Ladies and gentlemen, welcome to the Sika Q3 Report 2019 Conference Call. I am Shay, 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 Q and A session. The conference must not be recorded for publication or broadcast.
At this time, it's my pleasure to hand over to Mr. Dominic Slapning, Head Communications and IR of FICA. Please go ahead.
Yes. Good afternoon and good morning, and welcome to the 9 months results conference call. We published our figures this morning at 5 Now our CEO, Paul Schuler and our CFO, Ian Wissmer, 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 1st 9 months 2019.
Good afternoon, and thank you for joining the call. I'm happy to inform you about our strong results for the 1st 9 months. We had an excellent sales growth of 15.1% in local currency with a record sales of over CHF 6,000,000,000. Organic growth reached a strong 4.1%. All our 4 regions were able to grow.
EMEA, Americas and Asia Pacific all grew double digit, 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. Growing the major European market developed moderating. In the automotive business, the number of new vehicles dropped by 5.8% or 4,000,000 cars. Despite this significant decline in car production figures, global business recorded a growth of 3.6%.
With highly selling prices to our customers and action taken on the procurement side, we could increase our gross margin from 53 0.3% to 53.5 percent. Strict cost management EBIT of $805,900,000 Including one off and acquisition effect in 2019, like for like EBIT grew all proportionally. Even including this effect, EBIT developed strong v double digit growth. I'm particularly pleased with the strong operation free cash flow of $555,000,000 that we were able to achieve in the 1st 9 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 numbers possibilities to create synergies and to cross selling. In more than 20 countries, management in. In more than 20 countries, management structures are fully integrated and are working under one leadership. We also see the first benefit of our combined procurement activities.
In China, 1500 shop in shops with thicker products is Parex point of sales has been introduced. Seeing this very positive development, we now expect the Synuysys to reach the upper end of the forecast of $80,000,000 to $100,000,000 In the Q3, we acquired Krevor in China. They produce silicon based sealants and adhesives, which fit very well into our cross selling activities in the distribution channel in China and give us a great opportunity for a facade placing business. The 2 other excellent acquisitions we made this year, King Package Material in Canada and Perrineco in 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 1st 9 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 Wittmann. 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 insights into the financials. In the 1st 9 months of the year, the business showed continued strong growth of 15.1 percent 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 Swiss francs.
Negative currency development was primarily owed to a weaker euro, British pound and Australian dollar as well as to a number of emerging market currencies. Again, all regions contributed to our growth in the 1st 9 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 euro. 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 6 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 minus 0.6%. The acquisition of Krebo 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 1st 9 months. However, Seeker generated further growth supported by the residual impact of the Pfizer acquisition, and we were able to keep a flat organic growth in a difficult market environment. Foreign exchange impact was negative at minus 1 0.9%. On gross 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 on the procurement side as well as reducing negative impact on material cost inflation. On a net basis, material cost impact year on year was broadly flat but continues to be relatively volatile.
Excluding acquisition related onetime and dilution effects, organic material margin increase would have been 50 basis points for the 1st 9 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 $26,500,000 of acquisition and integration related costs for Parex, which compares to $23,000,000 of onetime costs related to the resolution of the takeover dispute with Sangobah 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 $47,000,000 while reducing other operating expenses by $55,000,000 Organically and excluding onetime effects, nonmaterial costs grew slightly below organic sales growth.
In consequence, EBITDA increased by 18.2 percent to CHF 1,239,800,000. This is up from CHF 880,000,000 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 digit driven by a higher material margin as well as disciplined cost management. In absolute terms, EBIT increased from $728,900,000 to 805.9 Higher debt, mostly to the share buyback in
connection with the resolution of
the Saint Laurent situation last year as well as the financing of the Parex transaction in early 2019 led to an increase in interest cost as well as other financial expenses. Net interest cost increased by 23,300,000 dollars This amount also includes an interest component related to the lease obligation according to IFRS 16. Also, net other financial expenses increased by $2,800,000 Of the combined $26,000,000 increase, CHF 6,700,000 are nonrecurring 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 9 months of 2019. As a result, net profit increased by 7.4% to $566,800,000 This is up from $527,700,000 Very positively, cash generation in the 1st 9 months of 2019 was very strong.
