Thanks for coming. It's a pleasure to have you here, and I hope you find this occasion well suited. If not, Dominic is in charge. Dominic. We try 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 Adrian to present. But then I have all the regional manager here, starting with Ivo Schettler from EMEA, then Christophe Gans for the Americas, then Mike Champion from Asia Thomas Hassler, Automotive and Industry and Jose Luis from Latin America. So 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 grow rate of 9%, and the first time in SIC history we went over SEK 6,200,000,000. I think that's excellent results, and we are very proud of it. Then we have an EBIT of 12% increase, so very nice to SEK 896,000,000. Then net profit rose by 14.5%, also very nice and to Road trip by 1% to 29.8%. So it's quite exciting.
And on the other side, we had 3 new national subsidiaries. We have 9 new factories and we had 7 acquisitions. I will explain later a little bit, but we're very excited with the new acquisition we have. And we could confirm the 2020 targets for the years. So in a nutshell, here again the results, SEK 8,600,000 in Swiss currency, then 29.8% and the 6.49%.
So 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 Aussie 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.
And I think we are well established for to grow also next this year quite nicely. Very nice to see to grow in EMEA, which is the biggest market we have. It's SEK 7,500,000,000 up to SEK 2,800,000,000 and this is excellent results. Outstanding, North America, mainly U. S.
With SEK 18.4 percent. And the first time in Sika history, U. S. Is more than SEK 1,000,000,000 as a single company in the Sika history. So excellent done, excellent job of the team.
So we were quite excited about our new factories around the world, from Russia to Africa to Mexico. So 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. 3 new subsidiaries around the world makes us to the 100 subsidiaries. I think it's nice.
And if somebody can tell me then and know all the flags, I offer him then a bottle of wine. Maybe 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.
Think we are everywhere now where it's worthwhile to have a subsidiary. We will add in the next 3, 4 years probably 3 to 4 more. But 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 7, 8 acquisitions we have, we added around €482,000,000 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 Zika, the responsibility to the general manager. They are in charge to integrate.
They are in charge to make sure we welcome the people, and they are very flexible and free to run this organization. And therefore, 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, which has closed finally after a long waiting time last week is Feist Chemical. It's a company around the world, 6, 7 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, very strong supplier for the next future. Another exciting one in U. S, M Seal. It's for infrastructure, for joint sealing, and this helps us dramatically to be in the big projects, to be closer to the engineers. And together with our strong sales organization, we expect a lot of additional sales here.
And we added around CHF 40,000,000, but key to these specifiers is excellent. Another exciting one in Italy, SEK 150,000,000. 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 EUR 220,000,000 profitable business in Italy, very strong organization now.
And together, we are quite confident that we will have a great future in Italy with this excellent new company. So I hand over to Adrian to present the nice results, please. Good. Thank you, Paul.
And 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, C and C has again shown very strong performances with record results, a record turnover of SEK 6,248,300,000, which is exceeding the SEK 6,000,000,000 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 SEK 101,000,000 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 0.5%, 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. And this with slightly higher capital investments of SEK 163,000,000. 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 10% or 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. And 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 2 years. And also acquisitions with a contribution of 2.7 percent 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 Q1, organic growth has accelerated throughout the year with an 8.8 percent 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 Pfizer's Chemtech, which closed in January February, respectively, will be in 2018 with an estimated growth contribution from acquisitions in 2018 of 6 percentage points. Moving to the P and 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. Fika partially counted 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 percent, whereby the initial dilution effect coming from acquisitions accounted for about 1 third of this or about 30 basis points. On the cost side, nonmaterial cost, these are personnel costs, other operating expenses as well as depreciation and amortization have grown under proportionally compared to sales growth at the rate of 4.9%.
