Thanks for coming. It's a pleasure to have you here, and I hope you find this location well suited. If not, Dominik is in charge. We tried to arrange it that it's easy for the most of you to join us, and we're very happy to have you here. We will show you the results, the highlights, and to make sure you get the benefit out of your visit, I ask also Edwin to present, but then I have all the regional manager here, starting with Ivo Schädler from EMEA, then Christoph Ganz for the Americas, then Mike Campion from Asia, Thomas Hasler, Automotive and Industry, and José Luis from Latin America. Feel free in the break and afterwards to ask all the questions and that you get a nice overview of this one. Overall, I think we are quite happy with the results from last year.
We have a growth rate of 9%, the first time in Sika history, we went over CHF 6.2 billion. I think that's excellent results, and we are very proud of it. We have an EBIT of 12% increase, very nice to CHF 896 million. Net profit rose by 14.5%, also very nice. The ROCE by 1% to 29.8%. It's quite exciting, and on the other side, we had three new national subsidiaries. We have nine new factories, and we had seven acquisitions. I will explain later a little bit, but we're very excited with the new acquisition we have. We could confirm the 2020 targets for the years. In a nutshell here again, the results, 8.6% in Swiss currency, 29.8% and the CHF 649 million. Overall, excellent results, and we are very proud to have it.
If you look around the world, we are happy, but challenging in Latin America with José Luis, only 3.3%, but next time, no, it's good. The problem was actually we had some difficulties in Brazil, in Chile, where the market was quite slow, but we had excellent results also in Argentina and Mexico. Proud of Asia Pacific. I think the turnaround in China works, and we can increase and grow there again with 5.2% are in target and good. I think we are well established for to grow also this year quite nicely. Very nice to see the growth in EMEA, which is the biggest market we have. It's 7.5% up to CHF 2.8 billion, and this is excellent results. Outstanding North America, mainly U.S., with 18.4%. The first time in Sika history, U.S. is more than CHF 1 billion as a single company in the Sika history.
Excellent done, excellent job of the team. We were quite excited about our new factories around the world, from Russia to Africa to Mexico. Everywhere we have a lot of new initiatives, target is to be close to the market, be close to the customer, and have a very lean and fast supply chain. This makes us strong, and we can adapt our product to the local needs, and therefore it's for us important to really push these concepts else in future. Three new subsidiaries around the world makes us to the 100 subsidiaries. I think it's nice. If somebody can tell me then and know all the flags, I offer him then a bottle of wine, if you don't have to read it. That's excellent. We will come with this one.
I think with 100 subsidiaries, we are now there where this growth will slow down a little bit. I think we are everywhere now where it's worthwhile to have a subsidiary. We will add in the next three, four years, probably three to four more. On that side, I think the extension in this market is on a high level, but we won't push then too much more. The highlights are acquisition. As you probably know, we always use acquisition as a growth platform, and with these seven, eight acquisition we have, we added around CHF 482 million for this year, next year. We are well aware and well ahead of the integration of these companies. The question is how can we integrate these companies in this fast speed? I think the key is we delegate, as usual in Sika, the responsibility to the general manager.
They are in charge to integrate. They are in charge to make sure we welcome the people, they are very flexible and free to run this organization. We are quite excited all the time how fast we can work with these new companies and can use it as a platform. The last one, we just closed, finally, after a long waiting time last week, is Faist ChemTec. It's a company around the world, six, seven factories. Well-established, and it's exciting in automotive industry. It's for the acoustic, and it's a great benefit for us to use that as a platform with our key customers, and it will be very strong supplier for the next future. Another exciting one in U.S., Emseal. It's for infrastructure, for joint sealing, and this helps us dramatically to be in the big projects, to be closer to the engineers.
Together with our strong sales organization, we expect a lot of additional sales here. We added around $40 million, their key to these specifiers is excellent. Another exciting one in Italy, CHF 150 million. It's the leader in waterproofing and roofing. It was quite a competitive fight to get it, and we're very proud to have it. With this acquisition, we are now CHF 220 million profitable business in Italy. Very strong organization now. Together, we are quite confident that we will have a great future in Italy with this excellent new company. I hand over to Adrian to present the nice results. Please.
Good. Thank you, Paul. Good morning, ladies and gentlemen. After the highlights we have just seen, I would now like to present the 2017 financials in a bit more detail. As you have seen, Sika has again shown very strong performances with record results. A record turnover of CHF 6,248.3 million, which is exceeding the CHF 6 billion mark for the first time, and which represents a very dynamic 9% growth in local currencies or 8.7% in Swiss francs. Sika again increased the EBIT over proportionally by 12.7% or, in absolute terms, by CHF 101 million extra, reaching a 14.3% return on sales, which is up from 13.8%. A further decrease of financial expenses and another decrease of the tax rate to 24.7% resulted in net profit growth of 14.5%, which is for the first time exceeding 10% as a percentage of sales.
We have also further increased return on capital by another 110 basis points. This with slightly higher capital investments of CHF 163 million. Starting with the top line, you have seen this very dynamic and very broad-based in all the regions. We achieved double-digit growth in a large number of markets. We have seen particularly the U.S. very strong, but also Mexico, Eastern Europe, the whole African continent, Middle East, Greater China, the Pacific Rim, and the whole automotive business grew more than 10%. Organic growth at 6.3%, quite strong, and the acquisition effect of 2.7% was also higher than in the previous years. Overall, currency translation effects, always an issue, has been relatively moderate compared to previous years. This was particularly owed to the relative strength of the euro, particularly in the second half of 2017. Having said this, currencies in many markets actually remain quite volatile.
In 2017, we have again executed on all the pillars of the strategy with growth in mature markets, about 5%, in emerging markets with growth of more than 8% organically as well as through the acquisitions. As just highlighted, translation effects have been relatively modest. Growth, compared to the previous years, has accelerated with organic growth of 6.3%, significantly faster than in the previous two years. Also acquisitions with a contribution of 2.7% have been more pronounced compared to previous years, where we had an average contribution of about 1.5 percentage points coming from acquisitions. Also, throughout the year, and excluding here the calendar effects in the first quarter, organic growth has accelerated throughout the year with an 8.8% organic growth in the last quarter, and this is also the case for acquisitions.
