Ladies and gentlemen, welcome to the Sika Q3 Report 2019 conference call. I am Shire, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Dominik Slappnig, Head Communications and IR of Sika. Please go ahead.
Yes, good afternoon and good morning, and welcome to the nine-month results conference call. We published our figures this morning at 5:00. Now, our CEO, Paul Schuler, and our CFO, 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 our CEO, Paul, to start with the highlights of our first nine months, 2019.
Good afternoon, and thank you for joining the call. I'm happy to inform you about our strong results for the first nine months. We had an excellent sales growth of 15.1% in local currency, with record sales of over CHF 6 billion. Organic growth reached a strong 4.1%. All our four regions were able to grow. EMEA, America, and Asia Pacific all grew double digits, while sales in Global Business was impacted by the challenged automotive market. Especially strong sales development was achieved in Africa, Eastern Europe, North America, and China. Growth in the major European market developed moderately. In the automotive business, the number of new vehicles dropped by 5.8%, or 4 million cars. Despite the significant decline in car production figures, Global Business recorded a growth of 3.6%.
With higher selling prices to our customers and action taken on the procurement side, we could increase our gross margin from 53.3% to 53.5%. Strict cost management led to a record-high operational EBIT of CHF 805.9 million. Including one-off and acquisition effect in 2019, like-for-like EBIT grew out of proportion. Even including this effect, EBIT developed strong with double-digit growth. I'm particularly pleased with the strong operational free cash flow of CHF 555 million that we were able to achieve in the first nine months. This is already ahead of the full year 2018. Our excellent cash flow generation ensures the long-term success of our company and is a proof of the strength of our business model. Integration of Parex is making excellent progress, and we see numerous possibilities to create synergies and do cross-selling. In more than 20 countries, management structures are fully integrated and are working under one leadership.
We also see the first benefits of our combined procurement activities. In China, 1,500 shop-in-shops with Sika products as Parex point of sales have been introduced. Seeing this very positive development, we now expect the synergies to reach the upper end of the forecast of CHF 80 million-CHF 100 million. In the third quarter, we acquired Crevo in China. They produce silicone-based sealants and adhesives, which fit very well into our cross-selling activities in the distribution channels in China and give us a great opportunity for facade glazing business. The two other excellent acquisitions we made this year, King Packaged Materials in Canada and Belineco, Belarus , are both developing very well, and the integration is running as planned. Going forward, our acquisition pipeline is full, and we continue to look for opportunities to acquire companies which will contribute to future growth.
In the first nine months, we have continued to invest in future growth in emerging markets by expanding our production in Senegal, Egypt, Qatar, Serbia, and Cameroon. The expanded footprint will help us to continue to capture the potential in these growing markets. Now, I would like to hand over to our CFO, Adrian Widmer. He will guide you through the financial information. Adrian?
Thank you, Paul, and good afternoon or good morning, depending on where you call in from. Following our CEO's business summary and highlight presentation, I will now give you further insight into the financials. In the first nine months of the year, the business showed continuous strong growth of 15.1% in local currencies. Organic growth, which includes incremental sales growth by post-acquisition expansion of the acquired businesses, was 4.1%. While the acquisition effect added another 11 percentage points of growth. Currency effects reduced local currency growth by 2.2 percentage points to 12.9% in CHF. Negative currency development was primarily owed to a weaker EUR, GBP, and AUD, as well as to a number of emerging market currencies. Again, all regions contributed to our growth in the first nine months of the year. Region EMEA grew sales at a rate of 10.8% at constant currencies.
Organic growth was 3.1%, while acquisitions contributed 7.7%. We recorded strong growth in Africa and Eastern Europe, while major European markets developed more moderately. Foreign exchange effects were most pronounced in this region, and this is mostly related to a weaker EUR, and this had a negative impact of minus 3.6 percentage points. Region Americas continued to record strong growth of 18.1% in local currencies, supported by acquisitions which contributed 12.1%, while organic growth gained further momentum in Q3, primarily in North America, and amounted to six percentage points year to date. Business also developed well in Brazil, Colombia, and Peru, while the government change in Mexico and the impact on infrastructure projects continued to weigh negatively. Foreign exchange effects for the region were slightly negative, at minus 0.7%. Growth in the Asia Pacific region amounted to 31.1%, strongly influenced by the acquisition of Parex.
Organic growth was 6.7%, while the acquisition effect was 24.4%. China, India, and the Philippines were most dynamic. Foreign exchange impact was moderate, at -0.6%. The acquisition of Crevo-Hengxin, which closed right at the beginning of October, will open up further cross-selling opportunities, as just highlighted. The segment Global Business achieved a growth of 3.6% at the backdrop of a very weak market, with car build rates down significantly in the first nine months. However, Sika generated further growth, supported by the residual impact of the Faist acquisition, and we were able to keep a flat organic growth in a difficult market environment. Foreign exchange impact was negative at -1.9%.
