Good afternoon and welcome to the 9 months results conference call. Present from Zika with me here today is our CEO, Paul Schuler our CFO, Adrian Witzmer and Christian Kukan, Senior IR Manager. We published our figures this morning at 5 Now, Paul Schuler and Adrien Wittmer 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 1st 9 months.
Please, Paul.
Good afternoon, everybody, and thank you for joining our webcast today. I'm happy to inform you about our business development in the 1st 9 months. Despite the severe impact of the corona pandemic, Zika continues to grow by 2.6 percent in local currency and reached sales of CHF 5,800,000,000. Currency effect of 6 percent led to a decline in Swiss francs of 3.4%. Due to the impact of the corona virus pandemic, organic growth was negative at 6.6%, that clearly improves compared to the first 6 months.
With our local management structure and the 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 restriction in many countries, we have continued to gain market share in our region. 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 UK 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. But also the project business in China is once again recording double digit grow 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 to strong decline in the global car build rates, which dropped by 23.2 percent or 15,300,000 cars in the 1st 9 months. Even if production volumes in automotive aided clearly the comfort in the Q3, it will take some time until volume are back to 2019 levels. Despite the difficult environment with sustainably decline car production figures, FICA 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 U. S. Looking at the financial results, I'm very pleased with the strong operating free cash flow of CHF755 1,000,000. This exceeds previous year by CHF 200,000,000.
CHF 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 3rd quarter. The integration of products continues to make excellent progress. The generation of synergies run successfully and we are ahead of our plan. So far, a run rate of more than CHF 40,000,000 in synergies has been achieved.
This year, the contribution will mainly come from cost benefits to combined procurement activities and operational organizational efficiency measures. In China, we have launched 2,300 jobs in shops with thicker products in product points of sales. Worldwide, more than 500 synergies initiatives are being tracked. The integration of other acquisitions such as King in Canada or Crayvo in China runs according to plan. In the 1st 9 months, we completed the acquisition of Adiplas in Romania and acquired Modern Waterproofing, a leading producer of waterproofing and roofing system in Egypt.
This year, our acquisition pace has been so much slower since the due diligence process has been hindered by COVID-nineteen and travel restriction. But we continue to explore attractive opportunities for acquisition and our pipeline is full. Now I would like to hand over to our CFO, Adrian Wichtner. He will guide you through the financial information. Thank you, Paul.
Hello and 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 1st 9 months. In the 1st 9 months of the year, CECO 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 minus 6.6 percent due to the repercussions of the pandemic. In addition, negative currency effects reduced local currency growth by minus 6%, resulting in an overall sales decline of minus 3.4% in Swiss francs.
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 1st 9 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 minus 5.2%, while acquisitions contributed 9 percentage points. Foreign exchange effects in this region mostly related to the wheat euro had a negative impact of minus 5.2%, although effects were not as severe in Q3. Region Americas recorded a growth of 0.9% in local currencies supported by acquisitions, which contributed 7%, while organic growth was a negative minus 6.1 percent. 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 minus 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 minus 4.6%.
China was the clear driver having recorded double digit organic growth in recent months. Foreign exchange impact in this region, minus 5.6% year to date also remained strongly negative. Global Business recorded a sales decline of minus 16.1 percent year to date, while at the same time the Automotive sector reported a decline of car build rates of minus 23 percent in the period of review. Teca 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 minus 5.3% as in all the other regions. Moving down the P and 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 on the review, driven by a combination of reducing material cost, 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 Swiss francs of minus 3.4%.
Strongly negative operating leverage during April May as well as a slightly higher cost ratio of acquisitions was compensated by 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 1st 9 months. Consequentially, EBITDA increased by 3.1% to $1,701,700,000 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 $274,300,000 in the first 9 months. This was driven by additional fixed asset depreciation and intangible amortization from acquisitions relating to the 1st 5 months of the year, while the development since June was virtually flat.