And as a result, nonmaterial cost ratio has further decreased from 41.5% to 40.1% in 2017. Personnel cost 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. But 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 4th 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 proportionately and grew at the rate of 12.7% to 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 1 in March 2016. There was another SEK1.7 million positive impact compared to 2016. But also on the other financial expenses, a reduction of SEK 3,500,000 related to lower negative valuation effects and lower hedging costs. And 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, CKAG to CK 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 SEK 649,000,000 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 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 SEK 290 4,000,000 slightly down from SEK 416,000,000 at the end of 2016. We will also have a bond repayment coming up in July. Therefore, SEK 150,000,000 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 SEK 500,000,000, but was below the record year of last year. 2, due to the strong growth dynamic in the Q4 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 Q4, which led to a negative cash flow impact related to the rollover of our hedging contracts with an impact of SEK 35,000,000 negative compared to SEK 25,000,000 positive in the previous years. These were the two factors affecting here operating free cash flow. On free cash flow level, we had an increased acquisition spend of SEK 323,000,000 while the cash outflow from financing activities due to the fact that we didn't have any bond repayments was lower by SEK 184,000,000. As a result, net cash balance or cash balance reduced by SEK 117,000,000 to SEK 1,000,000,000. 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 the capacity such as the 9 new factories we built in 2017 have about an equal fifty-fifty share of our investment spend, which was SEK 163,000,000 in 20 17. But also, and the 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, SEK 40,000,000 of fixed assets represent 10 factories that were added to our supply chain through M and A. And 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 mainly 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 Zika'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 1,000,000,000. I think I would like to give you a short overview on the performance for last 3, 4 years, then I go to the market penetration, innovation, emerging markets and acquisitions. 1 is important, the values, and then I end with the targets.
Performance in the last since 2015, our strategy is based on the 5 pillars: market penetration, where we want to win all the projects, where we want to gain the customers Then we have the innovation part where we believe we need new innovation to be better than our competitors. We 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. And then we have the values and principles. If you look back on the sales, outstanding run-in the last 5, 10 years of Sika, always increasing sales, net sales.
And since years, we are able to increase our EBIT over proportionally, and we are confident this year, but also the next 5 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 SEK 70,000,000,000 market in all our 7 target markets. And even these markets are growing in 2020 another $10,000,000,000 Besides having a small market share, our markets are growing.
So it is, if we do everything right, just the question how fast we can grow. That we can grow. There is no question. The question is only how fast can we do it and how close are to the customers. One of the megatrends which also helps us are the urbanization.
For example, rising demand for high building, the standards going up. Or if you go to the vehicles, lighter vehicles, strong vehicles, more low emissions vehicles. These are 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 7 target markets where we have the right products, the right sales force, where we have innovation and all our organization are built to get and to conquer this market. Another important point is for 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. Not in Sitka. Sitka has the great opportunity.
Not in Sitka. Sitka has the great opportunity that higher 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 or seek us to drive product to go there. And 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. So we have an additional curve. So from infrastructure to higher building standards and to repair and refurbishment, you see the long term market penetration potential for Sika. So 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 283,000,000 since 2015 innovation disclosure. And 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.
So the customer has to have an advantage and it's an innovation. If, for example, they want to apply a floor and usually you have to wait 10, 15 days to get the next steps in a building and if you can offer them 4, 5 days faster products, we will buy it. And we have a lot of products in this direction where we offer true innovation potential to the customers. 2nd important is it's much nicer for the sales force to sell new products. They are more motivated.
They like to go and sell. And therefore, they are really motivated sales team to sell new innovation. And because it's new and an advantage for customer, we believe he's also willing to pay more. And out of this reason, we usually get around 30% a better margin out of the new products on innovation. And our product range is, average, 20% of the last 5 years are always new product.
So we have a constant change of all the product in new products where we bring an advantage to the customer. I think that's a huge innovation. And therefore, we are able to sell to nice buildings like this one, for example, new products, Sika Omnitern, which gives us stronger standard for 150 minutes before to keep this deal holder longer. So 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 Sesh explained, it's huge advantage. It's more productive, more efficient. And therefore, I always feel customers are willing to pay more because he has a real advantage to use the building earlier. And that's just a part out of these great new products we have around. Accelerate the emerging market.