On growth result level, we have been able to increase our margin as a percentage of net sales by 20 basis points, driven by continued price increases, various initiatives from the procurement side, as well as reducing negative impact on material cost inflation. On a net basis, material cost impact year-over-year was broadly flat, but continues to be relatively volatile. Excluding acquisition-related one-time and dilution effects, organic material margin increase would have been 50 basis points for the first nine months. Operating costs, which includes both personnel costs as well as other operating expenses, increased on the proportionally by 11.1%, but were impacted by a number of special effects.
On the one hand, we recognized the CHF 26.5 million of acquisition and integration-related costs for Parex, which compares to CHF 23 million of one-time costs related to the resolution of the takeover dispute with Saint-Gobain in the same period last year. Secondly, the application of the revised leasing standard, IFRS 16, led to changes in the recognition of lease-related expenses, increasing depreciation and amortization expenses by CHF 47 million, while reducing other operating expenses by CHF 55 million. Organically and excluding one-time effects, non-material costs grew slightly below organic sales growth. In consequence, EBITDA increased by 18.2% to CHF 1,039.8 million. This is up from CHF 880 million in the same period of last year. Driven by the change in recognition of lease-related expenses as well as higher intangible amortization coming from acquisitions, particularly Parex, depreciation and amortization expenses increased by 54.8% versus the same period of last year.
As a result, EBIT growth of 10.6% was double digits, driven by a higher material margin as well as disciplined cost management. In absolute terms, EBIT increased from CHF 728.9 million to CHF 805.9 million in 2019. Higher debt, mostly to the share buyback in connection with the resolution of the Saint-Gobain situation last year, as well as the financing of the Parex transaction in early 2019, led to an increase in interest costs as well as other financial expenses. Net interest costs increased by CHF 23.3 million. This amount also includes an interest component related to the lease obligation, according to IFRS 16. Net other financial expenses increased by CHF 2.8 million. Of the combined CHF 26 million increase, CHF 6.7 million are non-recurring in nature and related to the Parex transaction. Group tax rate reduced slightly from 23.9% in the previous year to 23.8% in the first nine months of 2019.
As a result, net profit increased by 7.4% to CHF 566.8 million. This is up from CHF 527.7 million. Very positively, cash generation in the first nine months of 2019 was very strong. Operating free cash flow is up by CHF 314 million to CHF 555.1 million. This compares to CHF 240 million in the same period of last year. This was driven by higher profitability, high depreciation and amortization expenses, lower capital expenditure, as well as a significantly lower net working capital buildup, and in spite of higher cash taxes. This strong cash generation in the third quarter led to a net debt reduction of close to CHF 400 million since the end of June. With this, I conclude my remarks and hand back over to Paul Schuler for the outlook.
Okay, thank you very much, Adrian. Our outlook 2019. The strong results support our full-year targets, and we are expecting an increase in sales for the first time of more than CHF 8 billion, along with the double-digit EBIT growth. With the Parex acquisition and the full pipeline of exciting construction projects, as well as many new products and initiatives, we are confident to deliver, even if there might be headwinds in some of the markets. Thank you to the commitment of our employees and the strength of Sika growth model, we can look forward with high confidence to end of 2019. Okay, this is the outlook.
Now, thank you, Paul. We are ready to take your questions, and we can open the line, please.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to only handle to asking a question. Anyone who has a question may press star and one at this time. The first question comes from the line of Tobias Simon, Morgan Stanley. Please go ahead.
Hi. Thank you very much for taking my questions. Two, if I may. Firstly, the obvious one on the organic growth. You changed the definition a little bit. Could you maybe explain us what the organic growth would be in Q3 based on the old definition, i.e. excluding the growth from M&A? That would be the first question.
First, to clarify why we had this change. You have to understand that we integrated all the 20 sales organization in one organization. Each country has now a combined sales organization. They work together in the market, with which market, with which customers approach, and cross-sell. It's impossible to manage then and to clarify which one is now organic growth from ex Parex and which is growth from Sika. As Parex is a huge acquisition for us overall with CHF 1.2 billion, it's impossible for us, or we don't willing to spend the time just to clarify this one. In the first nine months, it was very minor. It was just around 0.5%, which is organic growth from Parex.
In the future, we just have one organic growth, we don't want to really manage now which one is the growth of which one, because it's one sales organization in each country.
Okay, it was about 0.5%, is this correct?
Correct.