Operating free cash flow is up by $314,000,000 to 551 dollars 555,100,000 This compares to CHF 240,000,000 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 3rd quarter led to a net debt reduction of close to 400,000,000 since the end of June. With this, I conclude my remarks and hand back over to Paul Schuller for the outlook.
Okay. Thank you very much, Adrian. Our outlook 2019, The strong results support our full year target, and we are expecting an increase in sales for the first time of more than CHF 8,000,000,000 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. Now we are ready take your questions, and we can open the line, please.
We will now begin the question and answer session. The first question comes from the line of Tobias Simon, Morgan Stanley. Please go ahead.
Hi, thank you very much for taking my questions. 2, 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 and 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 with which also and cross sell. So it's impossible to manage then and to clarify which one is now organic growth from Parex ex Parex and with this growth from Masika.
As Parex is a huge acquisition for us overall with SEK 1,200,000,000, it's impossible for us or we don't be willing to spend the time just to clarify this one. But in the 1st 9 months, it was very minor. It was just around 0.5%, which is organic growth on Parex. But in future, we just have one organic growth, and we cannot really and 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. So it was about 0.5%. Is this correct? Correct. That's correct.
Okay. And that's for the 9 months. So for Q3, I assume it would be significantly higher?
A little bit higher, but we didn't follow it really up.
Okay, okay. And then on your operating expenses, the personnel expenses clearly were down 50 bps in Q3, whereas I think in the first half, we were up 12 bps or something like that. So I wonder what was the key driver for the improvement here? And then also on the other operating expenses, if I just add back the impact from IFRS 16 and also the Parex integration costs, it looks like your other OpEx increased by, I think, 130 basis points in Q3. So again, what was the key driver here?
Was it Parex related margin dilution? Or where is it coming from? Thank you.
Yes. Overall, as I said, if you exclude all these onetime and acquisition effects, operating expenses overall increased slightly below organic sales growth. That's point number 1. Secondly, as you pointed out, I mean, there's a somewhat different mix coming from acquisitions on the one hand, well, the type of business, which is more, let's say, other OpEx heavy, more distribution focused. And secondly, there's also a geographical element in there, which has an impact on the split between personnel
final up on this. The margin difference just for this year for Parex on a stand alone basis versus CICA on a stand alone basis, how big is this in terms of the percentage point?
I mean, we during the Capital Market 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. And then, of course, you have the onetime expenses. We're very well on track in terms of the performance of the business. Also onetime costs should be lower in the Q4. So all in all, a very good development, but too early to give sort of a very precise impact on the business.
Next question comes from the line of Martin Flueckiger, Kepler Cheuvreux. Please go ahead.
Yes. Good afternoon, gentlemen. Thanks for taking my question. I've got 2 and I'll go one at a time. Firstly, when I look at building permits in Europe, but also leading indicators to the commercial It looks like the numbers there are softening.
And also judging from other indications on the U. S. Construction market, it 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. And 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 a thicker office. However, if you look at the U. S, yes, it will be reduced.
But 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. But we will work from that one. We're quite confident we can remain in our target from the 6 percent to 8%, including acquisition and organic growth is just a part of it, so we have to adapt. We also are able to adapt to organization. As you know, for example, in Mexico, the market is down.
And we have, for example, Mexico 10% less organic growth. So it's a difficult market. However, we could improve the operational EBIT then because we can adapt our organization. So to maintain the organic growth, if everything goes up, that will be packet, we are quite confident for all the market, including China, including everything that will be in our guidance from 6% to 8% also next year.
Okay. And just on the infrastructure side, yes, I realize that infrastructure is probably the most likely sector 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 lots of political turmoil. I think in Argentina, a little bit difficult. Delta G has started now.
We just got the news on Bolivia. So 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, so not so bad sign. We have nice infrastructure project. And 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.
So 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. And then just going back to one of the statements from Adrian a couple of minutes ago. I think Adrian was talking about the dilution
The
The material margin increase, let's say, organically was 0 point 7% versus 0.4%. So that's the dilution effect there on the material
Okay. Thank you, Martin.
Next question comes from the line of Martin Hissler, ZKB. Please go ahead.
Yes. Good afternoon. Also I have a question to Parex, maybe to make it completely clear. So you say that the impact of Parex on gross profit margin in Q3 was 30 basis points?
