if you also expect then these temporary cost savings to remain in 2021? That would be my first question. Second question would be on CapEx. Is there any change from your previous guidance given that the business outlook has improved for you, in particular for 2020 but also 2021? Lastly, on your operating free cash flow, which you said is up CHF 200 million year-over-year in the nine months, do you expect this CHF 200 million better free cash flow also to save until the end of the year at your free cash flow?
Thank you, Markus, for the question. On the cost side, as alluded to, most of the elements here are really our efficiency programs, additional synergies. If you look at your Q3 there, it's probably about the sort of a 50 basis points of what you would or could consider temporary in terms of, let's say, less travel cost or other measures. Obviously, when these go up again, this will also mean that the top line will improve. We're not expecting that next year, the travel level will be back at sort of pre-COVID levels to start with. I think this impact is relatively small. We have overall cost leverage. We have been quite disciplined on the cost, particularly driving all these initiatives to improve efficiency as we progress.
On the CapEx side, in terms of this year's guidance, it's probably a sort of a slight increase to the previous year, CHF 130 million-CHF 140 million, I would expect for this year in terms of CapEx. The target is to, let's say, go up to sort of a more normal level, but obviously depending on business development, but also for the next years. There's no reason why, let's say, this 2.5%-3% CapEx as a percentage of sales should deviate. That's our target and also what we see commensurate and necessary for our growth. On the operating free cash flow, obviously very pleased, particularly also how the organization has been tackling this, been very disciplined, very focused on cash generation, on working capital and supply chain management. Can you just extrapolate this strong development in the first nine months? I would say not entirely.
We will continue to generate a good level of cash in the fourth quarter. There's probably two elements. If you look at the previous year, we have generated in the fourth quarter about CHF 500 million of cash. I would not quite expect that level due to the fact that, let's say, the working capital base is lower now, and there is typically a seasonality there. This effect will be somewhat lower compared to last year's fourth quarter. We also had, on the hedges, the cash flow effect, the positive one we already had earlier this year, compared to last year. Probably not as strong, but overall, we are clearly targeting a very strong cash generation for 2020.
Okay. Thank you, very helpful.
Okay. Thank you, Markus.
The next question comes from Yves Bromehead from Exane BNP Paribas. Please go ahead.
Good afternoon, gentlemen. Thank you for taking my questions. Three question, if I may. Just looking at the Americas division, where organic sales remain negative in Q3 2020, could you maybe comment on what you're seeing on the ground, especially in the U.S., as some indicators and some peers have mentioned a subdued infra and non-residential markets. I was wondering if this is also something that you're seeing, or if it's simply due to some metropolitan cities which are still somewhat, let's call it, closed because of the COVID-19. My second question is coming back to the pricing side. Does your comment that you mentioned earlier imply a direct passthrough, so no lag versus the raw material inflation in H1 2021, for example? We also heard from some distributors that the markets are getting tighter in the light side industry.
Is this a fair observation for your main products, especially in Europe? Thank you.
Okay. Start with the U.S. I think we had a tough U.S. market over there. Very many different big cities are in lockdown. Not lockdown, but under critical construction. That's the main reason we have not seen growth. We also see a little bit effect that several big projects are a little bit postponed. In principle, we see the U.S. mainly on the pandemic, where the people cannot move, cannot go to construction site in many, many big cities, and it's just there. What runs very well in the U.S. is still the retail market, where we are quite strong. Therefore, we assume, if there is no more lockdowns, we should go back to a growth rate also in U.S. again. Latin America, we said it's still very challenging, mainly also in Argentina, Colombia, Peru, or even Bolivia.
There is a big bug which we cannot see how the pandemic goes, but if this is a little bit released, that would help us to grow also in Americas. With the prices, I think the major products we buy, there will be no really shortage, or if the market not really picks up. If the market picks up, we can probably pass it through. That's our aim and our challenge. If you look back in the last two years, three years, the force majeure always really put a lot of pressure on certain materials. If there is not many force majeure in the market, we also feel for next year, we can pass our prices quite good to our customers through their market. Does that answer your question?
Yes. Thank you.
Okay. Thank you.
The next question comes from Martin Hüsler from ZKB. Please go ahead.