Okay. That's for the nine months. For Q3, I assume it would be significantly higher.
A little bit higher, but we didn't follow it really up.
Okay. Thank you. On your operating expenses, the personal expenses clearly were down 50 basis points in Q3, whereas I think in the first half you were up 12 basis points or something like that. I wonder what was the key driver for the improvement here, also on the other operating expenses, if I just add back the impact from IFRS 16 and also the Parex integration cost, it looks like your other OpEx increased by, I think, 130 basis points in Q3. Again, what was the key driver here? Was it Parex-related margin dilution, or where is it coming from? Thank you.
Overall, as I said, if you exclude all these one-time and the acquisition effects, operating expenses overall increased slightly below organic sales growth. That's point number 1. Secondly, as you pointed out, there's a somewhat different mix coming from acquisitions on the one hand, the type of business which is more, let's say, other OpEx-heavy, more distribution-focused. Secondly, there's also a geographical element in there which has an impact on the split between personnel expenses and other operating expenses.
Okay, perfect. Just a very quick final up on this, the margin difference just for this year for Parex on a standalone basis versus Sika on a standalone basis. How big is this in terms of percentage points?
During the Capital Markets Day and the strategy presentation, we gave an indication what the impacts are, both on the dilution side, but also on sort of the incoming profitability. Then, of course, you have the one-time expenses. We're very well on track in terms of the performance of the business. Also, one-time costs should be lower in the fourth quarter. All in all, a very good development, but too early to give sort of a very precise impact on the business.
Okay. Thank you very much. Thanks.
Thank you.
Next question comes from the line of Martin Flueckiger, Credit Suisse. Please go ahead.
Yeah. Good afternoon, gentlemen. Thanks for taking my question. I've got two, and I'll go one at a time. Firstly, when I look at building permits in Europe, but also leading indicators for commercial construction in the U.S., looks like the numbers there are softening. Also, judging from other indications on the U.S. construction market, looks like we've seen the peak in terms of momentum. Firstly, I was just wondering, what are your expectations, and that's not referring to the U.S. specifically, but rather to your global exposure in terms of construction chemicals. What are your expectations for stimulus measures on the infrastructure side? That would be the first part of my question. The second, how do you expect to counter any potential softening or weakness coming up in key markets in order to maintain your high organic growth in 2020? That's my first question.
Okay, thanks for the simple question, Martin. The crystal ball is not in Sika office. If you look at the U.S., yes, it a little bit reduced. If we look at our pipeline, if you look at our projects, if you look how we base there, we are quite confident that for the next few months, we see it's okay. We will work from that one. We quite confident we can remain in our target from the 6%-8%, including acquisition, and the organic growth is just a part of it, so we have to adapt. We also are able to adapt the organization. As you know, for example, in Mexico, the market is down, and we have, for example, in Mexico, 10% less organic growth, as it's a difficult market. We could improve the operational a bit then because we can adapt our organization.
To maintain the organic growth, if everything goes up, that will be difficult for us as well for other people. However, together in a mixed packet, we are quite confident for all the markets, including China, including everything, that we be in our guidance from 6% to 8% also next year.
Okay, thanks. Just on the infrastructure side, yeah, I realize that the infrastructure is probably the most likely factor in the construction industry to be benefiting from stimulus measures. We're already seeing some in China. Are you expecting or hearing anything else, say, in the U.S., Latin America, or Europe, with regards to infrastructure projects?
I guess it's difficult and not so pushy in Latin America. They are not so pushy on infrastructure. There are a lot of political turmoil. I think in Argentina, a little bit difficult. Also Chile started now. We just got the news on Bolivia. I don't expect big pushes there. However, we hope that Mr. Trump moves in the U.S. We see a little bit going there, not so bad sign. We have nice infrastructure projects. Also same as you analyze China, we see a good push on the infrastructure. However, I guess also with the new outline of our distribution business now as we go more and more to residential market and distribution. Distribution also will pick up as soon as there is a little more recession because the people will still reform their houses.
We are much more balanced than before, so we can pick up on the infrastructure. As well, we can benefit then on the residential market.
Okay, thanks. Perfect. Just going back to one of the statements from Adrian a couple of minutes ago. I think Adrian was talking about the dilution from Parex on the gross margin for the nine-month period. Could you provide that number for Q3 as well, please?
The material margin increase, let's say organically, was 0.7% versus 0.4%. That's the dilution effect there on the material margin.
Okay, thanks.
30 basis points.
Okay. Thank you, Martin.
Next question comes from the line of Martin Hessler, [ZKB]. Please go ahead.
Yes. Good afternoon. Also have a question to Parex, maybe to make it completely clear. You say that the impact of Parex on gross profit margin in Q3 was 30 basis points.
