Now.
Ladies and gentlemen, good afternoon. Welcome to the Sika Q3 Report 2017 conference call. I'm Sherry, the conference call operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Dominik Slappnig, Head Communications and IR of Sika. Please go ahead, sir.
Good afternoon, welcome to the Sika nine-month results call. We published our figures this morning at 5:00 A.M. Our CEO, Paul Schuler, and our CFO, Adrian Widmer, will now provide further details on the results. Afterwards, they will be ready to take your questions. With this, I hand over to Paul Schuler to start with the highlights of the first nine months. Please, Paul.
Good afternoon also from my side, thank you for joining the call. I'm happy to inform you about our very motivating third-quarter closing. We had an excellent sales growth of 7.9% in local currency with record sales of CHF 4.627 billion. All our four regions were able to grow. We posted excellent double-digit growth rates in Eastern Europe, Africa, North America, and in the Pacific area, with our growth significantly outpacing the market in many countries. In the automotive business, we are benefiting from the trend towards lightweight construction, and our sales growth is once again firmly in double digits. The pressure from higher input costs, like raw materials, were well managed through many pricing adjustments. Volume growth, together with disproportionate low cost development, results in further improvements in margins.
As a result, operating profit and net profit posted new record values in the first nine months of the year. EBIT improved by 13.2% to CHF 669 million, net profit rose strongly by 14.9% to CHF 477 million. We continue to invest in future growth in emerging markets by opening new four factories, one in Mexico, one in Kazakhstan, one in Tanzania, and one in Russia, where we opened a new membrane line for the waterproofing system. Further, we founded two new national subsidiaries, one in Senegal and one in El Salvador. Sika is now present in 99 countries with own national subsidiaries. We are now ready to open the 100th in the next few weeks.
On the acquisition side, we are very pleased that with Rmax in the U.S., Bitbau Dörr in Austria, ABC in Turkey, and KVK Holding a.s. in Czech Republic, we're able to complete four outstanding deals. The integration is well underway. Furthermore, our acquisition pipeline is full. We hope to close one or two additional acquisitions this year. I would like to hand over to our CFO, Adrian Widmer. He will guide you through the financial information.
Thank you, Paul, and good afternoon. Following our CEO's business summary and presentation of the highlights, I will give you now some further insights into the financial results of the first nine months in 2017. Q3 saw a continuation of the dynamic sales growth of the first half year, with nine-month sales 2017 growing at the upper range of our strategic sales targets by 7.9% in local currencies. Organic growth in the first nine months was strong with 5.5%, while acquisitions contributed another 2.4%. A modestly negative foreign exchange situation with a negative impact of -1.1%, which reduced in Q3, led to a sales growth of 6.8% in CHF to CHF 4.6275 billion. All regions and mature as well as emerging markets contributed to our growth in the first nine months. In the region EMEA, sales grew at a rate of 6.5% in local currencies.
This compares to a previous year growth of 5.3%. Organic growth of 4.6% was driven by solid volume growth in core markets such as the U.K., France, and Italy, and double-digit growth in Eastern Europe and Africa. Organic growth was complemented by acquisition growth of 1.9 percentage points, mainly coming from the acquisition of Bitbau Dörr in Austria. Foreign exchange impact in EMEA in the first nine months was a negative -2.6%, but Q3 saw a slightly positive impact. The three new plants and production lines in Tanzania, Kazakhstan, and Russia will support future growth in these countries. The highest growth was generated in North America, with a double-digit sales increase of 16.7% in local currencies. This compares to a 9.9% growth in the previous year.
Targeted investments into the supply chain and sales organization, primarily in the fast-growing metropolitan areas, as well as acquisitions in the U.S. contributed significantly to the strong business performance. Organic growth was a strong 8.5%, while acquisitions, primarily the acquisition of Rmax, added another 8.2 percentage points. Foreign exchange impact was mildly positive. The region Latin America recorded a 1.7% sales increase in local currencies. While Mexico and Argentina delivered above-average performance, overall regional growth was negatively affected by a persistently difficult economic and political environment in Brazil and other natural resource-dependent economies. Investment in the region include a new plant in the south of Mexico, as well as a new national subsidiary in El Salvador. Growth in Asia Pacific increased by 4.8%.