Yes, good afternoon. I have two questions. First of all, can you maybe remind us about the integration costs regarding Parex you had in the third quarter last year and maybe this year? Also talking about the synergies. You always still are focusing on cost synergies, as I understood it correctly. However, you already have some channels laid together, as you were mentioning, and I was wondering whether there is no sales synergies at this stage, and if we can expect this all to happen in next year, then. That's the first question.
Yes, Martin. On the first one, in terms of integration cost, just in isolation, last year, relating to Parex, there was about CHF 6 million of incremental integration cost compared just for the quarter. This year it's a very similar level, slightly lower, with about CHF 4 million related to the integration. Very broadly comparable. In terms of, let's say, the Parex synergies, maybe saying that there is no focus on the sales synergies is probably not quite right. I think these are by nature just elements that take a bit longer as you obviously build up the systems, the products, the channels. The lion's share of the realized synergies have come from the cost side. That's about sort of 75%-80%. As we move along, the sales synergies will actually take a larger share.
Very well on track, particularly in the last few months, we have seen a steady increase of our monthly run rate. I guess if the business picks up even in the rest of the Parex, we still feel we are strong on the way to this CHF 80 million-CHF 100 million, which we want to achieve, and very confident that we will go in this direction.
Okay, thanks a lot. The second question I have, turning to global business and actually to the car part of it. Can you maybe help us a bit and tell us what's the regional split of global business or at least how important is China for the whole global business part in order to understand better the trends in the respective markets?
China is around 20% of our total sales in global business. Very well ahead now from last year, quite nice. Also in the U.S., in the last one month, two months, we are really getting traction back there. It's around the half of the 35%-40%. Europe, where we have a big share now, is the rest. Here we have the difference is a little bit, the content per car is a bit different than in Europe. We have more content per car. In China, therefore, the growth rate just of the car, it's not always really reflecting. That's a little bit the split we have, and we assume in the next three or four months, we have improved conditions in all the three areas.
Thank you. That was very helpful.
Okay. Thank you, Markus. Yeah.
The next question comes from Patrick Rafaisz from UBS. Please go ahead.
Thank you. Good afternoon, everyone. I have three questions, please. First, as a follow-up on the margins, and I'm sorry for that, you've already talked about this. If I take the 350 basis points improvement on EBITDA, I exclude 150 basis points from the gross margin, let's say 50 basis points temporary savings, that leaves me with 150 basis points improvement. Would you argue that a large part of this is really underlying cost structure improvement? Is that sort of the level we should be adding in Q4 to last year's margin? The second question, also follow up on the regional EBIT development. I'm not sure whether you answered that question earlier, starting from H1, where did you see the biggest improvements in terms of profitability? The last question is also on global business.
If we separate auto and non-auto related activities, can you talk a bit about the growth you saw here in Q3? Thank you. Sorry, a follow-up on the global business. With auto improving faster than expected, are you changing your cost takeout initiatives that were targeted for automotive? Thank you.
All right. Well, a bunch of questions. I try to answer them one by one here. Maybe the first one on the cost buildup. I mean, 150, you have basically adopt as non-temporary and non-material. I mean, here, clearly, the major part is this ongoing efficiency improvements. These are a large number of different initiatives and projects we're driving on a continuous basis. This is something which will continue obviously in Q4 and thereafter, very much in line with our guidance on the strategy, 50 basis points of improvement coming from this. We have the synergy side, which also in the quarter was about 50 basis points- 60 basis points here in the cost. Also here, structural improvement, if you will.
There is a certain element of, let's say, leverage in combination with a reduced cost base in some of the areas where we have adjusted it, for example, in Global Business. Second one on the regional EBIT, I mean, we have improved regional profitability compared to the first half here in all the regions. In terms of the development, the two that showed the strongest development, obviously one is Global Business coming from a much lower base, and secondly, also EMEA, quite a strong development. The third question in terms of growth between auto and non-auto in Global Business, there is not a big difference, actually. The Automotive Business in Q3 was actually a little bit better than the rest, but not a big difference.
Fourth question on, let's say, the cost takeout and whether this is changing our view. No, it's not. We have basically aligned our cost base, our supply chain, the business with overall, let's say, reduced volumes, but not on a quarter-by-quarter basis. We can react very quickly. I feel we're in quite a good position to be profitable, even if, let's say, the sales growth is not that strong. If there is more sales growth, there is more upside.