I think we did new 10 subsidiaries. As I is and we are bound to do another 7 to 10 this year. And we will continue this peak to make sure we are close to the customer, able to produce the product in front and close. So 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 SEK 70,000,000,000, SEK 60,000,000,000 construction market now, The top 10 companies have around 40% of that. So it's quite a fight out there with the 10 big companies. They are also strong. They are also good.
But then we have 60% smaller companies, which we would like to acquire, to play, to have a start position and to increase this one. So we want to be a leader in the consolidation of the construction and the adhesive market. And 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 to consolidate the market, but we need that as a growing platform.
And therefore, all our acquisition helps us to grow faster, to cross sell, to have a stronger team. And with this one, we also get a lot of new managers in the teams where they are really strong, where we can work together. So we did 17 acquisitions since 2015. We added SEK 700,000,000 more sales in all target markets and in all regions. And I'm very glad and proud that Adrian provides always enough cash that we can do the acquisition and still a cash rating organization.
So from that side, we are able to do the acquisitions, and we want to keep that speed in the next future. Most important thing is, besides all the numbers, besides everything else, is our strong value and principle. I think 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, and we look strongly to keep that. And I think that's the most what we have to preserve for Sika, make sure we have value for our employees, empowerment and respect. I think, of course, customer first. We want to be driven by customers. We want to have the courage for innovation.
But finally, it's the people who makes the business. It's all our 18,000 people. And then clear, manage for results is a target that we are fair, that we also result oriented. But I think that's what makes ZIKEA drive. And I hope you see that ZIKEA has a great potential.
And don't tell me now we are too low in our targets. We want to have the market penetration by 6% to 8%. Adrian already informed that we are in a very good way this year. So for this year, our target is over 10%. So we are quite confident with this acquisition, with our speed, we will grow over 10% this year.
So for this year, good. Then we want to have more innovation. We want to have emerging markets again. We want to do acquisition, a lot of acquisition. And finally, we confirm our results with 105 national subsidiaries, 14% to 16% EBIT margin per year and 10% operating free cash flow.
Outlook. I would like now that EVO takes a little bit the EMEA stand.
Good. So yes, very excited to show you the outlook for EMEA. So we have in all our areas, we have within the region EMEA a really positive outlook when it comes to economic growth. So there, it looks really promising. We have our, let's say, area in Africa, emerging markets, now with 14 owned subsidiaries.
So we really expect over proportional growth. And also in Eastern Europe, already you have seen in 2017, we had a very strong growth there, but we 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're 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, and we are very well positioned there with our concrete and waterproofing systems and all our cross selling activities in such major projects.
Also in Dubai, they are building sort of a new part of Dubai with this also this tower project. This will be the tallest tower in the world. We are already active there or already with our system, with our waterproofing system in the basement, just visited there some months ago. So this project is well on track. Also 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. Also in London, there are new developments of the former battery seat power station, so huge development there. Also very big potential for Sika. Most of you, I think, from Switzerland know the Cupris Tunnel, this bottleneck when you want to go to the airport or at the north of Zurich. They finally started now with the extension of this tunnel, and I'm really proud to say that Zika is very well positioned there.
All the concrete admixtures will be delivered from Zika. So think about when you're driving there next time. Also in another major project in Central Europe, the Brannett Tunnel is between Italy and Austria. Sika won big parts of the concrete and also the waterproofing membranes for this project. And also in Germany, the Stuttgart 21 project is well on track and also with strong presence of Zika products.
We're 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 and combine the efforts there. And finally, our position distribution business, in the distribution channels, we will further strengthen, especially in Eastern Europe, in Germany and in the Middle East. So that's the outlook for EMEA.
I would like to hand over to Christoph.
So good morning. You probably know that Sika decided that we're going to put together North and South America and combine them into 1 large region Americas. So 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.