In China, the construction industry stabilized further, enabling Sika to achieve high single-digit growth rates, while in Southeast Asia, with the exception of Singapore and Indonesia, Sika achieved high growth rates. In Singapore, investment in state-funded residential construction projects and in Indonesia, investment in infrastructure remained at the low level. The gross result as a percentage of net sales increased slightly by 60 basis points from 55.3% to 54.7%. Price adjustments, as well as various initiatives on the procurement side, limited the impact of higher raw material costs, while the dilution effect from acquisitions continued to account for almost half of the material contraction of 25 to 30 basis points. Driven by strong volume growth, disciplined cost management, and efficiency improvements, particularly in Q3, showed a strong operating leverage.
With both personnel costs as well as other operating expenses growing significantly below sales growth at around 55% of that rate. Consequently, EBITDA increased by 10.9% to CHF 797.9 million, up from CHF 719.5 million in the same period of last year. At the rate of 0.5%, depreciation and amortization expenses increased less than sales growth, resulting in EBIT growth of a very strong 13.2% year-on-year to a record nine-month EBIT of CHF 669 million, up from CHF 591.2 million last year, and representing the 23rd consecutive quarter of EBIT % net sales improvement. Net profit after tax, again, improved over proportionally, completing a strong cascade. Net profit increased by 14.9% to CHF 477.4 million, or 10.3% of net sales. Net interest costs increased further by about CHF 1 million, largely driven by the residual impact of a CHF 250 million bond repayment in March 2016.
Net other financial expenses also decreased significantly by about CHF 6 million, driven by lower negative valuation effects. Lastly, tax rate was virtually unchanged at 25.8%, versus 25.7% last year. With this, I conclude my remarks and hand back to Paul Schuler for the outlook.
Okay, thank you, Adrian. Sika's outlook 2017. The strong results support our full-year target. We have a full pipeline of big, newly won construction projects, many new products and initiatives, as well as several acquisition candidates throughout the world. We are very confident to increase sales by 6%-8%, to more than CHF 6 billion for the first time. Volatile and rising raw material prices present a challenge in the current year. Operating profit, EBIT, is expected to once again increase at a disproportional higher rate, reaching between CHF 880 million or CHF 900 million for full year 2017. Thanks to the commitment of our employees and the strength of Sika growth model, we can look forward with high confidence to the end of 2017. Now I hand over to Dominik Slappnig.
Thank you. I think now the room is open for questions, everybody who has questions can now come with their questions, please.
The first question is from [Martin at] Please go ahead.
Good afternoon, gentlemen. Thanks for taking my questions. Actually, I have three, I'll go one at a time. Looking at your growth trajectory in EMEA, it looks like growth dynamics in that region have slowed in Q3, at least versus H1. Could you elaborate a little bit on the reasons and maybe the drivers that you have seen for this slowing growth? Maybe also highlight some of your main thoughts on your growth outlook for the region in Q4. That's my first question.
The growth rate in EMEA. I had a little bit bad line. Adrian, did you have a better line? Did you understand the question?
I think it's better now.
It's better. Can everyone understand me? Okay. Yes, it slowed down a little bit, but it was also one sales day less, which usually makes 5%. We are confident for the future on the growth level of EMEA. We should stay on the level where we are. We have great projects. We have a lot of initiatives, confident to get the desired results of the end of the year.
Okay. Just to clarify, sorry, did I understand you correctly? You're expecting more or less unchanged growth going into Q4 on an organic basis, or do you see acceleration or deceleration?
I would expect same as we had today. Same growth rate.
Okay. I know it's early days, but just looking ahead a little bit beyond Q4, Germany building permits are down overall and U.K. Brexit overall sentiment continues to be negative. What are you anticipating over the next, say, two to three quarters in these two markets?