Thank you very much. Very clear. Thank you.
Okay.
The next question comes from Manish Beria from Societe Generale. Please go ahead.
I have these two questions. The first is the Q3 gross margin improvement of 150 basis points. I want to see of this 150 basis points, how much is coming from price cost gap and how much is coming from this year longer term initiative in terms of procurement and formulation efficiency. Probably you can split that out between these two items, this gross margin improvement. The first question. Second question, I will ask later.
Okay. On the material margin in Q3. The biggest impact here, and I would always see this in combination, it's really the lower input costs, but in combination with maintained or even slightly increased pricing. That's obviously the important as input costs go down, to be able to maintain pricing, our value pricing. This we have done quite well, particularly here in the third quarter. The lion's share of the increase comes from there. All the initiatives, formulation, efficiency, new products, other procurement initiatives, that's also, I would say, a few tenths of basis points. This is an ongoing process. That's sort of the underlying initiatives where we're driving. Really the first part was the biggest margin driver.
Okay. That's quite clear. The second one I will ask again. You have already answered, but I was not very convinced. This EBIT margin guidance, you are giving like last year, so CHF 1,055, I mean the last year EBIT. That implies, because you have done 350 basis point EBIT margin improvement in Q3, that implies Q4 will be something like flattish. Going by what you are seeing, like pricing, gross margin improvement, the savings, then there is not much structural, all savings are structural sort of cost saving. I don't understand after doing 350 basis point improvement in Q3, why the margin will be flat in Q4. The math doesn't add up there.
We said it's going to be flat. I think it's fair to say that Q4 2020 will also show a higher margin compared to Q4 2019. Of course, the magnitude and your calculation will also depend on the top line, and I think here Paul has also been quite clear. Given the situation out there in the various markets, it's still very volatile in terms of our ability to do business and the magnitude of restrictions. Obviously the second element is the foreign exchange rates, which are also volatile and will continue to be negative. Typically, the fourth quarter is also from an overall volume, and this is every year the same, not as strong. There is certain effects that you should not expect sort of the same outgrowth of relative EBIT margin as in Q3.
Just a follow-up, does this Forex have a margin impact as well? I understand Forex will have revenue impact and things like that, but does it also contribute to some sort of margin impact, negative margin impacts?
The relative margin impacts are typically relatively small, unless there is big swings.
Okay. Thanks. Yeah.
Thanks.
Thank you.
The next question comes from Alessandro Foletti from Octavian. Please go ahead.
Yes. Good afternoon, gentlemen. Thank you for taking my question. I just have one left on the COVID situation. I know we are all tired about this, but it still can have an impact, as you say. We see the numbers getting back very strongly everywhere. The only place we don't hear anything is China. You have a big presence in China, so maybe you are well-positioned to tell us what's happening in terms of COVID in China, because if it recovers there as well, then it will also have a big economic impact.
Very interesting question, Alessandro. I have to admit, if we talk to our people and if you look at the news and if we talk to our clients and customers, it seems they have it under control. That's the only thing we see from our side. If it comes back, yes. Not sure, last time when it came back in China, they handled it apparently very well. I have nothing more to add and hope that it's the full picture we see, how the Chinese handled it. That's only. Yes, if it comes back, we hope they can carve it out again. Otherwise, we have to see.
In other words, what you are saying bottom-up seems to be consistent with what we are told from the government top-down.
It goes in line, yes. All our companies, all our people are on work, so nothing hidden there. Customers, we hear nothing. From bottom up, it seems the story is confirmed.
Thank you.
Thank you, Alessandro.
The next question comes from Arnaud Lehmann from Bank of America. Please go ahead.
Thank you. Good afternoon, Paul. Good afternoon, Adrian. Three on my side. Firstly, I think in your introduction, you mentioned that the acquisition pipeline is full. Would you mind being a bit more specific in terms of not necessarily the precise target, but which products or which geographies might be more of interest to you in the coming months? Secondly, on Asia Pacific, could you please remind us how much is China? I wrote down one third of Asia Pacific is China, but could you please confirm that, and is that including Parex? You said that China was doing well, but sounds like India and Japan are under pressure. On this, would you mind, when do you expect India and Japan to make a comeback? Lastly, on the U.K., your comment sounds quite negative, I guess.