Plus all the other acquisitions. So the acquisition dilution on material margin in Q3 was 30 basis points.
Okay.
And 50 basis points for 9 months?
That's the organic one for 9 months, just the organic development of the material margin. We have reported 20 basis points, including all the acquisitions. Also there, there's a 30 basis points dilution.
And so at this stage, you don't give a statement for the full impact of Parex, let's say, to overall EBIT, so not including integration costs, not including amortizations, what would be what would have been the results of Parex after 9 months?
Yes. And as I said, good underlying development. We clearly highlight that the onetime 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 in the impact of Parex.
Also, as you know, there is this ongoing commercial integration, as Paul had highlighted.
And Martin, it will be also more and more difficult. We could distract it that the business is one sales organization in each country. They share. They work together. So Parex for us, we don't follow-up Parex as a group as before.
Parex is integrated into countries and we follow country by country and then summarize in the region. So in future, Parex, there is no numbers anymore where we follow as a total.
Okay. I can understand this. Then maybe 2 very short questions. What is the consolidation date of Krevor, Hengxin?
Krevor Hengxin, that's the very beginning of October. So there is no impact in Q3 yet.
Okay. For Q4. And you were mentioning that the CapEx was quite lower than last year. What's your current guidance for the full year?
There was, as you remember, there was also a special effect of €70,000,000 relating to a buyback of long term operating leases last year in the amount of €70,000,000 percent. I mean, this is basically what we will not have. So I mean, for the full year, we will be below the 3% of sales.
Next question comes from the line of Bernd Pommerlein, Von
Yes, good afternoon, gentlemen. My question is a little bit similar to the question of the of Martin Flitika. I still would like to get a little bit of better feeling of your view about the different submarkets, so really infrastructure, commercial construction and the 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. They are it's more based on countries. Everybody comes, it has a little bit different. But 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 Home Depot, other things. So we believe U. S, Canada will still be strong in the next coming year months. Then 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 we 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. And we cannot see big signs, which goes slow in China, except back the automotive market. But all the other markets until now for a strong pipeline in both markets and exciting growth rate possibilities for the next few months. So we will I expect exciting numbers out of China.
It's different in Japan. It's a lot of typhoons in the last 3 or 4 months or so. It slowed down our business a little bit. But after disaster, they have to rebuild. So we don't see there a real whole month is a real downturn.
When 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 even slower. We don't expect there be grow rate in the major markets from Germany, Italy, then Spain. All these major markets are rather slower.
We see a little bit of slowdown in these markets. And the Brexit is also still open. We don't know where it goes. Also, our numbers, it's now the first time after all the years of Brexit we see a decline in our grow model. It's just down.
But also there, we adopted organization and improved our EBIT margin. So overall, it's all markets are a bit different. So in overall, we see still 6% to 8% for next year growth rate.
That's very helpful, Paul. Thanks a lot.
Okay. Thanks, Sven.
Next question comes from the line of Patrick Rafaisz from UBS. Please go ahead.
Thank you and good afternoon everyone. Two questions please. The first is and I'm sorry to circle back to Parex and growth in the Q3, but at H1, you said Parex organics were around 6%, 8%, including some minor M and A for Parex stand alone. Do you think that, that accelerated in the Q3? And is that a sustainable trend into Q4 as well?
Or was there any special effects we have to keep in mind?
Yes. I mean, the Parex, if you want to call it the Parex business, we don't talk about the Parex business anymore. But if you want to call it perimeter like this, it was at least that it was actually a bit stronger in the 3rd 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, so good very good traction there.
And as we said, we are confident to reach the upper level of the €80,000,000 to €100,000,000 So in the many, many markets, we are very happy how this business works together.
Okay. And 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 9 months. Is that an area where you see further improvement? Or is what's the timing effect?
Should we expect a bit of a bounce back here for the working capital in Q4?
Yes. I mean, the working capital development was quite good, as I mentioned. There is 2 factors. On the one hand, in some markets, of course, less dynamic growth, which per se have an impact, but there is also a number of also operational improvements, for example, on the inventory side, very focused on the receivables. So 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 Wrigglesworth from Citi. Please go ahead.
