Ladies and gentlemen, good afternoon. Welcome to the SECA Health UReport 2017 Conference Call. I'm Iruna, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. After the presentation, there will be a Q and A session.
The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Dominik Slutnich, Head Communications and IR of Sika. Please go ahead, sir.
Good afternoon, and welcome to the Sika first half results conference call. We published our figures at 5 o'clock this morning. Our new CEO, Paul Schuller and our CFO, Adrian Witzmer, will now provide further details on the results. Afterwards, they will be ready to take your questions. With this, I hand over to our CEO to start with the highlights of the first half year.
Paul, please?
Good afternoon, and thank you for joining the call. I'm happy to inform you about our very motivating half year closing. We had an excellent sales growth of 8.1% in local currency with a record sales of CHF 2,995,000. And yes, it was just short by CHF 5,000,000 to cross the CHF 3,000,000,000 line and probably would have pushed a little bit harder. All our for each were able to grow.
We posted double digit growth in Eastern Europe, Africa, U. S, Argentina, Greater China and Automotive and saw it grow in our core markets like Germany, France, Italy and Switzerland. We have clearly grown faster than the market in a number of countries. The pressure from higher input costs like raw materials were well managed through many pricing adjustments. Volume growth, together with this portion of low cost development, results in further improvement in margins.
As a result, operating profit and net profit posted new record values in the first half year. EBIT improved by plus 30.7 percent to EUR 402,000,000 and net profit went up by plus 16% to $285,000,000 In the 1st 6 months, we continued to invest in future growth in emerging markets by opening 3 new factories, 1 in Kazakhstan, 1 in Tanzania and 1 in Mexico. We opened a new membrane line in Russia for waterproofing systems, and we founded a new subsidiary in Senegal. Zika is now present in 98 countries with its own national subsidiaries. We are here now which new country will deserve to become number 100 this year.
On the acquisition side, we are very pleased that with Air Max and U. S. Spit out in the U. S. And spit out there in Austria, we could apply leading manufacturing of roofing and waterproofing systems.
Integration runs excellent and the synergies are even higher than expected. So overall, we had a great start. I would like to hand over to our CFO, Adrian Wichtman. He will guide you to the financial information. Please.
Thank you, Paul, and good afternoon. Following our CEO's business summary and presentation of the highlights, I will now give you further insights into the financials and the drivers of our record results of the first half year. The business showed an excellent growth trajectory, as we have heard, on top of a strong first half year twenty sixteen with sales growth of 8.1% in constant currencies, picking up momentum from a softer second half year twenty sixteen. Normalizing Q1 and Q2 growth for the number of working days, organic growth showed a very similar strong growth between the quarters, averaging 5.7% in the first half year. Acquisitions added another 2.4 percentage points to our growth.
A continued strong Swiss francs led to a negative foreign exchange effect of minus 1.4% in the 1st 6 months, equaling a minus of €39,000,000 and resulting in a growth of 6.7% in Swiss francs. Again, all regions contributed to our growth in the first half year. In the region EMEA, sales grew at a rate of 7% at constant currencies. The core markets, Germany, France, Switzerland, Italy as well as the UK achieved solid increases. Growth was particularly strong in Eastern Europe as well as on the African continent.
Negative currency effects were most pronounced in the EMEA region with a negative effect of minus 4.2%. The North American region recorded the strongest growth at 17.4% in local currencies, beating strong growth of 12.7% in the same period of last year. We have been able to leverage the robust activity in the construction sector with our targeted investment in recent years in sales force, supply chain close to the metropolitan areas as well as acquisitions. Foreign exchange effect in North America continued to be positive, resulting in a growth of 19% in Swiss francs. Sales in Latin America grew by 2.7% in local currency as compared to 5.9% in the previous year period.
While Mexico and Argentina developed strongly, Brazil continues to be affected by the difficult political and economic environment. In addition, construction activity in the natural resources space, countries in the region has been subdued. Translation effects for once have been positive at the plus 2.2% resulting in 4.9% growth in Swiss francs. Growth in Asia Pacific was a solid 4.1%. High growth was achieved in Southeast Asia with the exception of Indonesia and Singapore, where residential and infrastructure projects remained at the low level.
We also saw high growth in the Pacific Rim as well as in China, where the construction industry continues to stabilize. Business in Japan developed well, ahead of growth, similarly expected from projects for the 2020 Olympic Games.
Gross result
as a percentage of net sales decreased slightly by 50 basis points from 55.6% to 55.1%. 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 accounted for about half of the material margin contraction or about 25 basis points. Driven by the strong volume, disciplined cost management and efficiency improvements, we showed a strong operating leverage with both personnel costs as well as operating expenses growing significantly below sales growth at below 60% of sales growth. In consequence, EBITDA increased by 11% to CHF488,200,000. Dollars This is up from $439,700,000 in the same period of last year.