I mean, also in the Swiss press, you read a lot about our President and what he is promising to us. So we believe we might even see a slight uptick in GDP growth this year, mainly due to U. S. Infrastructure bill, which has been promised and the tax reform, of course, which will have a positive impact. But also 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. There like Mexico and Argentina, where we believe they will continue growing pretty nicely. Mexico influenced also by the U. S. Economy, of course.
And 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. So 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 20 18, mainly due to a lack of large projects. But nevertheless, we follow we go after business opportunities. So even in decreasing markets, there are opportunities that we can go after. And in North America, I'd like to mention the big boom that's taking place in the enormous amount of data centers throughout the whole United States.
And this is the most expensive construction structure that you can imagine. And here, of course, this is just a great opportunity for us, and Sika is very well positioned with these companies. Also distribution centers. So Amazon, we're basically involved in almost all Amazon distribution centers that are being built. These are 100, 200, 300,000 square meter 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.
And then maybe a bit less nice on one side. I mean, 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 2 hurricanes in Florida and Texas that happened last year, We see, of course, huge repair works happening right now. So 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.
And these are really big, big projects that we have seen coming in over the last few months, several $1,000,000 of sales, every project, and 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, Scott. They appreciated that, but that has damaged a lot of structures, roads, dams and all these structures have to be repaired and seekers involved here really very strongly, and we will see this also continuing during 2018. And then I experienced it myself, never seen such a harsh winter like this year in East and Central U.
S, Canada, even down to Texas. So we've seen freezing temperatures even in Texas. And 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.
I mean, as I said, in a lot of markets, we have a lack of the large projects that just don't happen anymore. But 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. And we will put a specific focus on distribution business this year and in the years to come. It's a nice margin business.
And you always have to focus on the things, on the opportunities basically. Big city focus, this is a strategy which Jose 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, and this has helped us to produce this accelerated growth rate. And there are a lot of cities in Latin America, which are way bigger than most cities in the United States.
So I think we have huge potential there yet to explore this. And 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. And here, of course, we have high expectations. The merge of North and South is really an exciting thing for us. So we see it happening right now.
Officially, it will happen only by March 1. But on the supply chain side, on the procurement side, we're just it gives us new opportunities that we can follow. So Latin America is producing products which we don't manufacture in the North, but which we can ship now. And in the North of the Americas, we produce, for example, PVC membranes, which now we can introduce more strongly in Latin America. So 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 Botherfield, M Seal is very exciting also for Latin America now. I mean, a lot of these countries, they can use and sell these products as well. Alcoa in Mexico, which produces bituminous membranes, has some opportunities for us in North America as well. And then the pipeline is pretty full, almost too full, I'd say, sometime.
So you can expect, I'm sure, additional acquisitions happening in the Americas also this year. And last but not least, digitalization is a very big topic for us. We've been we are investing, we have invested quite a lot of money into the digitalization tank monitors, which we install in 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 we seek and the truck leaves then and fills up that tank somewhere in a remote area. Or 3 d printing and 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. And so we will see for sure some pilot projects happening very, very soon in North America.
So we try to be the leader on the digital topic as well in our industry. So I would like to hand over to Asia Pacific, Mike Campion.
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 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.
So even we expect a very strong Asia market in 2018, but even without a strong Asia, we believe there's always opportunity to grow our market shares. We expect double digit growth in both China, Greater China and in Pacific areas this year. In China, we successfully managed through a dramatic downturn in the China market in 2015 2016. We also successfully forecasted that the downturn or the bottom for Sika would be in Q3 of 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 in the strong double digit growth into 2018 with disproportionate growth in profitability. Also in Pacific, we had excellent business development in 2016 and in 2017, and this led to tremendous growth in Pacific region, 10.3% growth. And again, with this new business development, we expect that double digit growth to continue and really a tremendous improvement in the overall profitability of Pacific region. So 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.
