Ladies and gentlemen, good afternoon. Welcome to the Sika Q3 Report 2017 Conference Call. I'm Sherry, the Chorus 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 Slatnik, Head Communications and IR of Sika. Please go ahead, sir.
Good afternoon, and welcome to the Sika 9 months results call. We published our records this morning at 5 o'clock. Our CEO, Bonjour and our CFO, Adrian Wichtman, 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 9 months.
Please, Paul. Good afternoon also from my side, and thank you for joining the call. I'm happy to inform you about our very motivating search for the closing. We had an excellent sales growth of 7.9 percent in local currency with a record sales of CHF 4,627,000,000. All our 4 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. Wallingbro, together with this proportion of low cost development, results in further improvements in margins. As a result, operating profit and net profit post new record values in the 1st 9 months of the year.
EBIT improved by 13.2 percent to EUR 669,000,000 and net profit rose strongly by 14.9 percent to CHF 477,000,000. We continue to invest in future growth in emerging markets by opening new 4 factories, 1 in Mexico, 1 in Kazakhstan, 1 in Tanzania and 1 in Russia, where we opened a new membrane line for the waterproofing system. Further, we founded 2 new national subsidiaries, 1 in Senegal and 1 in El Salvador. Sika is now present in 99 countries with own national subsidiaries. We are now ready to open the 100 in the next few weeks.
On the acquisition side, we are very pleased that with Air Max in U. S, Pitfall Tur in Austria, APC in Turkey and KVT up in Czech Republic, we're able to complete 4 outstanding deals and the integration is well underway. Furthermore, our acquisition pipeline is full, and we hope to close 1 or 2 additional acquisitions this year. I would like to hand over to our CFO, Adrian Wittner. He will guide you through the financial information.
Thank you, Paul, and good afternoon. Following our sales business summary and presentation of the highlights, I will give you now some further insights into the financial results of the 1st 9 months in 2017. Q3 saw a continuation of the dynamic sales growth of the first half year with 9 months sales twenty 17 growing at the upper range of our strategic sales targets by 7.9% in local currencies. Organic growth in the 1st 9 months was strong with 5.5%, while acquisitions contributed another 2.4%. A modestly negative foreign exchange situation with a negative impact of minus 1.1%, which reduced in Q3, led to a sales growth of 6.8% to CHF4.6 275,000,000,000 Again, all regions and mature as well as emerging markets contributed to our growth in the 1st 9 months.
In the region India, 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 UK, 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 Bitbaud Austria. Foreign exchange impact in EMEA in the 1st 9 months was a negative minus 2.6%, but Q3 saw a slightly positive impact.
The 3 new plants and production lines in Tanzania, Kazakhstan and Russia will support future growth in these countries. The highest growth again 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 5%, while acquisitions, primarily acquisition of Aramex, 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.
Investments in the region, including new plants in the south of Mexico as well as the new national subsidiaries in El Salvador. Growth in Asia Pacific increased by 4.8%. In China, the construction industry stabilized further, enabling Seeker to achieve high single digit growth rates, while in Southeast Asia, with the exception of Singapore and Indonesia, Seeker achieved high growth rates. In Singapore, investment in State Farm and Residential Construction Projects and in Indonesia, investments in infrastructure remained at the low level. The gross result as a percentage of net sales decreased 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 continue to account for almost half of the material contraction of 25 to 30 basis points. However, driven by strong volume growth, disciplined cost management and efficiency improvements, particularly in Q3, show you strong operating leverage with both personnel costs as well as other operating expenses growing significantly below sales growth at around 55% of that range. In consequence, EBITDA increased by 10.9 percent to EUR797,900,000 up from EUR 719,500,000 in the same period of last year. At the rate of 0.5%, depreciation and amortization expenses increased less than sales growth. Resulting EBIT growth was a very strong 13.2 percent year on year to a record 9 month EBIT of 669 €1,000,000 up from €591,200,000 last year, and representing the 23rd consecutive quarter of EBIT percent net sales improvement.
Net profit after tax, again, improved over proportionally, completing a strong cascade. Net profit increased by 14.9 percent to 477,400,000 or 10.3 percent of net sales. Net interest costs increased further by about €1,000,000 largely driven by the residual impact of a €250,000,000 repayment in March 2016. And net other financial expenses also decreased significantly by about 6,000,000, driven by lower negative valuation effects. Lastly, tax rate was virtually unchanged at 25.8% versus 25 point 7% last year.
With this, I conclude my remarks and hand back to Paul Schuler for the outlook.
Okay. Thank you, Adrian. I think as 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 percent to 8% to more than DKK6 1,000,000,000 for the first time.
Volatile and rising raw material prices presents a challenge in the current year. However, operating profit, EBIT, is expected once again increase at this proportional higher rate, reaching between EUR 880,000,000 or EUR 900,000,000 for full year 2017. Thanks to the commitment of our employees and the strength of CECO Grow model, we can look forward high confidence to the end of 2017. So now I hand over to Dominik Lobnik. Thank you.
And I think now the question the room is open for questions. So everybody who has questions can now come with their questions, please.
The first question is from Martin Piotiger, Kepler Cheuvreux. Please go ahead.
Yes, good afternoon, gentlemen. Thanks for taking my questions. Actually, I have 3, and 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, I.
E, the drivers that you have seen for this slowing growth? And maybe also highlight some of your main some of 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.
Obin, did you have a better line?
I think it's better now.