Thank you for your presentation, gentlemen. A 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 9 months, that that was large that largely fell in Asia and thereby implying that S. Market Americas market is kind of a good like for like number. Secondly, on that Americas growth, I mean, obviously, we heard about the Q1 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, Rx China, Asia, very good performance, excellent. It's also correct that in U. S, the business is on track, but not as fast growing. But underlying growth rate, our organic growth and is still around 6% in the U.
S. And should be also in the next coming months.
Next question comes from the line of Daniel Lilovkamp, Mura Vo. Please go ahead.
Yes. Hello as well. Just also on Asia Pacific, after 3% in the first half now in the Q3, 14% significant growth, okay, maybe also because of products. But 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.
And the second question is in the global business. I mean, just your other Swiss kind of competitor reported minus 8% in Q3 organic, and you had even slight growth. So very well done. But the question is, going forward, do you expect a stabilization here as well? Or as you mentioned, the production numbers are quite negative for cars, but that was probably also destocking in the channels.
But in the end, customer demand is maybe okay. Would be nice to have your view here. I know you have don't have the crystal ball, but there's certainly more no more than me.
Yes, Marius. Keep 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. But also, as mentioned, we're seeing some pickup in Southeast Asia.
Some of the markets have really been depressed also in relating to specific factors, to political factors. So there is in a number of countries. And just from a growth rate point of view, the Philippines was one of the examples, but of course, it's relatively small in the mix. But 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. So that's basically one of the organic or some of the organic drivers in Asia Pacific.
Okay. I'll 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 grow rate and still able to maintain business. We don't expect that the automotive market turns fast around in the next 3, 4, 5 months. There will be still some headwind there, some turbolences.
As explained on the Investor Day that we are in a few new models where we expect some grow rate. So we're confident to stay at that average grow rate, a little bit grow, not expanding, but at least keeping the level or small growth, but not That would be then really a turnaround in the whole automotive market. So quite positive that we can maintain to grow or at least stay on the same level and not minus like our friends.
Okay. Thanks so much.
Okay. Thank you, Daniel.
Next question comes from the line of Manish Beria from Citizen Aireles. Please go ahead.
So yes, so I have three questions. The first one is on the operating leverage, I mean. So you talked about excluding acquisition and one off, I mean, the operating expense that is the nonmaterial cost just grew slightly below the revenue growth rate. So I mean 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. So what is the reason for picking up of the expense?
Is this because maybe you are growing slower, so maybe the operating leverage is less? How should we see it? Because you mentioned Mexico, you were able to cut costs despite lower growth and things like that. So should we assume, I mean, 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? So this is the first question.
I will take another 2 after you answer one.
Yes. Good question here. Of course, let's say organic growth rate or operating leverage does have a bit of an impact. I mean, we're talking here somewhat smaller numbers. There is also some foreign exchange impact, which have not been helping.
But all these differences also when I talk about, let's say, slightly below sales growth, I mean, these are not big impacts given the numbers. Secondly, we're of course, there is a number of markets where we are sort of rightsizing and addressing the issues. But also, I mean, we're, of course, maintaining investments in some of the markets where we do see long term strong growth. So 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, €560,000,000 €555,000,000 So just wanted to understand, I mean, is there some benefit coming from also the IFRS reporting because lease principal payment probably is included or excluded? Just wanted to know that.
Yes. And there is I gave
a number of explanations here on the good development. I mean, working capital is 1, 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 50,000,000, which is positively impacting a like for like comparison.
Okay. So understood. The last one is probably on the because I have seen your presentation. I mean, you mentioned trade wars as one of your mega drivers because I've not seen that before. So just trying to understand how does trade war become a megatrend for Seeker?
Okay. Now I get it. Okay. Thank you, Manish. A major 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. So that's the mega driver we have to do strategically to do. And usually, if someone really exports and is not able to produce in other counties, this supports always also our local growth. So we can be faster in local production so we can be faster in local production like in China than
everybody else.
And we also have nice factories in U. S, so we don't have to move things around. So each one want to produce more local, fine with us. And our competitor are running behind.
Sure. Yes. So yes, so I am fine. Yes. Thank you.
Okay. Thank you, Harish.
Next question comes from the line of Alessandro Foletti from ObsEva. Please go ahead.
Yes. Good afternoon, everyone. 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. But 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?