SEEKA 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 countries companies in the world that can do 7 target markets across these infrastructure projects and deliver more and more value to these projects. And 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 we believe currently we have about 30 different projects
that are Olympics related going
on in Japan. So we I think 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 4 new plants in 2018. Actually, each quarter we'll bring 1 motor 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 motor facility in Australia. So we continue to build and we'll continue to look forward to expand our supply chain in 2018 and beyond. And finally, for acquisition, we have a robust pipeline of acquisition targets and 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. So that's a quick summary of Asia Pacific.
I'll turn it over now to Thomas Hassler 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 is our 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 light weighting, fuel efficiency, safety and comfort increased demands by the end customer. And so 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 5 years. We intend to do that also in the coming years ahead of us. Electric vehicle built is a hype in the industry, it's a hype in politics and so on, but it's a reality when it comes to our activities.
And 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. And 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. But 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.
So 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, Feist Camtek 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. So we are doing excellent works in airborne and structure borne acoustics. So with that, we can leverage this at the carmakers, 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 megatrend 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.
Our guys, for this year, we are confident with our 10% increase, more than 10% we expect. So the biggest challenge we have with the raw materials. It was tough last year where the raw materials rise twice or 3 times a year. And 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 copying the paste of the raw material.
And not just the paste is difficult, it's also more the availability of the raw material. This 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. But on other side, we are confident that we can add that to the people.
On other side to the customer. On other side, we would like to get also more efficiency out of our plants. So overall, we still expect a better number of proportional EBIT growth, and I think we will deliver that. Any questions? I don't think so.
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?
I think it's 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 a job of a market leader to go ahead.
We have a great run on one side on the top line, so we can afford not taking a job if we don't get the right price. So we will be confident, and we have to increase the price, but that is not just a seeker problem, that is a market problem. And therefore, yes, the customer has to accept higher price or they are in trouble. And the magnitude can go 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.
But we are well setted. We are in hunter countries. We are local. We are close to the customer and we are well proven organization to do that. But it's a challenge, I agree.
Okay. And one second question, if I may, regarding your target markets. You mentioned the 7 target markets, which you always focused on. Now in the last months, you changed the name of one of your target markets. Historically, it 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. So 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. It's we have a strategy 2020 where we define the 7 target markets. We are in the process now to relook at our markets, how we build it, what is the next to 2025, how we organize ourselves. But in principle, all this addition is to give a better system to the customer. So same customer feel that 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. So yes, we got more, but to the same customer, we try to be a better supplier and of course to increase our market potential. It's correct. And 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, we'll see does it fit to the whole strategy. But it's correct.
Okay. Thank you.
Frueckfueger?
Yes, thanks for taking my questions. Martin Kluge 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 induced 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 measurement or the measures in China, where environmental teams are essentially going around and closing factories to reduce pollution and emission. And this did not only have an impact in China but really worldwide, most recently on epoxy raw materials but also key silicone materials. So 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. So that was one impact in the Q4.
Sorry, the quantitative aspect of the raw material price impact and the dilutive impact of acquisitions?
Yes, on a quarterly basis, this is very sort of difficult to say. But of course, you also have quite some swings in foreign exchange. There is not a uniform development by region, but it was actually more and more pronounced than in the
quarters before. Okay. And then my second question would 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?
Or is the gross profit margin going to be under pressure again in 2018?
I mean given the volatility, it's really at the moment not possible to sort of indicate what eventually will be the price increase impact. It's clear it will be higher than 2017. There's 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. But 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 this relatively volatile and challenging environment.
Okay, thanks. And then 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 these what are they called again? Not liquidity related, other financial expenses exactly are.
And also with regards to the net working capital development, how much you've seen that being reversed in 2018? And also with regards to the taxes paid, is that €250,000,000 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. And in the Q4, 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, the let's 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. And of course, there is also a certain acquisition impact in a 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.
So if you normalize for all this, we haven't actually increased the ratio. So 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 and L, we are almost fully hedged on the financial instrument side.