This being said, the main growth impact of the transactions consummated in 2017, together with Index and Faist ChemTec, which closed in January and February respectively, will be in 2018, with an estimated growth contribution from acquisitions in 2018 of six percentage points. Moving to the P&L and moving down. Clearly, 2017 was characterized by a significant increase in raw material prices, which in combination with partial shortages in a number of raw materials, for example, MDI or also key silicone raw materials, led to higher raw material cost. Sika partially countered these effects with price increases, actions on the procurement side, ongoing new product introductions, and also a continued localization of the supply chain. In result, 2017 material margin gross result has decreased by 90 basis points from 55.3% to 54.4%.
Whereby the initial dilution effect coming from acquisitions accounted for about one third of this, or about 30 basis points. On the cost side, non-material costs, these are personnel costs, other operating expenses, as well as depreciation and amortization, have grown under proportionately compared to sales growth at the rate of 4.9%. As a result, non-material cost ratio has further decreased from 41.5% to 40.1% in 2017. Personnel costs decreased in relation to sales from 20.1% to 19.4%. This was driven by the operating leverage as well as certain structural adjustments in selected countries. Other operating expenses have also developed below sales growth overall, thanks to efficiency improvements, disciplined cost management, but also lower admin and warranty costs.
On the other hand, transportation costs have increased more strongly, particularly in Q4, which was weather and capacity related in some areas, and also acquisition costs and initial consolidation effects of the acquisitions had a negative effect in the fourth quarter. Depreciation and amortization expenses have grown at only 1.1%. This in spite of the investments in new plants and in future growth. In result, as already mentioned, EBIT developed very strongly over proportionally and grew at the rate of 12.7%-14.3% of net sales. If we look below the EBIT line, as far as financial expenses are concerned, we saw another reduction compared to 2016. Firstly, on the interest expense side, there was a further residual impact of the lower amount of bonds outstanding another quarter. We paid back one in March 2016.
There was another CHF 1.7 million positive impact compared to 2016, also on the other financial expenses, a reduction of CHF 3.5 million related to lower negative valuation effects and lower hedging cost. The group tax rate at 24.7% was again below previous year, where we had a rate of 25% on group level. A positive tax effect from an intangible asset transfer from our holding company, Sika AG, to Sika Technology, compensated higher withholding taxes and the recognition of deferred tax assets in 2016. Overall, as a result, net profit increased again over proportionally by 14.5% to CHF 649 million, which represents 10.4% of net sales, up from 9.9% of net sales in the previous year. Quick look at the balance sheet.
The good performance is also reflected in a continuing strong balance sheet at the end of 2017 with all the main balance sheet metrics, working capital ratio gearing, equity ratio being very solid while we maintained a net cash balance of CHF 294 million, slightly down from CHF 416 million at the end of 2016. We will also have a bond repayment coming up in July. Therefore, CHF 150 million of our bonds outstanding are now classified as short-term as opposed to long-term. Talking about the cash flow. In terms of cash flow, operating free cash flow was again strong with almost CHF 500 million, was below the record year of last year due to the strong growth dynamic in the fourth quarter, where we grew in Swiss francs at 14.5%. Net working capital growth was higher.
This 14.5% compares very favorably to the year before, where we had a rather slow quarter with growth of 3.4%. Therefore, the net working capital tied up was higher. The second reason is owed to the quite significant movements in foreign exchange in the fourth quarter, which led to a negative cash flow impact related to the rollover of our hedging contracts with an impact of CHF 35 million negative compared to CHF 25 million positive in the previous years. These were the two factors affecting the operating free cash flow. On free cash flow level, we had an increased acquisition spend of CHF 323 million, while the cash outflow from financing activities due to the fact that we didn't have any bond repayments was lower by CHF 184 million. As a result, net cash balance, or cash balance reduced by CHF 117 million to CHF 1,038 million.
Apart from an increasing EBIT, the asset-light nature of our business and an efficient capital appropriation are key drivers of an increasing return on capital. With CapEx of around 2.6% of sales, we maintain and improve our facilities around the globe and are able to invest in future growth by adding new factories. Maintenance CapEx and investment in growth and in the capacity, such as the nine new factories we built in 2017, have about an equal 50/50 share of our investment spend, which was CHF 163 million in 2017. Also, innovation acquisitions not only provide growth platforms in terms of market access and cross-selling opportunities, but also add to our ability to produce and deliver products close to the customer. In 2017, CHF 40 million of fixed assets represent 10 factories that were added to our supply chain through M&A.
This efficient usage of capital is reflected in a significantly increased return on capital over the years, reaching 29.8% in 2017. This already brings me to the dividend proposal. Given the continued strong performance, the board of directors of Sika proposes another substantial dividend increase of 15.6%, which is namely a dividend of CHF 111 per bearer share, up from CHF 96 in the previous year, and a dividend of CHF 18.5 per registered share, up from CHF 16 in the previous year, respectively. With this, I hand back to Paul for further insights on Sika's successful strategy execution. Thank you.
Okay. Thank you very much. I would like to share some thoughts why we still believe Sika is an outstanding company and we have the possibility to grow the next CHF billions. I think I would like to give you a short overview on the performance for the last three, four years. I go to the market penetration, innovation, emerging markets and acquisitions. One is important, the values, and I end with the targets. Performance since 2015, our strategy is based on the five pillars. Market penetration, where we want to win all the projects, where we want to gain the customers. We have the innovation part, where we believe we need new innovation to be better than our competitors. In emerging market, we need to build up the supply chain to be close to the customers.
With acquisition, we want to consolidate the market and use that as a growth platform. We have the values and principles. If you look back on the sales, outstanding run in the last five, 10 years of Sika, always increasing sales, net sales, and since years, we are able to increase our EBIT over proportionally, and we're confident this year, but also the next five years, it goes in this direction. Why we are so confident? I would like to share a little bit how big our markets are. We're talking about CHF 70 billion market in all our seven target markets. Even these markets are growing in 2020 another CHF 10 billion. Besides having a small market share, our markets are growing. It is, if we do everything right, just a question how fast we can grow. That we can grow, there is no question.