As a result, EBIT declined only slightly by 1.1 percent or 8,500,000 in absolute terms to €797,400,000 representing an over proportional EBIT development of 13.7% net sales and this compares to 13.4% in the same period of 2019. Below EBIT also here positive development, net interest expense decreased slightly compared to the same period of last year by €2,500,000 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 €4,500,000 from €21,000,000 in 20 19 to EUR16,500,000 this year. Group tax rate increased modestly from 23.8% in the previous year to 24.4% in the 1st 9 months of 2020 due to country mix and shift in relative profitability. However, underlying expected group tax rate remains unchanged.
As a result, net profits decreased only marginally by 0.9 percent to €561,500,000 down from €666,800,000 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 1st 9 months exceeding the prior year figure for the same period by €200,000,000 to €755,000,000 The strong cash generation was driven by lower working capital buildup, a positive cash impact from hedging transactions as well as lower CapEx. The continued strong cash generation in the Q3 also led to a net debt reduction of more than EUR 400,000,000 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% to 8% a year in local currency until 2023 and the target on EBIT margin of 15% to 18% from 2021 onward. With the execution of our growth strategy, we will continue to deliver sustainable profitable growth.
Since June, business activities 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 lockdown that we saw in March, April and in May. Now we are ready to take our questions.
The first question comes from Bruce Prayal from Jefferies. Please go ahead.
It's Prayal 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 bps. 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 bps year on year. I just wondered, I mean, 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? And then 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. Priyal, this 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 up regarding to the PPA. This somewhat affected positively the dilution effect. But really in terms of the overall profitability development, it's all these elements as higher synergies, also these efficiency programs and some leverage due to a reduced cost base and recovering volumes for all the operating measures. And therefore, in Q4, we should also be exceeding quarter by quarter compared to the previous year, obviously the EBIT. And you mentioned here somewhat lower exceedance if you will.
And 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. And 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. But 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, Brial.
The next question comes from Thomas Biegelsberg 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-nineteen 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 the construction in your markets imply that there should be a full recovery of that of the kind of lost COVID revenue from 2020?
2nd 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. So if you can give us some kind of sense of how performance will be going forward from the global business, your order book?
Okay. Thank you, Tom. I'll 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.
I think every many countries announced big potential projects, so 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. So we expect if the 2nd wave not really close country down, we should benefit from infrastructure investments and from refurbishment. Under car manufacturing, we see some improvements there.
We estimate this year they will build around 73,000,000 cars. We expect or the forecast is to go to $78,000,000 around. So if that will happen, we see a turnaround. However, as I said in the beginning, to go back to the old levels where they produce 90,000,000 car will take a while. But 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?
Yes. So 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 Taylor 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 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.
Okay. Challenging situation there. From the raw material side, we see some pressure in certain materials, but not everywhere. So with our corporate purchasing, we could keep that on a very low level. So we haven't seen the price increases yet.
We are ready to do this. On the pricing side, I think with our innovation, we launched several new products also in this year and for next year. We are quite good in bringing advantage to the customers. So we have a little bit improvement there on the pricing side because we switch to new materials. And then we will increase our prices for next year in several countries up to 4 to up to 8, depends a bit on the region.
But 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.
Yes. It's different throughout the world. It depends a little bit where. But in general, I would say, 'six should be the target which we could see to bring to. It will obviously depend on also the dynamic on the input cost side.
I mean, currently, it's very much supply driven as we understand it with, let's say, more force majeurs. How prolonged this will be, we'll have to see. But obviously, that's something we're watching very closely. And the reaction will be according to this. I mean, 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. So 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.
Yes. Okay, helpful. Thank you very much.
Okay. Thank you, Soren.
The next question comes from Markus Mayer from Baader Helvea. Please go ahead.
Yes, good afternoon. Three questions from my side as well. Coming back to this margin improvement, this 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.
2nd question would be on CapEx. Is there any change from your previous guidance given that the business outlook has improved for you, so in particular for 2020 and but also 2021? And then lastly, on your operating free cash flow, which you said is up €200,000,000 year over year in the 9 months. Do you expect this €200,000,000 better free cash flow also to save until the end of the year at your free cash flow?
Yes. 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 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 costs or other measures. But obviously, as when these go up again, this will also mean that the top line will improve.