Plus all the other acquisitions. The acquisition dilution on material margin in Q3 was 30 basis points.
Okay. 50 basis points for nine months?
That's the organic one for nine months, just the organic development of the material margin. We have reported 20 basis points including all the acquisitions. Also there's a 30 basis points dilution.
Mm-hmm. At this stage, you don't give a statement for the full impact of Parex, let's say, to overall EBIT. Not including integration cost, not including amortizations. What would have been the results of Parex after nine months?
As I said, good underlying development. We clearly highlight that the one-time costs related to Parex, there is other impacts in terms of the dilution on the amortization side. There's other acquisitions, but, yes, for now, we're not specifically highlighting in detail the impact of Parex. As you know, there is this ongoing commercial integration as Paul has highlighted.
Martin, it will be also more and more difficult. We could distract it, the business is one sales organization in each country. They share, they work together. Parex for us, we don't follow up Parex as a group as before. Parex is integrated into countries, we follow country by country and summarize it in the region. In future, Parex, there is no numbers anymore where we follow as a total.
Okay. I can understand this. There may be two very short questions. What is the consolidation date of Crevo-Hengxin?
Crevo-Hengxin, that's the very beginning of October. There is no impact in Q3 yet.
Okay. Full Q4. You were mentioning that the CapEx was quite lower than last year. What's your current guidance for the full year?
If you remember, there was also a special effect of CHF 70 million, relating to a buyback of long-term operating leases last year in the amount of CHF 70. I mean, this is basically what we will not have. For the full year, we will be below the 3% of sales.
Okay. Thank you.
Okay. Thank you, Martin.
Next question comes from the line of Bernd Pomrehn, Vontobel. Please go ahead.
Yes. Good afternoon, gentlemen. My question is a little bit similar to the question of Martin Flueckiger. I still would like to get a little bit of better feeling of your view about the different sub-markets. Really infrastructure, commercial construction, and residential construction. Where do you see some weakness? Where do you see opportunities? Could you maybe elaborate a little bit on these three markets on a high level? Thank you.
Thank you. It's more based on countries. Every country has a little bit different. If you look over the countries and then in the market, in the U.S., we feel infrastructure as well as residential market still will be good for us. We still have a lot of opportunities. We just have a lot of good news on The Home Depot, other things. We believe U.S., Canada will still be strong in the next coming months. As I said before, Latin America is a little bit back. It is a matter of its residential infrastructure. It's the political issue there in some countries. Until now, Colombia is strong. We have good business out in Brazil, in infrastructure as well in residential distribution market. If you go to China, if I read the press, I would be scared.
I just had a visit over there and it's very good to see how they manage it. It's still a 6% GDP growth. We cannot see big signs which grows slow in China except back the automotive market. All the other markets until now for us, strong pipeline in both markets and exciting growth rate possibilities for the next few months. I expect exciting numbers out of China. A little different in Japan. It's a lot of typhoons in the last three or four months, it slowed down our business a little bit. After disaster, they have to rebuild, so we don't see there a real, all months, a real downturn. Southeast Asia turned a little bit around. It's also much better than before, infrastructure as well as distribution market. Europe is also challenging, rather a little bit slower.
We don't expect a big growth rate in the major markets from Germany, Italy, Spain. All these major markets are rather slower. We see a little bit of slowdown in these markets. The Brexit is also still open. We don't know where it goes. Our numbers, it's now the first time after all the years of Brexit, we see a decline in our growth model. It's just down. Also there, we adapted the organization and improved our EBIT margin. Overall, it's all markets a little bit different. In overall, we see still 6%-8% for next year growth rate.
That's very helpful, Paul. Thanks a lot.
Okay, thanks, Bernd.
Next question comes from the line of Patrick Rafaisz from UBS. Please go ahead.
Thank you. Good afternoon, everyone. Two questions, please. The first is, I'm sorry to circle back to Parex and growth in the third quarter. At H1, you said Parex organics were around 6%, 8%, including some minor M&A for Parex standalone. Do you think that accelerated in the third quarter? Is that a sustainable trend into Q4 as well, or was there any special effects we have to keep in mind?
Yeah. If you want to call it the Parex business, we don't talk about the Parex business anymore. If you want to call it parameter like this, it was at least down. It was actually a bit stronger in the third quarter. There's very good momentum in many of the key markets they're in, and we're starting to realize that the first synergies have combined the organization. Very good traction there. As we said, we are confident to reach the upper level of CHF 80 million-CHF 100 million. In the many, many markets, we are very happy how this business works together.