We've seen, on the other hand, that the distributors in the U.K. are doing quite well. The home builders are doing quite well as well. Is it a mixed effect? Are you more exposed to non-residential construction in the U.K.? Thank you.
Okay. Thank you, Arnaud. On the acquisition side, I think I said it before, it's very difficult for us to really execute the acquisition. We have a principle, we want to see it, top managers want to see it, and meet the management. We have to see the properties. We were very restricted in traveling. This slows down. On the other side, we had one or two nice opportunities which we didn't really handle, so we walked away because price or quality was not good enough. If you look at our current pipeline, it's a nice pipeline. We have to see how we can go on with this in acquisition. In principle, we're always very keen on looking at adhesives and sealants.
I think that's a very nice target with focus on, or also on the mortar side and the business side, we are quite keen and a little bit our focus. In principle, all our target markets, all our five technology, we are interested to acquire. If there are good opportunities which fits our five technology, we're always open to go. I think that's a little bit the situation. In Asia, we see China around 40%-45% of our sales there. If I look at Japan had a terrible two or three months now, terrible for Japan. Usually they are quite well, not really growing, not really losing, but this time, I think they had a tough year on the COVID-19, but also on the weather in the last quarter. We have to see what's going on, Japan usually is a little bit stable.
India, we know the situation from the corona, quite challenging. We are on the way. We have to follow this up. Southeast Asia probably is one of the biggest issue, still lockdowns in the Philippines and Singapore. Tough situation there. I ask Adrian to comment U.K.
On the U.K., yes, I mean, your observation is right. It's a difficult market. The pandemic has hit quite strongly there, but it's also correct in saying that here the indirect, the retail channel is actually doing very well. It's growing quite nicely. Our exposure is about 60% direct and around 40% indirect. We have a good balance here as well, which is obviously helping. U.K. as a market has been quite tough.
Thank you very much.
Okay. Thank you, Arnaud.
The next question comes from Ouyang Xintong from On Field Investment Research. Please go ahead.
Hello, good afternoon. Thank you for taking my question. The first one I have is on China. Obviously, you think it is a very promising market for Sika. I have two questions. The one is on the previous Parex business. Since most of its business is in new builds, I am wondering, is it important for you to build any relationships with the real estate developers in China? Also, the second question is on the project business. You said that you were growing double digit, but I am wondering, are you growing just because the underlying market growth because of infrastructure, or is it because you are gaining market share in the relatively scattered Chinese market? This was my first question. The second question is that I know that in your U.S. business, you have this part of insulation business that goes with roofing, like membranes.
I'm wondering, probably it's market specific, but I'm wondering, now that in Europe with all this renovation initiatives going on and insulation producers are actually looking into membranes, I'm wondering, would you do the same as you do in the U.S., in the sense that developing more insulation business in Europe as well? Thank you.
On China, I think the former Parex business is running very well. I think we have a lot of cross-selling opportunities, a very strong setup with 2,300 distributor. From that side, we are very pleased with that business. A very strong and resilient business. If you look at our direct business, although in the Parex business, we grew double- digits, so we are ahead of last year. On the construction side business, it's always we won some quite nice project. The underlying market is good in China, but also we won some big jobs, some nice jobs on this side. It's a little bit mixed bag. On one side is a good market, so on the side we win a little market share as we won some big projects. With China overall, we are very pleased.
If you look at the membrane market in the U.S. and in Europe, the European market is a little bit different than the U.S. market. In the U.S., they have three or four big insulation producer where we can buy the product, we have also our own production for a certain region. In Europe, the market is a little bit different. There are few big players, we work with those together, like Kingspan or so. We sell already certain part of their insulation. However, the competition on the insulation is so big that we only, with the opportunities, we sell the whole system. Where we have the opportunity to sell the whole system, that's the right step to do to also sell the insulation, we are not going in the insulation production in Europe.
I see. Thank you. That's very clear and helpful.
Okay. Thank you, Xintong.
The next question comes from John Fraser-Andrews from HSBC. Please go ahead.
Thanks. Good afternoon, gents. Three for me, please. The first one, on the cost savings. I'm pretty sure you said at the Capital Markets Day, you haven't laid off any permanent staff, assuming that all your cost savings were temporary staff, the question is: Is that right? If organic sales pick up next year, you start to recover sales, will you have to take back those temporary staff to service that business? The second question is, retail, the indirect side of your business. Just to get a feel for how this trend is evolving. Has it accelerated since the back end of the second quarter, or was it a very strong lockdown phenomenon and it's decelerating? Note that you're strong in the U.S. and the U.K. Is it fair to say that you're strong everywhere, in retail and distribution?