They will be quite tough markets out there already today. Germany is low growth, I agree. We still don't expect too much. However, we have good initiatives, so confident as for next year. U.K. for us is still going strong. Brexit is not really a big issue as we have our own manufacturing there. We have our place. U.K. is still going solid growth rate so far, rather stronger than slower for next year.
Okay. That's helpful. Thanks. My second question would be on sales growth in North America. To be fair, I was a little bit surprised because you had significantly less challenging comps in Q3. Did Sika see some impact from the hurricane season in Q3? Does that mean we're going to likely see growth acceleration in Q4?
We expect growth acceleration in Q4. It was also the same reason, one day less. We had the issue getting the raw material. We have no breakdown. However, the shipping transportation was over the long run a little more difficult, but very confident to go a double-digit growth rate until end of the year organically, and also for next year, confident to keep on this theme.
Okay, thanks. The growth margin contraction in Q3 accelerated somewhat versus Q2. I know Adrian was talking about the impacts there. It was rather quick, at least for me. Could you just elaborate a little bit and go into the numbers on how much of that 90 basis points contraction was due to raw materials and how much was due to the initially dilutive impact of acquisitions?
Yes, in Q3, raw material input cost has increased further. It's been quite volatile also with some force majeure situations. The acquisition dilution impact continues to be about 30 basis points of this. Of course, looking forward, it's a bit more difficult to say, but we don't see, let's say, a worsening trend.
Okay, very helpful. Thank you very much.
Okay, thank you, Martin.
Next question is from Thomas Salmann, Mirabaud. Please go ahead.
Yeah, good afternoon, everybody. My first question was exactly to the gross margin development that was answered. The second one is, I'm pretty impressed by your growth pace and with automotive OEMs, despite actually that we had double-digit decline in car production in the U.S. Here, my question, did you feel that at all? Did it have any impact? Pure car production was down, I think 30% in September, and total light vehicles , if I'm not mistaken, down 17%. Did you feel that and what was the trend basically within Q3 and maybe for the next quarter? Do you think you can shrug that off, this market weakness in the U.S. or what are your expectations here? Thank you.
Okay. Thank you, Thomas, first for the nice compliment. Yes, we are quite confident that we can continue this pace. We felt it a little bit. However, with the new models and with the new pipeline, we are confident to keep the double-digit growth rate out in U.S., and it depends always a bit on which model goes down and which model is not so much produced. We felt it a little bit, so we dropped probably 2% growth margin, but we're still double digits. Also for the next coming months, we are confident, and we will see how the American auto market will continue. We are confident with good models and with good products. Does that answer your question?
Yes. Thank you very much.
Okay.
Next question is from Phil Rosenberg, Bernstein. Please go ahead.
Hello, good afternoon. Just a couple of questions for me, please. The first one, you've come up with your, let's call it, new guidance on EBIT for the full year between CHF 880 million and CHF 900 million. If I do my calculations for Q4, this low end of guidance would result in a much lower growth around 20 basis points in my calculation for margin or even a fall in margin if you take the high end of sales. I'd just like to understand what scenario you are envisaging to reach, or what would happen to reach that sort of a lower end of guidance and a margin fall, because we've seen, I think, year-on-year, 23 consecutive quarters of margin improvement. It's a little bit of a concern. My second question, very quickly, is just, you mentioned volatile and rising raw material prices represent a challenge.
Can you quantify what that challenge was in 2017 or what has that taken off from your expected margin for the full year? Also perhaps what we can expect from raw material prices going into 2018. Thank you.
Okay, to the second question. Our major challenge was to get enough raw material in many countries, mainly in Europe as well as in the U.S., North America. On the percentage of the margin, as I said, going forward, we don't see a deteriorating trend in the material margin, but it has been quite volatile also from region to region with this force majeure, with these situations. It's difficult to predict it entirely, but we do anticipate that we're not seeing any worse trends than in the first nine months. We have, on balance, been quite successful balancing this off also if you see some of the comments of our competitors. I guess, with our pricing model, we are likely a bit behind, but we're confident that also we can improve the pricing to offset the higher costs.