Okay, thanks. The second question is around net working capital. Adrian, you talked a bit about the lower working capital buildup that also helped your cash flow performance in the nine months. Is that an area where you see further improvement or was there a timing effect? Should we expect a bit of a bounce back here for the working capital in Q4?
Yeah. The working capital development was quite good, as I mentioned. There is two factors. On the one hand, in some markets, of course, less dynamic growth, which per se has an impact, but there is also a number of also operational improvements. For example, on the inventory side, very focused on the receivables. I continue to see a good progression, slowly but gradually, but that's certainly another area of focus also in this integration now.
Okay. Thank you very much.
Okay. Thank you, Patrick.
Next question comes from the line of Thomas Wigglesworth from Citi. Please go ahead.
Thank you for your presentation, gentlemen. Couple of questions, if I may. The first is, sorry, to go back to the growth from Parex in the organic growth. Can we assume that the 0.5% growth for the nine months, that largely fell in Asia? Thereby implying that the recovery in the U.S. market was to what I calculate about 9% organic growth, sorry, U.S. market, Americas market, is a good like for like number. Secondly, on that Americas growth, obviously we heard about the first quarter being impacted by labor, but what do you think is the rate of growth, the underlying market rate of growth in the U.S. today, and can we infer from your earlier comments that you think that can be sustained into 2020? Thank you.
It's correct. It's large comes from China, Parex China, Asia. Very good performance. Excellent. It's also correct that in U.S., the business is on track, but not as fast-growing. Underlying growth rate, our organic growth, and is still on around 6% in the U.S., and should be also in the next coming months.
Okay. Very clear. Thank you.
Next question comes from the line of Daniel Jelovcan, Mirabaud. Please go ahead.
Yeah, hello as well. Just also on Asia Pacific, after 3% in the first half, now in the third quarter, 14%.
Significant growth. Okay. Maybe also because of products, why the Philippines, for instance, there's such a big infrastructure demand, and why also India you mentioned? Just a bit more information would be great. The second question is, in the Global Business, just your other Swiss kind of competitor reported minus 8% in Q3 organic, and you had even slight growth. Very well done. The question is, going forward, do you expect a stabilization here as well? As you mentioned, the production numbers are quite negative for cars, but that was probably also de-stocking the channels. In the end, customer demand is maybe okay. Would be nice to have your view here. I know you don't have the crystal ball, but you're certainly more-
We try to give-
Know more than me.
Give a bit of flavor. Maybe your first question. Yes, of course, the Parex business has developed, or the original Parex business has developed quite well in Asia-Pacific. Also, as mentioned, we're seeing some pick up in Southeast Asia. Some of the markets have really been depressed also in relating to specific factors, to political factors. There is in a number of countries, and just from a growth rate point of view, the Philippines was one of the examples. Of course, it's relatively small in the mix. Overall, a positive development in this part of the world. Also India, quite solid. In Japan, we also had a bit of a positive effect from a tax change that is to come. That's basically one of the organic, or some of the organic drivers in Asia-Pacific.
Okay. I take the second one, Daniel. Yes. If I look at the growth rate of our peers, I'm quite pleased with our hanging in there and still have a growth rate and are still able to maintain business. We don't expect that the automotive market turns fast around in the next three, four, five months. There will be still some headwind there, some turbulences. As explained on the Investor Day that we are in a few new models where we expect some growth rate. We're confident to stay at that average growth rate, a little bit grow, not expanding, but at least keeping the level or small growth, but not declining. That would be then really a turnaround in the whole automotive market. Quite positive that we can maintain the growth or at least stay on the same level, and not minus like our friends.
Okay. Thank you so much.
Okay. Thank you, Daniel.
Next question comes from the line of [Manish Devia], [Citizen Era]. Please go ahead.
Yeah. I have three questions. The first one is on the operating leverage. You talked about excluding acquisition and one-off, the operating expense, that is the non-material cost, just grew slightly below the revenue growth rate. This is a change because in the first half, I think you mentioned something like 75% growth rate of this operating expense, but now it's like 90%-95%, maybe. What is the reason for the picking up of the expense? Is this because maybe you are growing slower? Maybe the operating leverage is less. How should we see it? You mentioned the Mexico, you were able to cut costs despite lower growth and things like that.
Should we assume, even in a slower environment, probably you will be able to maintain the margins or the expense as a percentage of revenue, but not really getting operating leverage. This is the first question. I will take another two after you answer this one.