But given the fact that we roll most of our forward contracts in the Q4, there was quite an impact in terms of cash due to the particularly due to the increase of the euro. I'm of course, it's always difficult to predict sort of 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 EUR 60,000,000. I'm certainly not expecting this to happen again in volatile. And here a prediction is, of course, relatively difficult to do.
I'm sorry, on the tax?
On the tax, there was one impact also on the cash flow here. I am mentioning the transfer of the brands from Sika AG to Sika Technology. There was about a SEK 20,000,000 impact of tax outlay, which will over time come back through amortization and lower tax expenses in the future.
Okay. So 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.
You just go.
Thank you. Your organic growth in 2017 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 quite close to the market. We also always have very impacts foreign exchange. You change systems, you improve them. The mere price effect is in the magnitude of 1% to 2% and the rest is volume.
Okay. Thank you.
Okay. Thank you.
Three questions
for me, 2, 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? And 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 percent net sales basis. It's too early to talk about the magnitude, particularly the 2 larger ones we have just closed and particularly also the purchase price allocation has not been finished. So 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 percent of net sales will increase also in 2018.
Okay. And then 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. So if you say more than 10% growth, including already 6% M and A impact, do you already assume in that guidance more deals to happen? Or is that would that come on top of that?
Yes, like my board, sell more. No, it's what we have last year already pronounced 10%. We're confident. And of course, the new acquisition in the pipeline are not considered. So all the new acquisition, of course, will generate more volume.
And the last question for is for EMEA actually. You talked a bit about the growth prospects and large projects also London. But 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, you see that as well?
Or are you still growing in the UK in 2018?
So in general, I mean, 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.
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? And perhaps how sustainable is that pickup in LatAm?
2nd question on competitions. You mentioned the Italian on acquisitions rather. 2nd 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 2, yes, it's quite tough there. There were 3 or 4 big companies 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 Zika because we didn't want to close factories. We promised an rates. We wanted to use as a platform also to export.
And 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 there was the big difference between the other bidders that we could assure him that we use it as a growth platform. Question number 1, Jose Luis, to Brazil.
With the 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, we as Christo has already mentioned, our case of Brazil and Chile lack totally lack of new project is really because the case of the President Kavitski in Peru and the problem with the other bridge. And in the case of Chile, because the transition from the old politic case to the newpolitik environment, we are in this moment looking 2018 with very positive things in Chile, very promising in Brazil, but it's the 3rd year that the GDP tendency from the banks said that it will be very, very positive. But at the end, we are really facing 16/17 difficulties. But this year, again, we are working, thinking that the tendency will be totally changed.
This is our opinion. Have I answered totally the questions?
Thank you.
Thank you. Martin Hisseltzer, Kantonalbank. I also have 3 questions, 1 by 1 maybe. Germany, which is the 2nd largest market for you only saw a growth of about 1% last year. I 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, I mean, in Germany, we have already very high market shares in our target markets there and of course, makes it a little bit more difficult to grow further. But 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. So there are the specific initiatives planned there to increase our growth as well.
Okay. And then 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 Q1?
So 1st month January started very well. So
What's U. S, Peter?
Sorry, U. S. Okay.
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. And March, we have the move of the Eastern holidays from April last year into March. This is we're losing like 2 days.
So March will be a bit of struggle. But February looks very, very strong, which is good thing for what's happening in the market.
So for the group, overall, you're on a solid growth path in start up?
We had a very, very solid 1st 2 months, very solid
without acquisition. Thank you. Then 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, which came the negative EBIT came down quite a bit. Can you maybe give us some indication about the gross numbers, so 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 and also a small reduction in cost.
Tag von Tolff from Adsit 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? And then second question, growth usually attracts also imitators, perhaps other companies that will try to take your best people and then copy the CECL Growth Formula.
How great a risk do you see that?
You remember 211?
It's long gone. What was
the question 311? Sorry, I wanted to see.