The question only how fast can we do it and how close are to the customers. One of the mega trends, which also helps us, are the urbanization. For example, rising demands for high building, the standards going up. If we go to the vehicles, lighter vehicles, strong vehicles, more low-emissions vehicle. These all the trends which gives us dramatic and great opportunity to grow. We have everywhere the right products. We have a lot of potential. For example, safety increase, fire, water, earthquake, and Sika has the right products and the right systems there. We are focused on the seven target markets where we have the right products, the right sales force, where we have the innovation, and all our organization are built to get and conquer this market. Another important point is to analyze the potential of Sika.
If you look at the curve of the infrastructure, that's the usual way this curve goes in construction. It starts in emerging market, goes to the developing market, then slowly but surely these market are mature and these curves goes back. Not in Sika. Sika has the great opportunity that high building standard, for example, even we have to go in this direction, we won't go with this curve. We have an additional curve where we say, we need higher standards so Sika has the right product to go there. Then in the developing market, of course, is the repair and refurbishment. We are very well-based and placed in the market that we are in the right place to be a leader in repair and refurbishment. We have an additional curve.
From infrastructure to higher building standards and to repair and refurbishment, you see the long-term market penetration potential for Sika. Big market, low market share, a lot of opportunities, just a question how fast we can get it. Innovation. Strong record. We had since 2015, 270 patents. We have more than 900 people working on new products and innovation. We had 283 since 2015 innovation disclosure, we work close to the customer with 20 technology centers around the world. Innovation is always important for us to bring advantage to the customer. The customer has to have an advantage and is an innovation.
If, for example, they want to apply a floor, usually you have to wait 10, 15 days to get the next steps in a building, if you can offer them 4, 5 days faster products, he will buy it. We have a lot of products in this direction where we offer to innovation potential to the customers. Second important is, it's much nicer for the sales force to sell new products. They are more motivated, they like to go and sell, therefore, they are really motivated sales team to sell new innovation. Because it's new and an advantage for customer, we believe he's also willing to pay more. Out of this reason, we usually get around 30% better margin out of the new product on innovation. Our product range is an average 20% of the last five years are always new product.
We have a constant change of older product in new products where we bring an advantage to the customer. I think that's a huge innovation. We are able to sell to nice buildings like this one. For example, new products Sika Unitherm, which gives us stronger standard for 150 minutes before to keep this steel holder longer. Very nice application, but only one small thing out of a big basket of innovation where we can go in the right direction. Another one is application time for the floor. As I explained, it's huge advantage. It's more productive, more efficient. I always feel customer is willing to pay more because he has a real advantage to use the building earlier. That's just the part out of these great new products we have around. Accelerate the emerging market.
We did new 10 subsidiaries. As I explained before, this will slow down a little bit. We won't slow down with new plans and new openings. We did 26 in the last years. We are bound to do another 7 to 10 this year. We will continue this speed to make sure we are close to the customer, able to produce the product in front and close. We are very good in that one. Sales in emerging market are 36 and 5 acquisition to be strong there. Acquisition. If you look at our CHF 70 billion, CHF 60 billion construction market now, the top 10 companies have around 40% of that. It's quite a fight out there with the 10 big companies. They are also strong, they are also good.
We have 60% smaller companies which we would like to acquire, to play, to have a strong position and to increase this one. We want to be a leader in the consolidation of the construction and adhesive market. For us, it's always important that we use this as a growing platform. We never do an acquisition just to consolidate the factory. We do an acquisition, consolidate the market, but we need that as a growing platform. All our acquisition helps us to grow faster, to cross-sell, to have a stronger team. With this one, we also get a lot of new managers in the teams, where they are really strong, where we can work together. We did 17 acquisitions since 2015. We added CHF 700 million more sales in all target markets and in all regions.
I'm very glad and proud that Adrian provides always enough cash that we can do the acquisition, and still a cash rating organization. From that side, we are able to do the acquisitions. We want to keep that speed also in the next future. Most important thing is, besides all the numbers, besides everything else, is our strong value and principle. That's the heart of Sika that drives us. We delegate our responsibilities to the manager. We make sure everybody who wants, have a nice life, have an exciting life. He can work on this organization. He finds a place where he can be successful. We look strongly to keep that. That's the most what we have to preserve for Sika, make sure we are of value for our employees, empowerment and respect. Of course, customer first.
We want to be driven by customers. We want to have the courage for innovation. Finally, it's the people who makes the business. It's all our 18,000 people. Clear manage for results is a target that we are fair, that we also result-oriented. I think that's what makes Sika drive, and I hope you see that Sika has a great potential. Don't tell me now we are too low in our targets. We want to have the market penetration by 6%-8%. Adrian already informed that we are in a very good way this year. For this year, our target is over 10%. We are quite confident with this acquisition, with our speed. We will grow over 10% this year. For this year, good. We want to have more innovation. We want to have emerging markets again.
We want to do acquisition, a lot of acquisition. Finally, we confirm our results, with 805 national subsidiaries, 14%-16% EBIT margin per year, and 10% operating free cash flow. Outlook. I would like now that Ivo takes a little bit the EMEA stand.
Good.
Okay.
Yep. Very excited to show you the outlook for EMEA. We have in all our areas, we have within the region EMEA, a really positive outlook when it comes to economic growth. There, it looks really promising. We have our, let's say, area in Africa, emerging markets, now with 14 own subsidiaries. We really expect their overproportional growth. Also in Eastern Europe, already you have seen in 2017, we had a very strong growth there, but really see very strong signs that it will continue like that. Because, for example, there are EU funds and other, let's say, very positive inputs for this area. In Middle East, we are working very strongly in projects, in big projects. I'm sure you heard about this huge investment in Turkey, Istanbul Airport.
They are building there the largest airport in the world, we are very well-positioned there with our concrete and waterproofing systems and all our cross-selling activities in such major projects. In Dubai, they are building a sort of a new part of Dubai with also this tower project. This will be the tallest tower in the world. We are already active there, are already with our system, with our waterproofing system in the basement. Just visited there some months ago. This project is well on track. In the more mature markets, let's say in Europe, we have substantial infrastructures and very good project wins. For example, in Paris, this Grand Paris project with 50 kilometers of tunneling where we are also very well-positioned with our systems. In London, there are new developments of the former Battersea Power Station, a huge development there.