Yes. I mean your calculation is
board
In Canada, in the U. S, in all the businesses, a
bit of a slow start. But as Paul has
mentioned, I mean, we're seeing a good pipeline and continued strong development. And 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. And my second question, more related to the growth contribution of the acquisition, but not what you have mentioned about Parex right now. We have understood that 0.5%. But 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 Zika organic growth? Do you know that?
Yes. I mean, to be honest, I don't have an exact figure. And of course, there is some more visible parts when you basically sell it through sort of existing organizations. But 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.
There is that's one off, let's say, the growth elements, but I could not spell it out how exactly or what exactly the impact is.
All right. Just for your information, the reason I ask is because you always mentioned one of your criteria is when you make acquisition is that it has to provide a growth platform. So if that's the case, there should be incremental growth coming from these acquisitions.
Yes, there is. But having concretely answering your question, what is the impact of the last 15 acquisitions, it is in different places, and there are different drivers. So there is definitely a positive impact. That's also what we always say. I mean, 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 Sicco, we merged the companies also there. So 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 3 years. And so therefore, we know exactly what benefit they have.
And the 3rd element, we really always watch where the new products goes. We follow the products, not just to grow. So if we sell now King package and King products out in U. S, that's a growth platform because we have the formulation that we will produce it, of course, in U. S.
So we see it's a growth platform because we could move the products and the information and customers that on the other side that we follow that, but we don't really track it down. That's a growth platform, and we see that every month if it goes in the right direction or not.
Next question comes from the line of John Fraser Andrews, HSBC. Please go ahead.
Thank you. 3 for me, please. First one are the first two actually around the Parex synergies. So have we seen any cost synergies already in Q3? And can you update on how you see those in terms of the time scale?
Second one, again, Parex Synergies. The sales enhancements we see, we can make some calculations there. But can you just say in Asia and in China, is the enhancement that's visible in the Q3 report, is that solely from the 1500 points of sale? So where are you with the other best part of 15,000 others that you identified at the Capital Markets Day? And then the final question, if I could ask you to get your crystal ball out again, please, Paul, And 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, but at least it is released 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.
But a good indication is there is no more fussure. And I think it's rather softer than the pressure we had 2 years ago. And 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. And 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 year to date, we're talking about 1.5% of price increases. Maybe I'll also take the first question you had on the realized synergies. I mean the realized synergies, they're still small. They're around €2,000,000 to 3,000,000 and rather 2,000,000 in the first two, three months. With the expectation in for 2019 between €5,000,000 10,000,000
Okay. And I take Yes. Sorry. Yes.
Sorry. Is that on the cost side, Adrian?
It's mostly on the cost side, yes.
And I take the China one. The 1500 jobs was just a fast reaction from our new colleagues in China. They really have tricked out the shops they have at the first 1500 very fast in 1 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 grow model and they grow tremendously well with their own old system they have.
So from that side, the majority is of their own growth, and cross selling will kick in beginning of next year in a bigger line.
Next question comes from the line of Xintong Liang on Credit Investment Research. Please go ahead.
Hello, gentlemen, and thank you for the presentation. I have a small question on the margin, EBIT margin. So 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. So we are wondering for this year, will it still be the case? Or it will be diluted by the acquisition effects?
Yes. The acquisition effects are, of course, I mean, larger. So there will be a continued impact here also in the Q4 on the, let's say, the dilution side. And as we said, we're guiding for double digit EBIT increase and more than SEK 8,000,000,000 in sales. But there will be a continued sort of dilution impact in the 4th quarter.
Okay. And thank you. Okay, great. And 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 markets 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?
No, I focus on all the 8 target markets. We expect that all the target markets have new products. We expect that for all our 5th technology, we have new products in. So we expect it everywhere and think we will go from there. So 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 better solution to our customers.
Okay. All right. I see. Thank you.
Thank you.
Next question comes from the line of Reimer Rosenau, LVTISCHE 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 to EBITDA to reach around 2.7 times to 2.9 times by the end of 2019, then going down to around 2.0x by the end of 2020 and then being reduced by a factor of 0.4x each year. Of course, all that without any additional acquisitions. Now the question is, I mean, of course, you will do additional acquisitions.
So 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? And what kind of debt level measured with this net debt EBITDA ratio would you feel comfortable like being remaining there?