Well, just generally, Zika has a long history, but growth has taken off only recently, it seems like, starting it seems in 2011. So my question will be what happened? What changed in 2011?
The change came in the year 2000 when Mr. Changed the organization from focused global small business thinking to a real industrial thinking. And I think the change, the real change to SEEK came in the year 2000. And since then, we grew faster, slower, but that was the real change of our SIC organization. And 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? And 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.
So a lot of people like to stay with us. The few who decide to take another big opportunity, that's fine. We have enough strong own people to carry this. So and to copy the thicker 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. Not in the moment.
And I guess, yes, it's a struggle, but we are confident we can build up our own people.
Reuters News Agency. I wanted to address the elephant in the room, if I could. I mean, can you tell us what's happening now with the family and Saint Gobain? And I mean, it strikes me that the share price has risen so much that kind of the Saint Gobain offer might 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 good results and with high market price on the shares, We can offer now the family a better deal, can be faster and they can sell their shares through Sika as one vote, one share, we would change. So it's a great opportunity now to find a good solution with the family. We talked to the family during our board meeting and to talk, of course, is not management, it's the board.
But yes, there are talks. And during all the meetings we have, yes. Other questions? Are there elephants around?
No elephant. No, it is. Torsten Meade from BZ Bank. Going back to financials, just one question about the cost leverage target you have of not having costs growing more than twothree of top line. You did very well in H1, Q3.
And in Q4, you kind of had costs growing a bit stronger than top line than this rule, so to speak. I guess this due to acquisition costs now into 2018. It's 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. So on the cost side, of course, and then you mentioned this correctly, there was a negative impact in the 4th quarter. Also, of course, the acquisition cost of the deals or partially of the deals we have closed in the Q1. In isolation on the acquisition side, just mathematically, we're 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. On the other hand, they have a contract with Sangerberg, so they cannot step away from this contract unilaterally. On the other hand, the contract needs to be renewed once in a while. Could you just remind us on how these terms are?
And 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. And then the family will be free to sell to whom they want. In the press, it's now discussion they want to continue. At least maybe the lawyer supported that.
I feel it's clear that the lawyer wants extend. There's also rumors around that Songpa 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 sick here in Switzerland as well, 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. And if I remember correctly, their argument was that you had increased the payout ratio too fast. 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 their 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. And shareholders are not supporting it at least last time. We will see what's going on.
I think we are there. But of course, from the management, from us, we would like to increase. And that's the proposal, at least, on that level.
Okay. But how would you assess the risk of, let's say, a repetition of last year events?
Well, don't ask me. I don't. What should I know? It's one shareholder who decides finally. So but I'm confident that this time it's in the line as they last year agreed, so it should be in the line of this
year. Okay. Thanks. And 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. Could you provide the number for that impact in Q4? And also, tell us about what kind of savings you expect in the U.
S. For 2018 and beyond?
Yes. On the and probably this question is a bit triggered by the announcement of the big banks having a significantly negative impact on tax loss carry forwards, we don't have those in the U. S. The actual deferred tax impact was actually very, very small and slightly positive, but really very small. Going forward, the impact of, let's say, current taxes will be around SEK 15,000,000 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 1 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. And 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 low number of staff in Asia Pacific?
Of course. And we look at this market by market. There is always where we see the need also to some adjustments, some selected efficiency measures. So that was essentially the reason in Asia Pacific.
Okay.
Thank you very much. I got all the rest designed now to stop. Let's say the final question.
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 when 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.
Because that would really surprise me because they then, as I understand, are not even allowed to look at it.
That's correct. I think the office is on the table. They know it, and it's clear that the price will be better than the offer price, but there 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 Zika in Switzerland to make sure we can continue the success. We can get a 10,000,000,000 company soon. And that's what we're working on. So thank you very much for coming. It was a great pleasure.
And we have now lunch outside and glad to answer more questions from our management team. Okay. Thank you very much.