Depreciation and amortization expenses were flat compared to the previous year period, which resulted in an EBIT growth of 13.7% year on year to a record EBIT of more than CHF 400,000,000 for the first time in the first half year. EBIT is up by CHF 48,400,000 in absolute terms to €402,100,000 with the biggest increase coming from the region North America. Net profit after tax again improved over proportionally completing the strong cascade. Net profit increased by 16% to CHF 285,700,000 or 9.5 percent of sales. Net interest cost decreased further by $1,100,000 largely driven by the residual positive impact of a €250,000,000 bond repayment in March 2016.
Net other financial expenses also decreased significantly driven by lower negative valuation effects. Lastly, tax rate of 25 point 9% was basically unchanged or flat versus the previous period at 26.0%. Cash generation with an operating free cash flow of CHF 63,000,000 in the first half of twenty seventeen was very solid, but below previous year. However, the reduction is largely related to timing with a larger tax prepayment happening in Q2. This payment last year was in Q3 as well as a stronger seasonal net working capital buildup due to the strong business growth and higher inventory value related to the higher cost of raw materials as well as time.
Overall, capital efficiency improved further and together with a strong profitability development resulted in a significantly improved return on capital of 28.0 percent. This compares to 25.5 percent in the previous year. With this, I conclude my remarks and hand back to Paul Schuller for the outlook.
Okay. Thank you, Ewen. Zika's outlook 2017. The strong start to the year supports full year targets. We have an outstanding pipeline of big new on construction projects, many new products and initiatives as well as several acquisition candidates throughout the world.
We are well on track to increase sales by 6% to 8% to more than SEK 6,000,000,000 for the first time. Wall tide and rising commodity prices presents a challenge in the next 5 months. However, with efficient improvement and price adoption, we expect EBIT and net profit to further increase in line with our guidance. Thanks to the commitment of our employees and the strength of Seaco's growth model, we can look forward with high confidence to the second half of twenty seventeen.
Okay. This takes us now to the Q and A session.
Thank you very much, Paul.
Thank you very much, Adrian, for these insights.
We'll now begin the question and answer session. The first question is from Martin Fluttinger from Kepler Cheuvreux. Please go ahead.
Yes, good afternoon gentlemen. Martin Flueckinger from Kepler Cheuvreux. Three questions please. Firstly, this morning, I think your main competitor in the U. S.
Recorded lower volumes in North America. Can you confirm that Zika gained market share in the U. S? And why you think you gained share? And in this respect, also, do you increase or did Zika increase selling prices in North America?
And if yes, could you give us an indication by how much? I'll go one step at a time.
It's Paul. Yes, I can confirm that we have a strong market share in the U. S. We invested in the last years in all the megacities concept. We are very active on all the different markets and invest in stock.
So from that side, we are very well prepared, and we are confident we go much faster than the market. Regarding the prices, yes, we could manage price increases and we could manage efficiency improvements through more volume. How much? I don't want to say. I understand probably we as a one to follow, and I don't think that's a great idea.
But overall, we can confirm we grow in North America by double digit, and we improved our EBIT.
Okay. And then my second question, coming back to your EBIT margin was up 80 bps in H1. Can you elaborate a little bit how much you saw raw material prices being up on average in H1? And you were talking about efficiency gains earlier on. Can you quantify how much efficiency gains contributed to the margin in H1?
This is Adrian, Martin. I mean the current situation is actually sorry, the material price situation is actually quite volatile. So it really depends from raw material to raw material. Also foreign exchange has an impact. There has been quite a push.
We had many, many initiatives also on the procurement side to push this back. So there is this is quite a constant work every day and together with price increases. I think we have managed quite well across the globe. In terms of operating leverage and efficiency improvements, our target is to increase cost below sales with a targeted about twothree of sales growth. We have managed quite well.
Of course, also here, this is not always that simple depending on the market and the growth. But the cost growth was actually below 60%, so ahead of target adding more than 100 basis points to the margin.
Okay, very good. Thanks. And my last question on Latin America. Latin America, according to my calculation, so negative growth of around minus 1%. Can you just quickly in Q2 that is, can you just confirm that?
And that did I understand correctly that Brazil was the only key driver of this negative development in Latin America in Q2? And speaking about Brazil, could you basically talk about your outlook for the country and other key markets like Argentina, Mexico and so on for H2? Thank you very much.
On Latin America, yes, I mean, the volume growth is quite subdued in Latin America overall. I was referring to Brazil being very difficult. This is probably the most difficult market, but there is a couple of others, particularly ones sort of natural resource and related economies where growth is clearly lower. And probably looking back to the beginning of the year, this is probably the region where some of the expectations in terms of market growth have not materialized. So the situation in Latin America is relatively difficult, but we are managing quite well with price increases, with efficiency improvements and are still able to improve profitability.
Martin, looking at the outlook for Latin America, we feel we are very strong in Mexico, in Argentina with great growth rate. Brazil will remain very difficult over the next 12 months, in our opinion. We will see how we can manage it. It's a difficult task, and we will have to work hard to achieve the results. The rest of America will stay on the same level, and we expect the growth rate also at least between 3% to 6% depending on the market.