The third, final question is in emerging markets. We've heard many instances where you're still struggling on sales. Apart from China, are there any areas of growth in emerging markets, in the third quarter? You haven't said much about Africa, but wondered if you're seeing any bright spots in emerging markets. Thank you.
Okay. John, I come back to the question of our employees. I think in a certain market, we adapt our organization also to the volume. Mainly a little bit in the automotive side, also in certain market, we had adapted our workforce. In principle, with the integration, we get a better leverage on the Parex side in many countries, we could increase the efficiency. We want to increase so the temporary worker won't come back if the volumes is not coming. Only if the volume really picks up to 6%, 8%, or 10% organic growth, probably we have to bring more temporary worker back. We have a very nice leverage there. Without much growth, we don't need additional people. From that side.
As I said, Sika is quite proud that we could keep the majority of our employees safe and keep them working and make sure that during the pandemic, Sika was a fair employer. If you go to the retail side, I think that's a really good business. It's not just a pickup. It's clearly we want more shelf. We have much better position with the acquisition of Parex, but also leverage now in other countries, these systems. We clearly won market share in the retail, and we see not just a pickup from the lockdown, we see a continuous win the market and space in this market. Very confident that we can build that up and even getting a stronger position. Emerging market, yes, besides China, many have total lockdowns like India, Philippines, Southeast Asia.
There's also Latin America, part of. They really suffer on the lockdowns and on the pandemic. If you look at Africa is also a mixed bag, where we have newcos , where we just started. They still grow, they're still doing very well. We are happy on that side. We really win market share. Many competitors left these small countries. Also in Turkey, we had a nice growth. Very good in Turkey. We suffered a little bit in Africa, in Egypt and Morocco and Algeria. They had a severe lockdown. It's challenging, moving back a little bit. In nature it's good. Very nice is Brazil, as emerging market, where we have a nice growth rate of around 10%-12%. Very nice and doing well. It's a mixed bag.
Thanks, Paul.
Okay. Thanks, John.
The next question comes from Martin Flueckiger from Kepler Cheuvreux. Please go ahead.
Good afternoon, gentlemen. Thanks for taking my questions. I have two, actually. First one, I'd like to focus on the European Green Deal and the impact that you have advocated in the past, I think, last time at the Capital Markets Day, that you're expecting going forward. I was just wondering, what are the latest news that you find relevant coming from this side with respect to the European Green Deal, and what kind of timelines do you see for the expected impact on your top line in the EMEA segment? That would be my first question. I'll follow up with the second one after you've answered the first. Thanks.
Okay. Thanks, Martin. Not too many big changes last week on the Capital Market Day, still very confident that this will help the Green Deal to build more and more sustainable buildings. As we explained on the Capital Market Day, Sika is a clear enabler to go in this direction. Many of our products, many of our patents, helps to bring the CO2 footprint down, to bring in better deals. It's a good movement for us. How fast the Green Deals will bring us product, I guess, we assume in the next few years it will be quite a part of our turnover towards there. Will it really help to grow faster? I'm not really sure, but we have, with our range, the opportunity to win the project and to bring better solutions.
We expect some support, but they only build the same buildings, same bridges, but in a way that we have to build it more green. Here we have a better position, I feel we're strongly convinced we win here more market share.
Okay, thanks. Second question I have is on your 15%-18% EBIT margin target range for 2021-2023. If I remember correctly, I think Adrian has been talking about 15% still being a doable or achievable target for next year. I was just wondering what kind of major up and downside risks do you see for that 15% EBIT margin floor in 2021, leaving COVID-19 aside just for a second?
Good. Well, thanks, Martin, for taking me up on this one. I think if we look at our progression on the synergy side, on the efficiency programs, on the impact we have been seeing, I actually have quite a good feeling that we will continue to move in this direction and that this 15% is clearly achievable in 2021. Obviously, there is a number of levers here. Material margin is another one where we have made good progression. Here, clearly, a combination of pricing and input cost, and here we're also in quite good shape. As long as, let's say, input cost increases or, let's say, these force majeures which lead to spikes where we have a certain delay, also I feel quite good here. We need probably some growth. Not the 6%-8% to achieve this.