And we're not expecting that next year, the impact is relatively small. And then we have overall cost leverage. I mean, we have been quite disciplined on the cost, but 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 bit of a slight increase to the previous year of €130,000,000 to €140,000,000 I would expect for this year in terms of to €140,000,000 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 year, I mean, there's no reason why, let's say, this 2.5% to 3% CapEx as a percentage of sales should deviate. I mean, that's our target and also what we see commensurate and necessary for our growth.
And 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 1st 9 months, I would say not entirely. Obviously, we will continue to generate a good level of cash in the 4th quarter. There's probably 2 elements. If you look at the previous year, we have generated in the 4th quarter about €500,000,000 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. So this effect will be somewhat lower compared to last year's Q4. And then we also had on the hedges, the cash flow effect, the positive one we already had earlier this year compared to last year. So 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 Braumel Head from Exane BNP Paribas. Please go ahead.
Good afternoon, gentlemen. Thank you for taking my questions. Three questions, 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?
Some indicators and some peers have mentioned subdued infra and nonresidential markets. So 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-nineteen? My second question is coming back to the pricing side. Does your comment that you mentioned earlier imply a direct pass through, so no lag versus the raw mat inflation in H1 2021, for example. And 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. I'll start with 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 grow. We also see a little bit effect that several big projects are a little bit postponed. But in principle, we see the U.
S. Mainly on the pandemic where the people cannot move, cannot go to construction site in site in many, many big cities, and it's just there. What runs very well in U. S. Is still the retail market where we are quite strong.
So 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 else in Argentina, Colombia, Peru or even Bolivia. So there is a big bag which we cannot see how the pandemic goes.
But if this is a little bit released, that would help us to go elsewhere in Americas. With the prices that 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. So that's our aim and our challenge. If you look back in the last 2 years, 3 years, the force majeure always really put a lot of pressure on certain materials.
So 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' future market. Does that answer your question?
Yes. Thank you.
Okay. Thank you.
The next question comes from Martin Husler from ZKB. Please go ahead.
Yes, good afternoon. I have two questions. First of all, can you maybe remind us about this the integration costs regarding Parex you had in the Q3 last year and maybe this year? And then also about 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 €6,000,000 of incremental integration costs compared just for the quarter. This year, it's a very similar level, slightly lower. It was about €4,000,000 related to the integration and so very broadly comparable. In terms of the Parex synergies, maybe saying that there is no focus on, let's say, the sales synergies is probably not quite right.
I think these are by nature just elements that take a bit longer as we obviously build up the systems, the products, the channels, but the lion's share of the realized synergies have come from the cost side. So that's about sort of 75%, 80%. And as we move along, the sales synergies will actually take a larger share. Overall, 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, so we still feel we are strong on the way to this €80,000,000 to €100,000,000 which we want to achieve and very confident that we will go in this direction.
Okay. Thanks a lot. And 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, so quite nice. Also in the U. S, in the last 1 month, 2 months, we are really getting traction back there. So it's around the half of the service, 35% to 40%. And Europe, where we have a big share now is the rest.
And here we have the different is a little bit the content per car is a little bit different. Than in Europe. We have more content per car. And in the China, therefore, the growth rate of the car, it's not always really reflecting. But that's a little bit the split we have.
And we assume in the next 3 or 4 months, we have improved conditions in all the three areas.
Thank you. That was very helpful.
Okay. Thank you, Markus.
The next question comes from Patrick Reifers from UBS. Please go ahead.
Thank you and good afternoon everyone. I have three questions please. And the first, as a follow-up on the margins, and I'm sorry for that, you've already talked about this. But if I take the 3 50 bps improvement on EBITDA, then I exclude 150 basis points from the gross margin, let's say, 50 basis points temporary savings, then that leaves me with 150 basis points improvement. So would you argue that a large part of this is really underlying cost structure improvement?