Yes, Remo. And what I mean what's included in this sort of deleveraging, if you will, is sort of a normal or smaller acquisition spend as we have had in the past. So there is some acquisition spend in there, but no, let's say, major acquisitions. There is also not that we say, I mean, we have to be at a certain level. But as we have always said, strong investment grade rating, A- is important, and we will clearly maintain this.
But certainly, there is some flexibility, particularly given the strong cash generation. Does that answer your question, Herb?
Yes. Okay. I was not saying that
you Without big acquisition, and big acquisition is 5 about $500,000,000 $600,000,000 We will go to the target we have with this cash generation, which will continue.
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 you how far you could see in the order book, in particular if you compare the construction chemicals to the global businesses? That will be my first question.
Okay. It's a little bit different business model we have comparing to other companies. They are mainly equipment builders. They have the orders in. We see our pipeline on the construction side.
So we don't have orders in. But on the construction side, as we mentioned before, we still believe in many, many markets, we have a strong pipeline.
So there was no change over the last month
from No. Okay.
And second question, what did you 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. Do you 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 5 months, mainly the Germans. And I guess we will see some lights in the tunnel. Not sure when, but I feel individual transportation with cars will remain in the next future even if the big cities model change a little bit. So we are confident that in the next few months, the cities will turn.
Okay. Thank you.
Okay. Thank you.
We have a follow-up question from the line of Martin Flukiger. Please go ahead.
Yes, thanks for taking my follow-up. So 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 bps by Parex and all the other acquisitions. Can you just remind me how much it was at the EBIT margin level?
And the dilution again, we don't spell out Parex right now what the impact is. I have given an indication at the Capital Market Day what the effects are. On a full year basis, there is about 400 basis points amortization effect, and there is the onetime costs we have spelled out. So of course, the really incremental impact so far has been relatively small.
The next follow-up question comes from the line of Thomas Wiegersford. Please go ahead.
Yes. Thank you very much. So I just want to on the organic growth, could you help us understand how much of that organic growth is kind of volumes, absolute tonnes versus price and mix effect? That would be helpful color.
Yes. I mean mix effect overall is very small to nonmaterial, and the price effect is 1.5%. So the rest is volume basically to the 4.1%.
Okay. And 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. Thank you.
Thank you.
The next follow-up comes from the line of Tobias Wijmann.
Just a quick final one on the prices again and also on the raw materials. So you mentioned earlier in Q3, gross margins organically were up 70 bps. Now 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 4th 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 1st 9 months.
So are you expecting an acceleration in pricing in the 4th quarter? And do you think 170 basis points margin outlook is feasible for the 4th quarter? Thank you.
I mean, of course, on the pricing side, I mean, we continue to increase prices, but we also do this in a measured way. Also when we look at raw material input cost and still very volatile, as Paul was indicating. I mean, we're not seeing sort of a broad decline. So there is hopefully going to be some impact, but we also have other measures on the procurement side, on new products and so on and so forth. But again, we have to see how the input costs develop, and there's just no point or clear trend to give a guidance in this regard.
And for the overall EBIT, and we have a lot of initiatives efficiency. So we're confident to keep our guidance.
And for pricing, you also still keep the guidance of 2% for the full year because clearly that would apply quite an acceleration in the Q4 if we have 1.5% year to date.
And I
think the comparison base is actually higher in the Q4 because last year in Q4, you had, I think, more significant price increases as well.
I mean, given the comparison, it will probably be a little bit shy of 2%, yes.
Okay. And then just sorry, just for clarification on the raw materials. What exactly is going up? Because clearly, 70% of your raw materials are oil derivatives and oil prices still have come down quite a long way. But also, if I look at acrylic acids, they have come down.
If I look at epoxies, they have come down. So what is really the headwind here?
Yes. The of course, oil price typically is one element. It's more sort of a long term one. I mean, that's not sort of the big driver typically. Short term, it's more supply and demand.
And there is areas, for example, in 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. So again, no sort of clear guidance we can really give on the input cost development.
Okay. Thank you very much.
The last follow-up question sorry, we don't have any questions at this time.
Okay. So basically, this brings us to the end of our call. Thank you very much for listening in and for your interest in FICA. We wish you all the best.
Okay. Thank you very much, and see you soon. Thank you.
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