Also, here I have to come back to the pandemic. Obviously, if there is a big impact on the top line, we will struggle to get there. The current assumption is that this will not happen, but clearly, here there is a certain risk. For the elements we have under our control, we believe we will be moving there in 2021.
Okay. Just to clarify, do I understand correctly that that 15% is a minimum target for 2021? Is this more or less the area that you're looking at?
Of course. We're giving a range. We're moving there. I don't think you should expect 17%. We always obviously try to overachieve, Clearly to get to 15 is the first step. Whether it's a bit more, we'll have to see. Yes, clearly. On the timeline, this is a minimum target, I think for 2021. It's probably not going to be at the end of the spectrum.
Thank you very much.
Okay. Thank you, Martin.
The next question comes from Christian Arnold from MainFirst. Please go ahead.
Yes, good afternoon. Two topics from my side. Coming back to Asia Pacific, in Q3 you had organic growth rate of slightly above 1%, and half of the markets there were growing double digit. If you think about China and also the positive contribution from Australia. That means that the other half was down double digit. Talking about Japan, talking about Southeast Asia, and I wonder what does it mean for your profitability there in the Asia Pacific? Did it have a positive mix effect or a negative mix effect? Maybe if you could give us here some light. What do you expect actually for these, let's say, more difficult markets going forward, be it Japan, be it Southeast Asia, be it India? That would be my first topic I would like to discuss.
Well, thanks, Paul, for this question. Yes, your calculation capabilities are very good. That's true. Here, obviously there is some very difficult markets currently in Asia Pacific, particularly when we look at Southeast Asia. India, still very much affected by lockdowns. Then also Japan, as Paul was mentioning, was really a tough quarter. In terms of, let's say on the mix, China versus the rest here, there is not a big impact on, let's say, profitability shift due to this. Obviously, Southeast Asia is an area where we're more profitable, but in others it's a bit less. All in all, this is not having a big impact on mix. Maybe for the outlook, I'll hand over to Paul.
If you look at India, for example, it's 30%-36% down. We have down in Indonesia, we are down in Thailand, we are operating in Vietnam, Malaysia is on lockdown since months, it's also around 30%. The good news is they could manage to control, the profitability is in the same level in the most countries, also Singapore. Yes, it's a tough market out there. We manage the cost, therefore the EBIT impact is not as big. The outlook, very difficult. I think in India, we cannot judge it. If you talk to our local people, they're also overwhelmed a little bit from the operations. Very difficult. I think Japan will recover, next year I am more positive on Japan. They are down by around 7%. Indonesia, also challenging market. The job sites are down in many countries.
They have not the pandemic under control. On the retail market, we are good. It's really a very tough situation, and your calculation is right. With China up double-digit and also in Australia, we are growing by 8%, 9%, the rest is, yes, very challenging. Therefore, if somebody tells me about the second wave, we have to wait until the first wave before we're in Asia Pacific.
Okay. What would be a fair assumption if, let's say, the picture is somewhat normalizing, you would have then a slight positive mix effect, given the fact that Southeast Asia is more profitable than the rest?
Yes. If this comes back, then we really will be very strong. Asia was always real good in cash, and if this market turns, then we probably have a nice 2021. That's the question.
Okay, thanks. Second question is on your target that you want to have some non-material cost improvement of 0.5% on an annual basis. We learned at the Capital Market Day that you actually have already achieved that in the first half. Now based on the calculation of Patrick, that we have some 1.5% non-material improvement in Q3, we could assume that maybe this non-material cost improvement could end up for the full year, maybe at around 1% instead of the targeted 0.5%.
I leave these great questions to Adrian.
Obviously, the 50 basis points in the first half-year is also on sales and that level. You cannot just double it. Of course, there is an element where we can do a bit better, also here for the general leverage, volume will help. There is different elements, but we will not just from these initiatives all of a sudden deliver 100 basis points, but very clearly, on good way. I mean, for me, particularly important, the organization is really very also focused on these efficiency elements of the business, and that's a very good program on a continuous basis.
But it looks-
Your assumption is not too far off.