Good question here. Of course, let's say organic growth rate or operating leverage does have a bit of an impact. We're talking here somewhat smaller numbers. There is also some foreign exchange impact, which has not been helping. All these differences also when I talk about, let's say, slightly below sales growth, these are not big impacts given the numbers. Secondly, of course, there is a number of markets where we are sort of right-sizing and addressing the issues. Also, we're, of course, maintaining investments in some of the markets where we do see long-term strong growth. It's a bit of a balance, and to look at it quarter by quarter is probably a bit not addressing it fully. I think very strong and good cost control. Also a number of efficiency projects which we are ramping up. All in all, quite satisfied with the cost development.
Okay. The second one is on your free cash flow, that you said operating free cash flow, CHF 560 million, CHF 555 million. Just wanted to understand, is there some benefit coming from also the IFRS reporting because lease principal payment probably is included or excluded? Just wanted to know that.
Yeah. I gave a number of explanations here on the good development. Working capital is one, also lower CapEx. The other one is on the amortization and depreciation area, and there you are right. There is an impact also from IFRS 16. Basically, the number I've mentioned in the cost context, about CHF 50 million, which is positively impacting a like-for-like comparison.
Okay. Understood. The last one is probably. I have seen your presentation, you mentioned trade wars as one of your mega drivers, because I've not seen that before. Just trying to understand how does a trade war become a mega trend for Sika?
Okay. Now I get it. Okay. Thanks, Manish. A mega driver is we have to follow the shift, and we have to adapt our organization. We have to make sure that our supply chain is in the right position, the right country. That's the mega driver we have to do strategically. Usually, if someone really exports and is not able to produce in other countries, this supports always also our local growth. We can be faster in local production, like in China, than everybody else. We also have nice factories in U.S., so we don't have to move things around. Each one wants to produce more local, fine with us. Our competitor are running behind.
Sure. Yeah. I am fine. Yeah. Thank you.
Okay. Thank you, Manish.
Next question comes from the line of Alessandro Foletti from Octavian. Please go ahead.
Yes. Good afternoon, everyone. Thank Thank you for taking my question. I just have a small follow-up here on the quarterly growth in the U.S. or in America. You've mentioned Mexico and the difficulties in LATAM, when I calculate the organic growth for the quarter, I come up to around 9%, which is, again, quite an acceleration. Can you give a little bit more of information regarding this growth, how it came about, and what's the outlook?
Yeah. Your calculation is absolutely right, and as we said, North America has been quite dynamic really across the board. In Canada, in the U.S., in all the businesses, a bit of a slow start, but as far as mentioned, we're seeing a good pipeline and continued strong development. This, of course, is not all the market, but we're gaining market share here also based on the more recent acquisitions really developing well, cross-selling and really being able to have a better and broader offering for our clients.
All right. Thank you. I have a second question more related to the growth contribution of the acquisition, but not what you've mentioned about Parex right now. We have understood that 0.5%. In general, can you give an idea of what you think is the contribution of acquisition on your organic growth, i.e., if you didn't have done, let's say, the last 15 acquisitions, how would have been the Sika organic growth? Do you know that?
Yeah. To be honest, I don't have an exact figure. Of course, there is some more visible parts when you basically sell it through the existing organizations. As we integrate relatively quickly also, as we have a very broad offering complement systems and so on, sometimes it's also about market access or getting access. For example, now in Canada, through the King acquisition, really having now a very strong position or inroads into the mining market. That's one of, let's say, the growth elements, but I could not spell it out what exactly the impact is.
All right. Just for your information, the reason I ask is because you always mention one of your criteria when you make acquisition is that it has to provide a growth platform. If that's the case, there should be incremental growth coming from these acquisitions.
Yes, there is. Having concretely answering your question, what is the impact of the last 15 acquisitions? It is in different places and there are different drivers. There is definitely a positive impact. That's also what we always say. We are looking for growth platforms, and this is part of the growth model which goes beyond just adding businesses. Just an explanation from my side. We measure, for example, Canada on a total grow now, not just King and Sika, merged the companies also there. We measure the grow rate, and then as Adrian has explained several times, we do a back testing of all the companies to see how they performed every three years. Therefore, we know exactly what benefit they have. The third element, we really always watch where the new products go. We follow the products, not just the growth.
If we sell now King package and King product sells in U.S., that's a growth platform because we have the formulation, but we will produce it, of course, in U.S. We see it's a growth platform because we could move the products and the information and customers there on the other side, we follow that, but we don't really track it down. That's the growth platform, and we see that every month if it goes in the right direction or not.
All right. Thank you.
Okay. Thanks, Alessandro.
Next question comes from the line of John Fraser-Andrews, HSBC. Please go ahead.