Very big potential for Sika. Most of you, I think, from Switzerland know the Gubrist Tunnel, this bottleneck when you want to go to the airport or let's say north of Zurich. They finally started now with the extension of this tunnel. I'm really proud to say that Sika is very well-positioned there. All the concrete admixtures will be delivered from Sika. Think about when you're driving there next time. In another major project in Central Europe, the Brenner Tunnel, between Italy and Austria. Sika won big parts of the concrete and also the waterproofing membranes for this project. In Germany, the Stuttgart 21 project is well on track and also with a strong presence of Sika products. We continuing also 2018, of course, as you have seen already before, in extending our production sites to increase our local footprint and our capacities.
The new acquired companies will bring a lot of synergies. We are about, of course, to roll out this in the market, combine the efforts there. Finally, our position in the distribution business, in the distribution channels, we will further strengthen, especially in Eastern Europe, in Germany, and in the Middle East. That's the outlook for EMEA. I would like to hand over to Christoph.
Good morning. You probably know that Sika decided that we're going to put together North and South America and combine them into one large region, America. It's my pleasure to present a short outlook on overall the Americas. Starting with North America, I guess it will not surprise you that we believe the outlook is pretty positive. In the Swiss press, you read a lot about our president and what he is promising to us. We believe we might even see a slight uptick in GDP growth this year, mainly due to a U.S. infrastructure bill, which has been promised, and a tax reform, of course, which will have a positive impact. In Canada, increasing oil and gas prices will have a positive impact on the construction sector at all.
Looking into Latin America, we see the picture probably is going to continue pretty similarly this year like last year. Mexico and Argentina, where we believe they will continue growing pretty nicely. Mexico influenced also by the U.S. economy, of course. Brazil will not be the big boom yet this year. It will improve. We've seen improvements taking place in Brazil during the last 4 months. We're hopeful that we should see a better picture in 2018 than the years before. Peru and Chile, it's going to be what we call a dogfight in the U.S. also in 2018, mainly due to a lack of large projects. Nevertheless, we go after business opportunities. Even in decreasing markets, there are opportunities that we can go after. In North America, I'd like to mention the big boom that's taking place in the construction of data centers.
The Facebooks, the Googles, the Apples, they build an enormous amount of data centers throughout the whole U.S., and this is the most expensive construction structure that you can imagine. Here, of course, this is just a great opportunity for us, and Sika is very well-positioned with these companies. Also, distribution centers. Amazon, we're basically involved in almost all Amazon distribution centers that are being built. These are 100,000, 200,000, 300,000 sq m surfaces, and they all have roofs, they have floors, they have basements, and we try to be positioned in all of these parts of projects. Then maybe a bit less nice on one side. We're, of course, kind of profiting also from, let's say, the climate change. I would say during the last 12 months in North America, we've seen pretty rough weather.
The two hurricanes in Florida and Texas that happened last year. We see, of course, huge repair works happening right now. In the Bermudas, for example, or in the Caribbean, lots of these hotels, they want to open again very quickly, so they have to repair all these roofs. These are really big projects that we have seen coming in over the last few months, several million CHF of sales every project. This will continue at least for another half a year to a year. We had very heavy rainfalls at the beginning of last year in California. Thanks, God. They appreciated that has damaged a lot of structures, roads, dams, all these structures have to be repaired, Sika is involved here really very strongly, we will see this also continuing during 2018. Then, I experienced it myself.
I never seen such a harsh winter like this year in East and Central U.S., Canada, even down to Texas. We've seen freezing temperatures even in Texas. That, you see it really, that has damaged a lot of these structures and repair works are happening right now. In Latin America, there are also a lot of great business opportunities. As I said, in a lot of markets, we have a lack of the large projects that just don't happen anymore. On the other side, our distribution business with small retail stores, larger distribution stores also, is still doing very well. Also in, let's say, companies or in countries where construction in general is decreasing. We will put a specific focus on distribution business this year and in the years to come.
It's a nice margin business you always have to focus on the opportunities basically. Big city focus. This is a strategy which José Luis has also followed very strongly in Latin America as well as we did in North America over the last years, which I think I explained this already. We invest right in the midst of these big metro areas. We build a sales force around these plants then, this has helped us to produce these accelerated growth rates. There are a lot of cities in Latin America which are way bigger than most cities in the U.S., so I think we have huge potential there yet to explore this. We have some new plants that are onboarding right now in Lima, for example, but also in Houston, just really close to these big markets.
Here, of course, we have high expectations. The merge of North and South is really an exciting thing for us. We see it happening right now. Officially, it will happen only by March 1st. On the supply chain side, on the procurement side, it gives us new opportunities that we can follow. Latin America is producing products which we don't manufacture in the North, but which we can ship now. In the north of the Americas, we produce, for example, PVC membranes, which now we can introduce more strongly in Latin America. All in all, a lot of opportunities for us. Acquisitions, you heard it from Paul. We're currently integrating the acquisitions which we've done last year, namely, Butterfield, Emseal is very exciting also for Latin America now. I mean, a lot of these countries, they can use and sell these products as well.
Alce in Mexico, which produces bituminous membranes, has some opportunities for us in North America as well. The pipeline's pretty full, almost too full, I'd say sometimes. You can expect, I'm sure, additional acquisitions happening in the Americas also, this year. Last but not least, digitalization is a very big topic for us. We are investing, we have invested quite a lot of money into the digitalization of our business. Not just into apps, which make, of course, the ordering process easier for our customers, but for example, also in what we call tank monitors, which we install in the tanks of, let's say, ready-mix companies, which indicate when the tank is empty and which then triggers out an order with Sika and the truck leaves then and fills up that tank somewhere in a remote area. Or 3D printing in construction, which you see here.
We've just introduced this topic to 250 engineers and architects in New York City, and have attracted a lot of attention within these guys. We will see for sure some pilot projects happening very soon in North America. We try to be the leader on the digital topic as well in our industry. I would like to hand over to Asia Pacific, Mike Campion.