So is that sort of the level we should be adding in Q4 to last year's margin? And then the second question and also follow-up on the regional EBIT development. I am not sure whether you answered that question earlier. But starting from H1, where did you see the biggest improvements from in terms of profitability? And the last question is on 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 Golden Business. With the 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 tried to answer them 1 by 1 here. Maybe the first one on the cost buildup. I mean, EUR150,000,000 you have basically adopted as non temporary and non material.
I mean, here clearly, the major part is this ongoing efficiency improvements. And these are a large number of different initiatives and projects that we're driving on a continuous basis. And this is something which will continue obviously in Q4 and thereafter and very much in line with our guidance on the strategy, 50 basis points of improvement coming from this. And then we have the synergy side, which also in the quarter was about 50 to 60 bps here in the cost, also here structural improvement if you will. And then there is a certain element of, let's say, leverage in combination with reduced cost base in some of the areas where we have adjusted it, for example, in Global Business.
2nd 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 2 that showed the strongest development, obviously, one is global business coming from a much lower base and secondly also EMEA quite a strong development. And the third question in terms of growth between auto and non auto in global business, there is not a big difference actually. Actually the automotive business in Q3 was actually a little bit better than the rest, but not a big difference. 4th question on, let's say, the cost takeout and whether this is changing our view.
No, it's not. I mean, 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. I mean, we can react very quickly. I feel we're in a quite a good position to be profitable even if the let's say the sales growth is not that strong and if there's more sales growth, there's more upside.
Thank you very much. Very clear. Thank you.
The next question comes from Birria Manish from Societe Generale. Please go ahead.
So I have these two questions. The first is the Q3 gross margin improvement of 100 and and 50 basis point. So can you just I mean, because I want to see of this 150 basis point, how much is coming from price cost gap and how much is coming from this your longer term initiative in terms of procurement and formulation efficiency. So probably you can split that out between these two items, this gross margin improvement? The first question, yes.
2nd question, I will ask later, yes.
Okay. On the material margin in Q3, the biggest impact here and I would always see this in combination, it's really sort of a lower input cost, but in combination with maintained or even slightly increased pricing because 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 Q3. So the lion's share of the increase comes from there. And all the initiatives, formulation efficiency, new products, other procurement initiatives that also, I would say, a few tenths of basis points.
But this is an ongoing process. That's sort of the underlying initiatives we're driving. And so really the first part was the biggest margin driver.
Okay. That's quite clear. The second one I will ask again. I mean you have already answered, I mean, but I was not very convinced. So this EBIT margin guidance, I mean, you are giving like last year, so 1055, I mean, the last year EBIT.
So that implies, I mean, because you have done 50 basis point EBIT margin improvement in Q3. So that implies, I mean, Q4 would be something like flattish, I mean. And going by what you are seeing, I mean, like pricing, gross margin improvement, the savings, then I mean, there is not much, I mean, structural all savings are structural sort of cost savings. So I don't understand after doing 350 basis point improvement in Q3, why the margin will be flat in Q4? I mean, it just doesn't the math doesn't add up there.
I don't think 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 the our ability to do business and the magnitude of restrictions. And obviously, the second element is the foreign exchange rates, which are also volatile and will continue to be negative.
Typically, the Q4 is also from an overall volume and this is every year the same, not as strong. So there is certain effects that you should not expect sort of the same
outgrowth
of relative EBIT margin as in Q3.
And just a follow-up, does this ForEx have a margin impact as well? I mean, I understand ForEx will have revenue impact and things like that, but does it also contribute to some sort of margin impact, negative margin impact?
The relative margin impacts are typically relatively small unless there is big swings.
Okay. Thanks. Yes.
Thank you.
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. And 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 we look at the news and if we talk to our clients and customers, it seems they have it in under control. That's the only thing we see from our side. We can if it comes back, yes, not sure. But the last time when it came back in China, they handled it apparently very well.
So I have nothing more to add and hope that it's the full picture we see how the Chinese handled it. So it's only but yes, if it comes back, we hope they can carve it out again. Otherwise, we have to see. So 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. So all our companies, all our people are on work, so nothing hidden there. And customers, we hear nothing. So 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. 3 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 1 third of Asia Pacific is China, but could you please confirm that? And is that including Parex? And you said that China was doing well, but it sounds like India and Japan are still under pressure.