Thank you. Three for me, please. First one, the first two actually around the Paroc synergies. Have we seen any cost synergies already in Q3, and can you update on how you see those in terms of the timescale? Second one, again, Paroc synergies, the sales enhancements we see, we can make some calculations there. Can you just say in Asia and in China, is the enhancement that's visible in the Q3 report, is that solely from the 1,500 points of sale? Where are you with the other best part of 15,000 others that you identified at the Capital Markets Day? The final question, if I could ask you to get your crystal ball out again, please, Paul.
Again.
Just tell us what your outlook is in raw materials, what you're seeing, and what the immediate and medium term outlook is there, please.
Okay. Take first the crystal ball, John. The outlook is a little bit a mixed bag as usual around the world in different countries. At least it is a release compared to 2017, and also better than 2018. In certain product mix, we go ahead. In certain, we still have to fight a little bit. A good indication is there is no more pressure, and I think it's rather softer than the pressure we had two years ago. Also, I don't expect if the volume will drop in future like our peers have shown negative sales growth or not really growing. I expect rather a relief on the raw material margin.
Thank you. To what extent does that include price increases on your part? How much more growth have you seen and how much are you going for?
On the price increases in year to date, we're talking about 1.5% of price increases. I also take the first question you had on the realized synergies. I mean, the realized synergies, they're still small. They're around CHF 2 million-CHF 3 million, rather CHF 2 million in the first two, three months. With the expectation for 2019 between CHF 5 million and CHF 10 million.
Okay. Nope, John.
Sorry. Is that on the cost side, Adrian?
It's mostly on the cost side, yes.
I take the China one, the 1,500 jobs was just a fast reaction from our new colleagues in China. They really have equipped out the shops they have at the first 1,500 very fast in one month with our products, the positioning, pricing. It's not the big cross-selling now. It's excellent for us, but they also have a nice growth model, and they grow tremendously well with their own system they have. From that side, the majority is of their own growth, and cross-selling will kick in beginning of next year in a bigger line.
All right. Thank you.
Okay. Thanks, John.
Next question comes from the line of [Xintong Liang] On Field Investment Research . Please go ahead.
Hello, gentlemen. Thank you for the presentation. I have a small question on the margin, EBIT margin. If we exclude all the one-off effects, we see that normally speaking in Asia Pacific, H2 will witness a several percentage higher margin than H1. We're wondering for this year, will it still be the case or it will be diluted by the acquisition effects?
Yes. The acquisition effects were of course larger, so there will be a continued impact here also in the fourth quarter on, let's say, the dilution side. As we said, we're guiding for double-digit, even increase, and more than CHF 8 billion in sales. There will be a continued sort of dilution impact in the fourth quarter.
Okay. Thank you. Okay, great. Thank you. Another question is on the midterm development. We see that you mentioned in Strategy 2023, saying that there will be 25% of new products that you targeted in selling. I just want to know, could you please provide more colors on the market that these new products are serving? Are they serving for any new sectors, or are they serving for the current purpose, but just improvement in functions?
I focus on all the eight target markets. We expect that all the target markets have new products. We expect that for all our five technology, we have new products in. We expect it everywhere, and think we will go from there. We have no clear breakdown. Every target market and every technology is expected to bring new products on the market, which we then can bring as a solution to our customers.
Okay. All right. I see. Thank you.
Thank you.
Next question comes from the line of Remo Rosenau, Helvetische Bank. Please go ahead.
Yes, thank you. A more general question here. After the Parex acquisition, at some stage, you said that you expect the net debt/EBITDA to reach around 2.7-2.9 times by the end of 2019, then going down to around 2.0 times by the end of 2020, and then being reduced by a factor of 0.4 times each year. Of course, all that without any additional acquisitions. The question is, of course you will do additional acquisitions. Is it also imaginable that by the end of 2020, you will not be at 2.0, but for instance, let's say at 2.4, 2.5, and you don't have a problem with it? What kind of debt level measured with this net debt/EBITDA ratio would you feel comfortable remaining there?
Yeah, Remo. What's included in this sort of de-leveraging, if you will, is sort of a normal or smaller acquisition spend as we have had in the past. There is some acquisition spend in there, but no, let's say, major acquisitions. There is also not that we say we have to be at a certain level. As we have always said, strong investment grade rating, A minus, is important, and we will clearly maintain this. Certainly, there is some flexibility, particularly given the strong cash generation. Does that answer your question, or?
Yes. Okay.
Remo, without big acquisition, big acquisition is above CHF 500 million, CHF 600 million, we will go to the target we have with this cash generation, which will continue.
Okay, good. Good. Fair enough. Thank you.
Okay, thank you.
Next question comes from the line of Markus Mayer, Baader Helvea. Please go ahead.
Good afternoon, gentlemen. Two questions remaining. First off, on your order book visibility, was there any change how far you could see in the order book, in particular, if you compare the construction chemicals to the Global Businesses? That would be my first question.