Thanks, Christoph. Good morning. I'd like to talk to you. It's a great pleasure for me, actually, to talk to you this morning about the outlook for Asia Pacific. First and foremost, in Asia Pacific, we see tremendous opportunities for growth across all of our target markets through new innovative products and a strong customer interaction where we bring solutions to our customers. All of our countries across the Asia Pacific region offer tremendous opportunities, really, to expand our market shares. We expect a very strong Asia market in 2018. Even without a strong Asia, we believe there's always opportunity to grow our market shares. We expect double-digit growth in both Greater China and in Pacific areas this year. In China, we successfully managed through a dramatic downturn in the China market in 2015 and 2016.
We also successfully forecasted that the downturn or the bottom for Sika would be in Q3 2016. Since that time, we've been back to strong single-digit growth, 9% growth in China in 2017. We expect this growth to continue into strong double-digit growth into 2018, with disproportionate growth in profitability. Also in Pacific, we had excellent business development in 2016 and 2017, and this led to tremendous growth in Pacific region, 10.3% growth. Again, with this new business development, we expect that double-digit growth to continue and really a tremendous improvement in the overall profitability of the Pacific region. We're very excited about those areas. In Southeast Asia and India, there's huge need in the emerging market and developing world for continued development of infrastructure. Sika is uniquely positioned to help our partners in the market deliver this infrastructure growth.
We have a cross-selling ability, and again, one of the few companies in the world that can do seven target markets across these infrastructure projects and deliver more and more value to these projects. We expect this to continue very strongly in both Southeast Asia and India. In Japan, we really have a laser focus on the 2020 Olympics in Japan, in Tokyo, and currently we have about 30 different projects that are Olympics related going on in Japan. We really expect in 2018 and 2019, really right up to the Olympics, I think they'll be ready before Brazil, but they'll continue the investment going forward, and we expect a really tremendous growth, not only in the Olympic business, but also in our baseline business in Japan. To sustain our growth model in Asia Pacific, we'll continue to expand our production base and overall supply chain.
We'll build four new plants in 2018. Actually, each quarter we'll bring one. A mortar plant in Vietnam. We have a waterproofing membrane line in Korea. We have a high technology, hot melt production in China, and finally, a huge mortar facility in Australia. We continue to build, and we'll continue to look forward to expand our supply chain in 2018 and beyond. Finally, for acquisition, we have a robust pipeline of acquisition targets, that align very well with our strategy overall, and we expect to continue to look for acquisition that's in line with our strategy to continue our growth model in Asia Pacific. Okay. That's a quick summary of Asia Pacific. I'll turn it over now to Thomas Hasler to talk about automotive and industry. Thanks.
Thank you, Mike, and I'm happy that I can follow the stream of my colleagues and provide a quite positive outlook about our centrally managed automotive business, as well as our locally led industry business. The automotive and the industry business overall are enjoying a quite positive environment in the key markets in North America, Europe, as well as in Asia. As an example, the automotive build rate for this year are forecasting another 2% overall base growth. Of course, different by regions, but for us, most significant, this is the same as last year, and this is fueling, of course, more demands. In addition to this growth, the growth in the vehicle build in automotive, but as well in trucks and buses, is requiring more of our solution to cope with the challenges of lightweighting, fuel efficiency, safety, and comfort, increased demands by the end customer.
We see that as an additional growth potential. Besides that, we want to beat our competitors and we want to further grow market share as we have done in the past five years. We intend to do that also in the coming years ahead of us. Electric vehicle build is a hype in the industry. It's a hype in politics and so on. It's a reality when it comes to our activities. We are active in this field for several years now at the OEMs, we are active at the tiers, tier 1 and tier 2, and not only in automotive, but also in bus, truck applications. It has to be seen as a thing that is maybe on the car side, speculative, how many cars are going to be on the road in the future.
I would like to draw your attention to the bus section, where we have already today in China, a 50% E-vehicle rate on the buses in China. They are building 200,000 buses a year, and 50% of those buses are full electric buses. That's a reality, and we are in that market, and we are providing with our technology solution to make those batteries, to make those specific needs of the E-vehicle better and more efficient going forward. Overall, we see a 20% increased potential in E-vehicles and hybrid vehicles in car, bus, and the truck industry. In line with that, we are going to expand our footprint in the key markets, providing locally all our global technologies to our customers. This means new plants. This means extension of plants in the key markets like Japan, China, in Europe, in Brazil, and in Mexico.
Finally, also acquisition is a topic that drives our growth. As you have heard, Faist ChemTec is an acoustic solution provider in automotive. It makes us now the strong number 1 in all acoustic applications in the car build for the body shop. We are doing excellent works in airborne and structure-borne acoustics. With that, we can leverage this at the car makers, but as well, it goes into the industry as well. It goes into the car, into the truck, into the bus, as well as into shipbuilding. Acoustic is a mega trend that is relevant for our customers, and we have solutions with this acquisition that we can roll out and leverage perfectly in the future going forward. Thank you.
Okay. Thank you, Thomas. Thank you, team. Great job. I guess for this year, we are confident with our 10% increase. More than 10%, we expect.
The biggest challenge we have is the raw materials. It was tough last year, where the raw materials rise twice or three times a year. Also we expect this year will be tough on the raw material side. We have a great history in increasing the prices to adapt the prices in the market, but this will remain a challenge because we always have to make sure we're coping the pace of the raw material. Not just the pace is difficult, it's also more the availability of the raw material. It remains quite a focus. We have a strong organization worldwide purchasing, where we can leverage. We are confident that we have enough raw material, but probably the price will be rather higher than lower. On the other side, we are confident that we can add that to the people and to the customer.
On the other side, we would like to get also more efficiency out of our plants. Overall, we still expect a better number, over proportional EBIT growth, and I think we will deliver that. Any questions? I don't think so, huh? Is it Brian?
Thanks a lot for the presentations. Obviously, again, very helpful also to get the insights from the local general managers, because obviously your business is very local. First question, yes, it is on pricing. Obviously, we have seen your EBIT margin in Q4 coming down a little bit because of pressure on your gross margin. 12 months ago, I think especially also in the financial community, we were rather concerned about deflation. Now we are seeing interest rates rising, we are seeing inflation again. Yesterday, one of your major peers in adhesives mentioned that they will more stringently push for price increases. Can you provide any magnitude of price increases you're expecting for this year? Are customers, again, more willing to accept price increases? How will it look compared to last year?