It's better. Can you can everyone understand me? Okay. So yes, it's slowed down a little bit, but it was also 1 sales day less, which usually makes 5 We are confident for the future on the goal level of EMEA. We should stay on the level where we are.
We have great projects. We have a lot of initiatives. So confident to get the desired results of the end of the year.
Okay. But just to clarify, sorry, did I understand you correctly? So 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. So same grow rate.
Okay. And just looking a little I know it's early days, but just looking ahead a little bit beyond Q4, Germany building permits are down overall and UK Brexit overall sentiment continues to be negative. What are you anticipating over the next, say, 2 to 3 quarters in these two markets?
There will be quite tough markets out there already today. Germany is low, I agree. And we still don't expect too much. However, we have good initiatives, so confident out for next year. UK for us is still going strong.
Brexit is not really a big issue as we have our own manufacturing there. We have our grades. So UK is still going solid grow rates. So far, not rather stronger than slower for next year.
Okay. That's helpful. And my second question would be on sales growth in North America. There, I was a little bit surprised because you had significantly less challenging comps in Q3. Did you did Sika see some impact from the hurricane season in Q3?
And does that mean we're going to likely see growth acceleration in Q4?
We expect growth acceleration in Q4. It was held for the same reason, one day, U. S. And we had the issue getting to a mature. 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 team.
Okay. And the gross margin contraction in Q3 accelerated somewhat versus Q2. Can you I know Adrian was talking about the impacts, but 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 bps 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. And the acquisition dilution impact continues to be about 30 basis points of this. And 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 Baumann,
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 the automotive OEMs despite actually that we had double digit decline in car production in the U. S. And here my question, did you feel that at all? I mean, did it have any impact?
I mean, pure car production was down, I think, 30% in September and total life cycle, if I'm not mistaken, down 17%. So did you feel that? And what was the trend shrug that off, this market weakness in the U. S? Or what are your expectations here?
Okay. Thank you, Thomas. First, for the nice complement. And yes, we are quite confident that we can continue this space. We found 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 the U. S. And it depends always a little bit on which model goes down and which model is not so much produced. So we found it a little big, so we dropped probably 2% gross margin, but we're still double digits. So also for the next coming months, we are confident, and we will see how the American market, the auto market will continue.
But we are confident with good models and with good products. Does that answer your question? Yes, thank you very much.
Next question is on 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 €880,000,000 €900,000,000 If I do my calculations for Q4, this low end of guidance would result in a much lower growth, around 20 bps in my calculation for margin or even a fall in margin if you take the sort of 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 lower end of guidance and a margin form because we've seen, I think, year on year 23 consecutive quarters of margin expansion improvement. So it's a little bit of a concern.
My second question very quickly is just you mentioned volatile and rising raw material prices represents 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? And then 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, it's yes, I mean, as I say, 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. And so it's difficult to predict it entirely, but we do anticipate that we're not seeing any worse trends than in the 1st 9 months. And we have, on balance, been quite successful balancing this off also if you see some of the comments of our competitors.
And I guess with our pricing model, we're likely behind, but we confident that also we can improve the pricing to offset the higher costs. So we are good. And with the prediction of EUR 8.80 million to EUR 900,000,000, 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 Hilsner, 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?
And then the other question is looking at your personnel costs. I was just wondering a bit in the Q3, 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 Q3, which I'm not aware of, or if this Q3 amount is a good run rate for the next couple of quarters. Okay. 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 4th quarter is by far the strongest quarter on the cash flow side. So we are quite confident to deliver good cash flows. And on the operating expenses or personnel expenses, yes, we have delivered really the full operating leverage in particularly in Q3. There is no specific impact, but also to predict the run rate, of course, and we have a seasonality in Q2, Q3 are typically high sales quarters.
But 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. So this was quite positive, and we're confident to continue on that. Thank you. Maybe, and, Ed, 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?
And we are certainly targeting not a lower level than last year.
Okay. Thank you.
Next question is from Bjorn Frommerlein from
obviously very strong control. Congratulations. If we listen to the comments from any companies, it seems that inflation is slowly returning. And obviously, you 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 increased price again.
Our results also sometimes leverage with the volume to get efficient in the factory. But we expect quite tense also next 5, 6 months on the raw material, where we are set to go for higher prices where we need and can put it through.
Okay. Excellent. Thanks, Paul. Thank you.
The next question is from Andrew Stott from UBS. Please go ahead.
Yes, good afternoon and thanks for taking the question. Just really on Latin America, I see that there's a certainly 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 sort of thoughts are on maybe on a 1 to 2 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, and this is mainly in Brazil, in Chile, Peru. And to this corruption and to these projects, they're missing the big project. They stopped a lot of big ones just to investigate all these corruption. So it did hurt the whole region, but obviously, 3 or 4 mainly countries. On the other side, we have a stable growth in Mexico, good growth in Colombia and a very strong growth in Argentina.
I don't or we don't expect a big change there. We will have to fight to have fair growth rates. I still we still expect another 6 months being tough in Latin America and then we go from there. But we are very well set. We have a nice pricing model, so at least we could keep on the EBIT side.
And on the profitable side, we are strong. So we could leverage out that future, doesn't look bright for many companies in Latin America.
Okay. That's clear. Thank you very much.
Okay. Thank you.
That was the last question.
Okay. Then thank you very much. It was a great pleasure to have you here, and I'm looking forward to see you soon. Thank you. This brings us to the end of our call.
Our next results are due at January 9, 2018. You will hear from us. And now we thank you for your interest in Sika. Goodbye to everybody.
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