So on this, would you mind when do you expect India and Japan to make a comeback? And lastly, on the U. K, your comment sounds quite negative, I guess. We've seen on the other hand that distributors in the UK are doing quite well. The homebuilders are doing quite well as well.
So is it a mix effect? Are you more exposed to nonresidential construction in the UK? 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. As we have a principle, we want to see it. Top manager want to see it and meet the management.
We have to see the properties. And we were very restricted in traveling. So this slows down. On the other side, we had 1 or 2 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. But in principle, we're always very keen on looking at adhesive in the uncealants. I think that's a very nice target with focus on or then also on the mortgage side and the business side, we are quite keen and a little bit our focus. But in principle, all our target markets, all our 5 technology, we are interested to acquire.
And if there are good opportunities which fits our 5 technology, we're always open to go. But I think that's a little bit the situation. In Asia, we see China around 40% to 45% of our sales there. If I look at Japan, Japan had a terrible 2 or 3 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 corona, but also on the weather in the last quarter. We have to see what's going on, but chat ban user is a little bit stable. India, we know the situation from the corona, quite challenging and but we are on the way, and we have to follow this up. Southeast Asia probably is one of the biggest issues, still locked down in the Philippines and Singapore. So tough situation there.
And I ask Adrian to comment U. K.
On the U. K, and 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 the indirect retail channel is actually doing very well, is growing quite nicely. And our exposure is about 60% direct and around 40% indirect.
So we have a good balance here as well, which is obviously helping, but U. K. As a market has been quite tough.
Thank you very much.
Okay. Thank you, Arnaud.
The next question comes from Ui Yang Qingtong from On Field Investment Research. Please go ahead.
Hello, good afternoon. Thank you for taking my questions. So the first one I have is on China. Obviously, you think it is a very promising market for Zika. So I have two questions.
The one is on the previous Parex business. Since most of its business is in new build, I'm wondering, is it important for you to build any relationships with the real estate developers in China? And also, the second question is on the project business. You said that you were growing double digit. But I'm wondering, is it are you growing just because the underlying market growth because of infrastructure?
Or is it because you're gaining market share in the relatively scattered Chinese market? So this will be 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 membrane.
And I'm wondering, probably it's market specific, but I'm wondering like now that in Europe with all this renovation initiatives going on and people and insulation producers are actually looking into main brain. 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?
Okay. On China, I think the formal Parex business is running very, very well. I think we have a lot of cross selling opportunities, very strong setup with 2,300 distributor. So from that side, we are very pleased with that business, very strong and resilient business. If you look at our direct business, although in the Products 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. Also, the underlying market is good in China, but also we won some big jobs, some nice jobs on this side. So it's a little bit of mixed bag. On one side, it's a good market.
On the side, we win a little bit market share as we won some big project. So with China overall, we are very pleased. If you look at the membrane market in U. S. And in Europe, The European market is a little bit different than the U.
S. Market. In the U. S, they have 3 or 4 big insulation producer where we can buy the product, and we have also our own production for a certain region. In Europe, the market is a little bit different.
There are few big players, so we work with those together like King Pen or so. So we sell already certain part of the insulation. However, the competitive 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 right.
That's due to also sell the insulation, but we are not going in the insulation production in Europe.
I see. Thank you. That's very clear and helpful.
Okay. Thank you.
The next question comes from John Frode Andrew from HSBC. Please go ahead.
Thanks. Good afternoon, gents. 3 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.
So assuming that all your cost savings were temporary staff, and the question is, is that right? And 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?
And 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 Q3? 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 certain markets, we adapt our organization also to the volume, mainly a little bit in the automotive side. But also in certain markets,
we had adapted
our workforce. But in principle, with the integration, we get a better leverage on the Parex side in many, many countries so we could increase the efficiency. So it's not we want to increase, so the temporary worker won't come back if the volumes is not coming. So only if the volume really picks up to 6%, 8% or 10% organic growth, then probably we have to bring more temporary Quebec. But we have a very nice leverage there.