Yes, I think it's a worldwide challenge, the price increases. Yes, every good company has to increase the price. We are the market leader. We are strong. It's the job of a market leader to go ahead. We have a great run on one side on the top line, we can afford not taking a job if we don't get the right price. We will be confident, and we have to increase the price, but that is not just a Sika problem, that is a market problem. Therefore, yes, the customer has to accept higher price or they are in trouble. The magnitude depends on the product range. Sometimes price increases by 10%, 15%, raw material. Depends always on the bucket, but that you have to give an add-on. We are well set.
We are in 100 countries, we are local, we are close to the customer, and we are a well-proven organization to do that. It's a challenge, I agree.
Okay. Thank you. One second question, if I may. Regarding your target markets, you mentioned the seven target markets, which you always focused on. Now, in the last months, you changed the name. One of your target markets historically was only flooring. Now it's called Flooring and Coatings. Are you becoming a little bit broader in terms of your market approach? I also recognize you did some acquisitions, some companies you acquired, which are doing also insulation products, colorants. Are you slightly becoming a little bit broader? Are you also now going into further end markets, becoming a full service provider for the construction industry?
Well noticed. We have a strategy 2020 where we defined the seven target markets. We are in the process now to re-look at our markets, how we build it, what is the next to 2025, how we organize ourselves. In principle, all this addition is to give a better system to the customer. Same customer field, but we add. If we add insulation, for example, we sell the roof, we give warranties for the roof. Now we start to sell also the insulation where it makes sense. Yes, we get more, but to the same customer, we try to be a better supplier and of course, to increase our market potential. It's correct. We will define where we go and how we organize step by step.
We have a bottom-down organization where they come back with some inputs, what is good for the market, and on the top level, see does it fit to the whole strategy. It's correct.
Okay. Thank you.
Flueckiger.
Yeah. Thanks for taking my questions. Martin Flueckiger from Kepler Cheuvreux. Three questions, please, and I'll take one at a time. Can we just go back to your discussion on the gross margin? You were talking about the full year 2017, and I was wondering the spread between raw material price and dues and the dilutive impact from acquisitions for the full year. Could you elaborate a little bit on that for Q4? That would be my first question.
On the margin impact. Yes, in Q4, we have seen more pressure on the raw material side, particularly related to the measurements or the measures in China, where environmental teams are essentially going around and closing factories to reduce pollution and emission. This did not only have an impact in China, but really worldwide, most recently on epoxy raw materials, but also key silicone materials. We had quite a bit of pressure there, which, of course, with a certain time lag, we will, as Paul just elaborated, pass on to the market. That was one impact in the fourth quarter.
Sorry, the quantitative aspect of the raw material price impact and the dilutive impact on acquisitions.
Yeah. On a quarterly basis, this is very difficult to say. Of course, you also have quite some swings in foreign exchange. There is not a uniform development by region. It was actually more pronounced than in the quarters before.
Okay, thanks. My second question will be on the outlook again with regards to pricing, selling prices, and the gross profit margin. I realize it's still early days, but I was just wondering what your best guess is at this point in time. With regards to selling price increases, I understand you're raising selling prices, but are you going to be actually to be able to overcompensate raw material price pressure in order to maintain or even increase your gross profit margin? Is the gross profit margin going to be under pressure again in 2018?
Given the volatility, it's really at the moment not possible to indicate what eventually will be the price increase impact. It's clear it will be higher than 2017. There is a lot of focus on this. On the acquisition side, I would probably expect a little bit stronger dilution on the material margin given just the size and the dynamics of the acquisition. Overall, and with the volume leverage and the possibility to extract more efficiencies, I'm very confident that on the EBIT level, we will increase EBIT margin further in 2018, in spite of the relatively volatile and challenging environment.
Okay, thanks. My final question, and I'll step back in line, is on your operating free cash flow development. I was listening to your elaborations, but I was wondering whether you could provide a little bit more detail, because looking at the annual report, the cash flow statement in the annual report, there was also the mention of non-liquidity related other financial expenses apart from the hedging transactions. Could you explain to us what are they called again?
Non-liquidity related other financial expenses exactly are.
Also, with regards to the net working capital development, how much you're seeing that being reversed in 2018 and also with regards to the taxes paid. Is that CHF 250 the new number or are we going to go down again?
On the working capital first. I mentioned, of course, very much dependent on the business dynamics. In the fourth quarter, we had quite a strong growth, which compared to the year before, was actually significantly higher by more than 10 percentage points. Of course, particularly on the receivable side, that's really the quarter that counts. Also, given the fact that due to raw material price increases, I'd say the absolute balance of inventory is a bit higher. Also to the fact that we're seeing the good dynamic continuing into 2018, making sure we are ready to ship. Of course, there is also a certain acquisition impact in the sense that we have on the balance sheet, additional working capital related to acquisitions which haven't delivered sales yet being at the end of the quarter. If you normalize for all this, we haven't actually increased the ratio.
I think I'm quite confident that this is really owed to the very good business development. The focus will continue to be on working capital, on cash flow going forward. Maybe to this impact, and really the cash flow impact is the large one here on the hedges. On the P&L, we are almost fully hedged on the financial instrument side. Given the fact that we roll most of our forward contracts in the fourth quarter, there was quite an impact in terms of cash, particularly due to the increase of the euro. Of course, it's always difficult to predict currencies moving, but if you compare this to the year before where we had a positive impact on these type of transactions, just on the cash level, the difference is about CHF 60 million.
I'm certainly not expecting this to happen again in 2018, but as I mentioned, exchange rates will continue to be volatile, and here a prediction is, of course, relatively difficult to do.
Sorry, on the tax?
On the tax, there was one impact also on the cash flow here. I mentioned indeed, the transfer of the brands from Sika AG to Sika Technology. There was about a CHF 20 million impact of tax outlay, which will, over time, come back through amortization and lower tax expenses in the future.
Is it fair to say that most of these impacts that we've just discussed, or that you just discussed, are going to be at least partially reversed in 2018?
That's correct, yes.
Okay, thanks.
Yes, go.
Thank you. Remo Rosenau, Helvetische Bank. Your organic growth in 2017, so ex Forex and ex acquisitions, was around, I think 6.3%-6.4%. Could you tell us how much of that was due to volumes and how much due to increased prices?