Q3 looks, I mean, that you have overachieved that target again. The full year will be also above this 0.5% target. What I wanted to ask is, what shall we expect for the future then, or especially for next year? I mean, overachieving that target, does it mean that you will overachieve that also next year? Does it mean actually you cannot achieve it next year because the base is that high?
Yeah. No, I mean, it's good that you clarify this. I think these, when we say, from operational efficiency, a 50 basis points contribution to profitability, it's really these type of programs. Obviously, we are diligent on cost. There is general leverage that we can leverage our cost base better if there's growth. These are elements which would or can come on top of it. We're talking about these specific dedicated efficiency measures. Here we will continue this. This is a continuing program. There is new ideas that are constantly being developed. You can also assume this 50 basis points contribution will also come from last year. Then obviously, the other elements will or may come on top of it.
As he explained, if you look at our formulation efficiency, where we have in many countries, our automatization efficiency, where we have, with our 0.5, we are quite positive we can deliver a little bit more, or a little bit less per year. It's not there, the target should be very clearly achieved also in 2021, 2022. Also very positive to bring the same in 2023.
Okay. Thank you very much. Very clear.
Thank you, Chris.
The next question comes from Daniel Jelovcan from Mirabaud. Please go ahead.
Hello. Just two quick ones on two countries, Germany and Brazil. Did I understand it correctly that Brazil was up 10%-12% in organic terms, in Q3 or in the last, let's say, in September, or why was that? I mean, you only read negative news in the press about Brazil. The other one is to Germany, which is, I think you mentioned rather flattish. I guess that's also because of the German car OEM accounts from the global business are allocated in this area, right? Otherwise, construction activity in Germany for you must have been positive. That are the two country questions.
Germany is the same level. I think we win market share there. If you look at the last few months in Germany, they really dropped down a little bit. Yes, Germany is for us, is good. If you look at India or another country, so in principle, we feel Germany is strong, but also we win a certain market share, but it's flat, yes. In Brazil, we had some quite nice quarters, but don't forget that in April, May, and also in March, was a complete lockdown. We have to bring this back. The last month was double-digit growth in Brazil. Overall, we still have to bring their level back. We organically, we are a little bit on the same level as last year, but don't forget that we had to bring back March, April, and May. It's, in the moment it's good.
What is the reason? I guess that they have a special way to handle this pandemic. The job sites are open. The shops are open. The pandemic is in certain special areas where we are not really doing a lot of business, and therefore for us, it's quite strong there.
Okay.
Just to clarify here on Germany, I mean, this is only construction. Global business is not allocated to Germany. That's, or automotive, that's all in global business.
When you talk about Germany, it's not including the German big OEMs in cars?
No. Yes.
Okay. Brazil, but the 10% was in Q3 or? It was a kind of pent-up demand?
Yes. I think they find a way to deal with it, and yeah, it's correct. Yes.
Okay. Many thanks.
Okay. Thanks, Daniel.
The last question comes from Martin Flueckiger from Kepler Cheuvreux. Please go ahead.
Yeah. Thanks for taking my follow-ups. Just two clarification questions. Sorry for being a pain. First clarification question is on the previous statement regarding these 50 basis points temporary impact from cost containments. Did I understand correctly, this was in Q3, not in the nine-month period? How much was the difference in the temporary impact on margins between Q3 and Q2? Because if I remember correctly, you had already started to adapt your cost structure in Q2. Actually in Q1 already in China, but I think in the rest of the world in Q2. The second clarification question, sorry Paul, I didn't understand this very clearly. The Brazil statement for Q3, was that in local currencies or double digit, or was that organic? Thanks so much.
Question three is in local currency.
It's only organic. We didn't have an acquisition impact in Q3.
For Brazil?
Yes.
Yes.
Organic double-digit growth in Q3 for Brazil.
Yes. That's correct. On, let's say the temporary cost measures. Obviously, as we had, let's say short time work impact in Q2 and some more here, the effect was actually larger in Q2. It was at least double compared to Q3, but also obviously the top line was a lot lower.
Okay. Makes a lot of sense. Thank you so much.
Okay. Thank you, Martin.
Thank you. This brings us to the end of our call. We thank you for listening in, and we thank you for your interest in Sika. We wish you all the best. Stay safe and speak to you soon.
Okay. Bye bye. Thanks for listening.
Thank you.