So without much growth, we don't need additional people, so from that side. But as I said, Zika is quite proud that we could keep the majority of our employees safe and keep them working and make sure that during the pandemic, SEEK was a fair employer. If we 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. So we clearly won market share in the retail, and we see not just a pickup from the lockdown. We see a continuous win on market and space in these markets. So very confident that we can build that up and even getting a stronger position. Emerging market, yes, besides China, many, 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, Africa is also a mixed bag where we have new codes where we just started. There's still growth. There's still doing very well. So we are happy on that side.
We really win market share. Many competitors left these small countries. And also in Turkey, we had a nice growth, so very good in Turkey. But we saw a little bit in Africa in Egypt and Morocco and Algeria. They had a severe lockdown, and it's challenging, moving back a little bit.
But in nature, it's good. And then very nice is Brazil, healthy emerging market, where we have a nice grow rate of around 10%, 12%. So very, very nice and doing well. So it's a mixed bag.
Thanks, Paul.
Okay. Thanks, John.
The next question comes from Martin Flueckiger from Kepler Cheuvreux. Please go ahead.
Yes, good afternoon, gentlemen. Thanks for taking my questions. I have 2 actually. First one, I'd like to focus on the EU 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 EU Green deal?
And what kind of time lines do you see for the expected impact on your top line in the EMEA segment? That would be my first question, and I'll follow-up with the second one after you answer the first.
Okay. Thanks, Martin. Not too many big changes last week on the Copper Market Day, but still very confident that this will help the Green Deal to build more and more sustainable buildings. And as we explained in the Capital Market Day, SICK is a clear enabler to go in this direction. So many, many of our products, many of our patents helps to bring the CO2 footprint down, to bring in better deal.
So it's a good movement for us how fast the green deals will bring as product. I guess we assume in the next few years, it will be quite a part of our turnover towards there. It really helped to grow faster. I'm not really sure, but we have in our range the opportunity to win the project and to bring better solutions. So 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.
And here we have a better position. And so I feel we're strongly convinced we will hear more
Okay. And then second question I have is on your 15% to 18% EBIT margin target range for 2021% to 23%. 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 2020 one, leaving COVID-nineteen aside just for a second?
Good, Walt. 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. I mean, material margin is another one where we have made good progression here.
Clearly, the combination of pricing and input cost and here we're also in quite good shape. And as long as, let's say, input cost increases or, let's say, these force measures, which lead to spikes where we have a certain delay. And also I feel quite good here and we need probably some growth. I mean not the 6% to 8% to achieve this. But also in here, I have to come back to the pandemic.
Obviously, there is a big, 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. But for the elements, we have under our control, we believe we will be moving there in 2021.
And just to clarify, do I understand correctly that, that 15% is a minimum target for 2021? Or is this more or less the area that you're looking at?
Of course. I mean, we are giving a range. We're moving there. I don't think you should expect 17%. We always obviously try to overachieve.
But clearly, to get to 15% is the first step. And whether it's a bit more, we'll have to see. But yes, I mean 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, I mean, 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 in from Australia. So that means that the other half was down double digit.
So talking about Japan, talking about Southeast Asia. And I wonder what does it mean for your profitability there in the Asia Pacific? And did it have a positive mix effect or negative mix effect? Maybe if you could give us here some light. And 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 will be
my first
topic I would like to discuss.
Yes. Well, thanks for this question. Yes, I mean, your calculation capabilities are very good. And 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. And then also Japan, as Paul was mentioning, was really a tough quarter. In terms of and on let's say, on the mix, China versus the rest here, there is not a big impact on, let's say, profitability shifts due to this. Obviously, Southeast Asia is an area where we're more profitable, But in others, it's a bit less. So all in all, this is not having a big impact on mix.
So maybe for the outlook, I'll hand over to Paul.
But if you look at India, for example, it's 30%, 36% down. Then we have down in Indonesia. We are down in Thailand. We are at breakeven in Vietnam. And also, Malaysia is our lockdown since months, so it's also around 30%.