Okay. Yeah, it's a little bit different business model we have comparing to other companies. They are mainly equipment builders. They have to order in. We see our pipeline on the construction side. We don't have orders in, but on the construction side, as I mentioned before, we still believe in many, many markets, we have a strong pipeline.
There was no change over the last month from the pipeline?
No.
Okay. My second question would be then in particular on the Global Businesses, at least looks like that in the automotive-related businesses, there was continuous destocking over this last month. What is your feeling on your customers in this business? Is the inventory level already low, or is there further destocking potential?
I guess they really destocked a lot in the last five months, mainly the Germans. I guess we will see some light in the tunnel. Not sure when. I feel individual transportation with cars will remain in the next future, even if the big cities model change a little bit. We are confident that in the next few months, this will turn.
Okay. Thank you.
Okay. Thank you.
We have a follow-up question from the line of Martin Flückiger. Please go ahead.
Yeah, thanks for taking my follow-up. Actually, most of them have already been answered. I just have one more follow-up, and sorry for being a bit meticulous on this one. Adrian, you were talking about the gross margin dilution in Q3 of 30 basis points by Parex and all the other acquisitions. Can you just remind me how much it was at the EBIT margin level?
The dilution, again, we don't spell out Parex right now what the impact is. I have given an indication at the Capital Markets Day what the effects are. On a full-year basis, there is about a 400 basis points amortization effect. There is the one-time costs we have spelled out. Of course, the really incremental impact so far has been relatively small.
Okay, thanks.
The next follow-up question comes from the line of Thomas Wigglesworth. Please go ahead.
Yeah, thank you very much. I just wanted to, on the organic growth, could you help us understand, how much of that organic growth is kind of volumes, absolute tons versus price and mix effect? That would be a helpful color.
Yeah. Mix effect overall is very small to non-material, and the price effect is 1.5%. The rest is volume, basically, to the 4.1%.
Okay. Can I, just to go back on the raw mats comments, I think one of your peers in the U.S. talked about falling raw materials into year-end, but you're saying that's not part of what you're seeing in the market today?
No, probably give me the names, I can call him to see the supplier. From our side, we don't see that too much. It could be possible, but I don't see it yet.
Okay.
Indeed.
Thank you.
Thank you.
The next follow-up comes from the line of Tobias Simon. Please go ahead.
Hi. Thanks for taking the follow-up. Just a quick final one on the prices again and also on the raw materials. You mentioned earlier in Q3, gross margins organically were up 70 basis points. You said raw materials are probably not improving much further from here, and if I look at consensus estimates, I think they imply 170 basis points uplift in the fourth quarter. I wonder if this is feasible. Maybe it comes from pricing because your initial guidance was calling for 2% pricing for the full year, but now you're saying we had 1.5% in the first nine months. Are you expecting an acceleration in pricing in the fourth quarter? Do you think 170 basis points margin uplift is feasible for the fourth quarter? Thank you.
On the pricing side, we continue to increase prices. We also do this in a measured way. When we look at raw material input cost and still very volatile, as Paul was indicating, we're not seeing sort of a broad decline. There is hopefully going to be some impact. We also have other measures on the procurement side, on the new products and so on and so forth. Again, we have to see how the input costs develop. There's just no point or clear trends to give a guidance in this regard.
For the raw mats, we have a lot of initiatives in effect and efficiency, we’re confident to keep our guidance.
For pricing, you also still keep the guidance of 2% for the full year, because clearly that would imply quite an acceleration in the fourth quarter if we have 1.5% year to date.
Yeah.
I think the comparison base is actually higher in the fourth quarter because last year in Q4, you had, I think, more significant price increases as well.
Given the comparison, it will probably be a little bit shy of 2%, yes.
Okay, thank you. Just for clarification on the raw materials, what exactly is going up? Clearly 70% of your raw materials are oil derivatives, and oil prices clearly have come down quite a long way. Also, if I look at acrylic acid, they have come down. If I look at epoxies, they have come down. What is really the headwind here?
Yeah. Of course, oil price typically is one element. It's more sort of a long-term one. That's not the sort of the big driver typically short-term. It's more supply and demand, and there is areas, for example, on special bitumen, but also polyamide, particularly also affecting the Global Business is still significantly higher year-on-year. It's just very volatile still also region by region. Again, no sort of clear guidance we can really give on input cost development.
Okay. Thank you very much.
The last follow-up question. Sorry, we don't have any questions at this time.
Okay. Basically, this brings us to the end of our call. Thank you very much for listening in and for your interest in Sika. We wish you all the best. Bye.
Okay, thank you very much and see you soon. Thank you.
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