As I said, very different development decisions are taken and quite close to the market. We also always have very different impacts, foreign exchange. You change systems, you improve them. The mere price effect is in the magnitude of 1%-2% and the rest is volume.
Thank you.
Okay, thank you.
Three questions from me, too, please. The first on the EBIT contribution from acquisitions in 2018. You said around 6% on the top line. How much would you then expect just consolidation effect to be on EBIT? How much will come on top in synergies?
In terms of, or generally speaking, acquisitions particularly initially have a certain dilutive effect on, let's say, on a % net sales basis. It's too early to talk about the magnitude, particularly the 2 larger ones we have just closed. Particularly also the purchase price allocation has not been finished. It will be, of course, absolute incremental, clearly incremental, but in terms of the overall sort of synergy extraction, the initial cost impact, I cannot give you a number yet. Again, overall, we are very confident that EBIT as a % of net sales will increase also in 2018.
Okay, thanks. The second one also related to acquisitions and the guidance. You mentioned very full pipelines for Americas and Asia/Pacific, probably also the other regions. If you say more than 10% growth, including already 6% M&A impact, do you already assume in that guidance more deals to happen, or would that come on top of that?
You ask like my board sell more. No, it's what we have last year, already pronounced 10%. We are confident and, of course, the new acquisition in the pipeline are not considered. All the new acquisition, of course, will generate more volume.
The last question is for EMEA, actually. You talked a bit about the growth prospects and large projects, also in London. Most recent reportings by local construction companies indicate that there's a slowdown happening in U.K. Can you confirm that? Apart from the large projects, do you see that as well, or are you still growing in U.K. in 2018?
In general, the projects we are involved, we don't actually see really a slowdown. We have good infrastructure projects besides London, let's say also in the energy sector, new power plants being built, which are really major projects. For our perspective, really expect further growth also in U.K.
Okay.
Thank you. Two questions. First one, in LatAm, there was a spike in the organic growth in Q4. Can you say what was behind that, particularly what's going on in Brazil? Perhaps how sustainable is that pickup in LatAm? Second question on competitions. Second question on acquisitions. You mentioned the Italian acquisition. There was quite a lot of competition from your competitors who are in those top 10. Can you give a feel as to how they're placed and how competitive it is out there more generally, to pick up these deals?
Question two, yes. It's quite tough there. There were three or four big companies here also interested to acquire it. I think, finally, we had to pay fair price, but it was more important for the owner to work close together with Sika because we didn't want to close factories. We promised an increase of raise. We wanted to use as a platform also to export. That was the final decision of the owner to hand or to sell it to Sika. He's still in the company. He's still supporting us, and I think that was the big difference between the other bidders, that we could assure him that we use it as a growth platform. Question number one, José Luis to Brazil.
In relation with Latin America, and particularly in relation with Brazil, we are clearly facing a very serious problem. No new construction is in this moment in the market, but we are very well established in distribution. In distribution and in content in the country, we are very well present, and we really run with a traditional full range product and introduction new product, who has permit us to stabilize the situation in Brazil in profit and loss. In relation with the rest of the Latin America countries, basically, as Christoph has already mentioned, our case of Brazil and Chile, totally lack of new project is really because the case of the President Kuczynski in Peru and the problem with Odebrecht. In the case of Chile, because the transition from the old politic case to the new politic environment.
We are, in this moment, looking 2018 with very positive things in Chile. Very promising in Brazil, but it's the third year that the GDP tendency from the banks said that it will be very positive, but at the end, we are really facing 2016 and 2017 difficulties. This year again, we are working thinking that the tendency will be totally changed. This is our opinion. Have I answered totally the question?
Thank you.
Thank you. Martin Hiesl, Zürcher Kantonalbank. I also have three questions, one by one, maybe. Germany, which is the second largest market for you, only saw a growth of about 1% in last year. Was just wondering, and if I call correctly, also in 2016, the growth wasn't really as high as one would have expected. What's the reason for this rather slow growth in Germany? As one would have expected, what's the reason for this rather slow growth in Germany?
In general, in Germany, we have already very high market shares in our target markets there. Of course, makes it a little bit more difficult to grow further. Let's say for the upcoming year, for the outlook 2018, we have some really strong initiatives. I mentioned in distribution, for example, there's still a lot of growth potential for further market penetration. There are the specific initiatives planned there to increase our growth as well.
Okay, the second question. It's early in the year, but maybe you can give us some flavor how you did so far. You were mentioning the harsh weather, winter in the U.S., maybe also in Europe. What trends do you expect for the first quarter?
First month, January, started very well.
Was U.S.
Oh, sorry. Oh, U.S. Oh, okay.
Not Europe, I think.
We have warm weather here.
I mean, the weather was indeed very cold, as I said, never seen such a cold winter, but we did well. February looks very good, March we have the move of the Eastern holidays from April last year into March. This is we're losing like two days, so March will be a bit of struggle, February looks very strong, which is good thing for what's happening in the market.
For the group overall, you're on a solid growth path in start of the-
We had a very solid first two months. Very solid.
Thank you.
Without acquisition.
My last question, on page 131 in the annual report, you're showing the EBIT per regions and also for the other segments and activities, the negative EBIT came down quite a bit. Can you maybe give us some indication about the gross numbers? The positive contribution from other segments and the negative of the cost overhead.
A lot of detailed questions. No, I mean, of course, quite a bit of this decrease is owed to the strong performance of the automotive business, which is mostly in there. Also, a small reduction in cost.
Thank you.
Then, yeah.
Good. Tuck von Tholf from AZ Medien. Sika has quite a long history, but growth has taken off only recently, it seems like in 2011. Could you tell us what happened in 2011? Second question, growth usually attracts also imitators perhaps other companies that will try to take your best people and then copy the Sika growth formula. How great a risk do you see that?
You remember 2011?
It's long gone.
What was the question? 2011, sorry. I wanted to see
Well, just generally, Sika has a long history, but growth has taken off only recently, it seems like. Starting, it seems, in 2011. My question would be, what happened? What changed in 2011?
The change came in the year 2000, when Mr. Grüebler changed the organization from a focused global small business thinking to a real industrial thinking. I think the real change to Sika came in the year 2000. Since then we grew faster, slower, but that was the real change of our Sika organization. The other question was?