The good news is they could manage most countries, also Singapore. So yes, it's a tough market out there. We manage the costs. So therefore, the EBIT impact is not as big. The outlook, very difficult.
I think in India, we cannot judge it. So if we talk to our local people, they're also overwhelmed a little bit from their operations. So very difficult. I think Japan will recover. So over 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.
So it's really, really a very tough situation, and your calculation is right. With China up double digit and also in Australia, we're growing by 8%, 9%. And then the rest is, yes, very challenging. And therefore, if somebody tells me about the 2nd wave, we have to wait until the 1st wave before we're in Asia Pacific.
Okay. But it 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 the Southeast Asia is more profitable than the rest?
Yes. Or if this comes back, we will if it comes back, then we really will be very strong. I mean Asia was always real good in cash. And if this market turns, then we probably have a nice 2021. But that's the question.
Okay. Thanks. Second question is on the on your target that you want to have some nonmaterial cost improvement of 0.5% on an annual basis. And we learned at the Capital Market Day that you actually have already achieved that in the first half. And now based on the calculation of Patrick that we have some 1.5% nonmaterial improvement in Q3.
We could assume that maybe this nonmaterial 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.
So, Christian, obviously, the 50 basis points in the first half year is also on sales and that level. I mean, 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. So there's different elements, but we will not adjust from these initiatives and 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 that's a very good program on a continuous basis.
But it looks Your assumption is not too far off.
Okay. But yes, Q3 looks I mean that you have overachieved that target again. So the full year will be also above this 0.5% target. And then 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?
Or does it mean actually you cannot achieve it next year because the base is that high?
Yes. 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. I mean, it's really these type of programs. Obviously, we are diligent on costs.
There is general leverage that we can leverage our cost base and better if there is growth. I mean, these are elements which would or can't come on top of it. I mean, we're talking about the specific dedicated efficiency measures. And here, we will continue this. This is a continuing program.
There is new ideas that are constantly being developed. So you can also assume this 50 basis points contribution will also come from last year. And 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. So with our 0.5, we are quite positive we can deliver a little bit more, but or a little bit less per year. It's not there, but the target should be very clearly achieved also in 2021, 2022 and 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 Jeroskomm from Mirabaud. Please go ahead.
Hello. Just two quick ones on 2 countries, Germany and Brazil. Did I understand it correctly that Brazil was up 10% to 12% in organic terms in Q3 or in the last, let's say, in September? Or and why was that? I mean, you only read negative news in the press about Brazil.
And 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? So otherwise, construction activity in Germany for you must have been positive that are the 2 contract 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. So 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 certain market share, but it's flat, yes. And in Brazil, we had some quite nice quarters. But don't forget that in April, May and also in March, there was a complete lockdown. So we have to bring this back, but the last month was double digit growth in Brazil. Overall, we still have to bring the level back.
So 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 May. But it's in the moment, it's good. While this is the reason, I guess, 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 is quite strong there.
But just
to clarify here on Germany, I mean, this is only construction and global business is not allocated to Germany. That's we're automotive. That's all in global business.
So when you talk about Germany, it's not including the German big OEMs in cars?
No, yes.
Okay. And Brazil, but the 10% was in Q3 or so it was a kind of pent up demand?
Yes. Or I think they find a way to deal with it. And yes, it's correct, yes.
Okay. Many thanks.
Okay. Thanks, Daniel.
The last question comes from Martin Flueckiger from Kepler Cheuvreux. Please go ahead.
Yes, thanks for taking my follow ups. Just two clarification questions. Sorry for being a pain. First, well, clarification question is on the previous statement regarding this 50 bps temporary impact from cost containment. Did I understand correctly, this was in Q3, not in the 9 month period?
And 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? And 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 3 is in local currency.
But it's only organic. We didn't have an acquisition impact in Q3.
For Brazil?
Yes. And the other question
And the 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. Then this brings us to
the end of our call. We thank you for listening in and we thank you for your interest in SECAM. We wish you all the best. Stay safe and speak to you soon.
Okay. Bye bye. Thanks for listening. Thank you.