We are good, and with the prediction of CHF 880 million to CHF 900 million, I think we're in a good way. We want to make sure we are in this range, and we will see the final count then when it's ready to count the money.
Okay. Thank you.
Thank you, Phil.
Next question is from Martin Hüsler, ZKB. Please go ahead.
Yes. Good afternoon. I have two questions as well. Maybe first, can you elaborate a bit on the cash flow development? I don't find this number as we were, I think, in the first half, a bit below last year's level. If you caught up there and maybe an outlook for the full year, what's your best estimate for the operating cash flow for this year? The other question is, looking at your personnel costs, I was just wondering a bit, in the third quarter, it was lower than in the first half or lower than 50% of the first half, and I was just wondering whether there is some seasonal impact in the third quarter, which I'm not aware of, or if this third quarter amount is a good run rate for the next couple of quarters.
Okay. Thank you. In terms of cash flow, yes, in the first half year, we have been a bit below. We caught up, and some of this, there have been some specific impacts. We're quite confident to deliver and continue to deliver a strong cash flow for the full year, as typically, the fourth quarter is by far the strongest quarter on the cash flow side. We are quite confident to deliver good cash flow. On the operating expenses or personnel expenses, yes, we have delivered really the full operating leverage, particularly in Q3. There is no specific impact, but also to predict the run rate, of course, we have a seasonality. Q2, Q3 are typically high sales quarters. It's very good to see that we can deliver this leverage, and we have many initiatives ongoing to continue to improve efficiency on all levels.
This was quite positive, and we're confident to continue on that.
Yes. Thank you. Maybe an add-on, if I may. You mentioned a good cash flow level. Can you be maybe a bit more precise if this means above last year's level?
We are certainly targeting not a lower level than last year.
Okay. Thank you.
Okay. Thank you.
Next question is from Bernd Pommer from Berenberg. Please go ahead.
Yes. Good afternoon, gentlemen. Quite good growth and obviously a very strong cost control. Congratulations. If we listen to the comments from many companies, it seems that inflation is slowly returning, and obviously we also saw quite some raw material cost increases. Does that mean that you will go for higher than usual price increases beginning of next year, or how should we think about your pricing going forward? Thank you.
Okay. Thanks for that question. If you compare with our competitors, you see that we can handle this price increase of raw material quite good. I think we have a strong base there. Our pricing model, we can increase prices, and we have to increase price again. It's also sometimes a leverage with the volume to get efficient in the factory. We expect quite a tense also next five, six months on the raw material. We are set to go for higher prices wherever we need and can put it through.
Okay, excellent. Thanks a lot.
Thank you.
The next question is from Andrew Stott from UBS. Please go ahead.
Yeah, good afternoon. Thanks for taking the question. Just really on Latin America, I see that there's a semi-implied slowdown in Q3, and the region, in general, obviously has been somewhat tougher than the rest of the group year-to-date. Can you just bring us up to speed on what your thoughts are maybe on a one to two-year view on the region, what project activity is right now, and how you fare indeed in the Q4 numbers as well?
We have a tough environment in Latin America, this is mainly in Brazil and also in Chile, Peru. Due to this corruption and due to these projects, there is missing the big project. They stopped a lot of big ones just to investigate all this corruption. It hurts the whole region, but also these three or four main countries. On the other side, we have a stable growth in Mexico, good growth in Colombia, and a very strong growth in Argentina. We don't expect a big change there. We will have to fight to have fair growth rates. We still expect another six months being tough in Latin America, then we go from there. We are very well set. We have a nice pricing model.
At least we could keep on the EBIT side, and on the profitability side, we are strong, we could leverage out. The future doesn't look bright for many countries in Latin America.
Okay, that's clear. Thank you very much.
Okay, thank you.
That was the last question.
Okay, thank you very much. It was a great pleasure to have you here, and I'm looking forward to seeing you soon. Thank you. This brings us to the end of our call. Our next results are due on January 9th in 2018. You will hear from us, and now we thank you for your interest in Sika. Goodbye to everybody.
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