Success usually attracts imitators, that other companies might try to take or recruit your best people and then copy your growth formula. How great a risk do you see that?
Oh, it's always a big challenge about the best people. Yes, it's a big risk that everybody tries to get the best people. I think we also have a long tradition to build up new people. We give the power to the people. It's a very nice environment. A lot of people like to stay with us. The few who will decide to take another big opportunity, that's fine. We have enough strong own people to carry this. To copy the Sika model would mean it's a mindset around the world, and that's the difficult part. Give the power to people is not as easy as it sounds. Therefore, yes, competitor is there. Yes, a lot of good people will leave. I don't think so. Please, not in the moment.
I guess, yes, it's a struggle, but we are confident we can build up our own people.
Hello, Mike Ship, Reuters. I wanted to address the elephant in the room, if I could. I mean, can you tell us what's happening now-
Elephant?
With the family and Saint-Gobain. I mean, it strikes me that the share price has risen so much that kind of the Saint-Gobain offer may have been overtaken by events. I'm just wondering if that opens opportunities for you to get creative with the family.
Thank you. I think the elephant is yes, he's in the room. The great opportunity we have with these high results, with the good results, and with the high market price of the shares. We can offer now the family a better deal, can be faster, and they can sell their shares to Sika as one vote, one share, we would change. It's a great opportunity now to find a good solution with the family.
Yes.
We talk to the family during our board meeting. The talk, of course, is not management, it's the board. Yes, there are talks and, during all the meetings we have, yes. All the questions? All the elephants around?
No elephant.
There is.
This is Thorsten Mieth from BSIP Bank. Going back to financials, just one question about the cost leverage target you have of not having costs growing more than two-third of top line. You did very well in H1 and Q3, and in Q4 you kind of had the costs growing a bit stronger than top line, than this rule, so to speak. I guess this is due to acquisition costs now into 2018. It is quite clear that the acquisitional impact is going to be bigger than in 2017. Are you going to be able to overachieve or at least achieve this cost rule in 2018, taking into consideration the acquisitions you will have to integrate?
Yes, on the cost side, of course, and you mentioned this correctly, there was a negative impact in the fourth quarter. Also, of course, the acquisition cost of the deals or partially of the deals we have closed in the first quarter. In isolation on the acquisition side, just mathematically, we are sort of not meeting this rule, but overall, quite confident that the overall leverage will provide for this ratio, yes.
Thanks.
Would like to go shortly back to the elephant. You mentioned that you are able now to offer the family a better deal, yes. They have a contract with Saint-Gobain, so they cannot step away from this contract unilaterally. The contract needs to be renewed once in a while. Could you just remind us on how these terms are? Is it true that if Saint-Gobain wants to hold on to the contract, there is no way the family can get out of it? Thank you.
Yes, I think there is a contract valid until end of this year. The family will be free to sell to whom they want. In the press, there's now discussion they want to continue. At least maybe their lawyer supported that. I feel it's clear that the lawyer wants to extend. There's also rumors around that Saint-Gobain thinks they can expand or would expand. I think I understand also that reason. I still confident that the family find a good way to keep Sika here in Switzerland as a wealth jewel instead of sending it to France and sell it to lower price. Other elephants?
Just a few follow-on questions, if I may. If I remember correctly, last year, you had to adjust your proposal for the dividend because of differences in opinion with the family. If I remember correctly, their argument was that you had increased the payout ratio too fast. Now, I realize you didn't increase it that much, but you've increased it slightly, I think around 50 basis points. What was the position by the board, well, at least by the so-called conflicted members of the board regarding the dividend proposal? Was there a big discussion on it or not?
I think I cannot discuss this internal. However, it's clear the management want to give as much dividend as possible. We want to increase that. Shareholders are not supporting it, at least last time. We will see what's going on. I think we are there, of course, from the management, from us, we would like to increase. That's the proposal, at least on that level.
Okay, how would you assess the risk of, let's say, a repetition of last year's events?
Well, don't ask me. What should I know?
Okay.
It's one shareholder who decides finally. I am confident that this time it's in the line as they last year agreed, it should be in the line also this year.
Okay, thanks. My second question would be on the U.S. tax reform. What was the impact, I presume there was an impact, on deferred tax assets and liabilities in Q4? Can you provide the number for that impact in Q4? Also tell us about what kind of savings you expect in the U.S. for 2018 and beyond?
Probably this question is a bit triggered by the announcement of the big banks, having a significantly negative impact on tax loss carryforwards. We don't have those in the U.S. The actual deferred tax impact was actually very small and slightly positive, but really very small. Going forward, the impact of, let's say, current taxes will be around CHF 15 million of lower taxes coming through the U.S. tax reform on an annual basis.
What does that yield in terms of tax rate guidance?
The overall percentage will be around one percentage point, a little bit more. I was also referring to some positive one-off effects we had this year and last year. The target is sort of around 24% of tax rate for 2018.
Okay, thanks. Just a final one. Looking at the number of employees across the various regions, they've gone up, I think, in all regions except for APAC. What was the reason for the lower number of staff in Asia-Pacific?
Of course, we look at this market by market. There is always where we see the need also to some adjustments, some selected efficiency measures. That was essentially the reason in Asia-Pacific.
Okay, thanks.
Okay, thank you very much. I got all the rest assigned now to stop. Let's say the final question. [inaudible] .
Thanks. The last one for the elephant again. You said you have an opportunity to give the family a nice offer. You said you're talking to the family. Are these just regular talks one has with the family because one's sitting on the same board? Or is it really specific, Sika has said, "Here's a nice offer," the family board has said, "Okay, I'll have a look at it." That would really surprise me because they, as I understand it, not even allowed to look at it.
That's correct. I think the offer is on the table. They know it, and it's clear that the price will be better than the offer price, but that is not yet in the discussion so far. Okay. The elephant is out. I would like to summarize. We are very confident for this year. We are confident that we can deliver the results. We are also confident, and we work hard to find a good solution with the family. I think the price is now great. We can do a good deal, and we trust that the family find the solution to keep Sika in Switzerland, to make sure we can continue the success. We can get a 10 billion company soon, and that's what we're working on. Thank you very much for coming. It was a great pleasure.
We have now lunch outside, and glad to answer more questions from our management team. Okay. Thank you very much.