Okay. So just to confirm, that's 3% to 6% organic, yes? Yes. Thank you so much.
The next question is from Martin Husler from Tudor Cantonalbank. Please go ahead, sir.
Yes, good afternoon. I have also several questions, maybe 1 by 1. The first one, coming back to the gross margin question Martin was asking before. Maybe you can give us an indication what's your expectation for the second half of the year. Do you expect a similar pressure on the gross profit margin?
Or do you think that comparables will be easier, and so maybe this gap will close a bit? That's the first question.
Well, we feel the headwind of the raw material will remain. We will have to push our prices. But then on the other side, we still have the efficiency improvement. So it will remain the same pressure in the same magnitude. So our guidance, we will stay there
between our guidance.
Okay. And then the second question, I'm looking at the regional EBIT margins. And it strikes me that in the regions where you had the biggest growth for organic growth, such as Europe and North America, the increase in the EBIT margin was lower than in the emerging markets such as Latin America, Asia Pacific, where you had a lower volume growth? And maybe you can shed some light why you had such nice profit increases or margin increases in the emerging markets, even though volume wise, it looked a bit higher than the mature countries?
Yes, I can do that. I mean, particularly in North America, as you said, very strong growth. But we also have quite
a strong
acquisition impact. And typically, in the very beginning, acquisitions typically have a lower margin than we have. So this is really the dilution effect coming from the acquisitions. Although Paul mentioned it, integration is well on track, and I think synergies are even higher than originally thought. We're very pleased with it, but this is sort of limiting the sort of percentage margin increase.
Initially, of course, in absolute term, North America has contributed the most to the EBIT. In the EMEA region, it's more related to actually foreign exchange rates, where there was by far the biggest impact, actually a negative impact coming from the euro and the pound and some other currencies. And this is essentially one of the reasons that has limited, although also here we have increased percentage wise and of course in absolute terms the EBIT contribution.
Okay. Thank you. That helps. And maybe just one more, if I may add. While you were mentioning the acquisitions, if I look at your on Page 13, you show the acquisition of Armex.
And according to my calculation, this company adds a net profit margin of about 8% to CECA. And I was just wondering whether this high contribution or profit contribution of about $2,300,000 was before or after amortization, which you clearly should have because you show intangible assets of about $45,000,000
I think the 8% you have calculated refers to the months where we have not yet owned the company. We have started to consolidate it at the end of January. And of course, this does exclude any PPA effects and this is exactly one of the reasons why margins typically initially are lower than the existing business.
But the profit contribution that you show since consolidation, the €2,300,000, is this before or after the consolidation? Yes. Yes. Okay. Thanks a lot.
The next question comes from Thomas Baumann from Mirabaud.
My first question refers to North America. And we thought when we look back to last year, we had a significant slowdown from this 1st semester to the second for the reasons you mentioned at the time. Now being at the end of July and you participating in a lot of projects, can you a little bit give us some flavor what the project pipeline looks like and whether we should probably should not, but just to be sure what the momentum from H1 into H1 into H2 looks like? That would be my first question. The second question is sales to the automotive industry.
You mentioned in the report from there was growing by 12% or almost 12%, which is a surprisingly strong number given the softening of the car market. What do you expect here? Or how do the call ups look like into the second half, especially sales to North America, which in the U. S. Where we have to face negative vehicle production growth?
Thank you.
Thomas, thanks for the question. We are pretty confident that we will have a great second year in North America. Our pipeline is excellent in new loan projects, many projects. And also, as I said before, we are in a good way in Home Depot with other customers' distribution. So we are confident we grow by double digit growth.
Even we delivered headwind, but we are very confident and strong momentum in the U. S. So now confident that we'll bring the double digit. We refer the industry. We also have a lot of new projects, a lot of new additional sales.
So also there, we will have we will go double digit. Referring to the automotive market in the U. S, we supply all the companies over there. We have added a lot of new parts in several new cars, and we won 1 or 2 or 3 new models in new car systems. And also there, even the market slows down, we will in automotive, we mine and grow.
And overall, industry will grow also confidently between our 6 percent to 12%.
6% to 8%, you mean,
or 6%
to 12%.
6% to 8% is a target and the industry probably overachieves the target. So my guess would be 10.
Okay.
Thank you very much.
All my hope. Let's put it this way. Okay.
Thanks a lot.
The next question is from Patrick Rafaisz from UBS. Please go ahead, sir.
Thank you. Also three questions from my side. First, on cash flow, you explained very well what happened with the operating free cash flow in H1 and with the cash tax and the net working capital. How much do you think of that loss versus prior year can you recover as you're setting down inventories or as this effect phase out? And as opposed to cash tax, it was just a timing issue, so that won't matter.
But do you think your cash conversion in 20 17 can be similar as in 2016? Or will it be lower because some of the net working capital increases?
No, I mean, I would expect this to be quite similar in terms of the cash conversion rate as in the previous year. As I mentioned, most of it is really timing and part of it is related to quite the strong growth momentum, which we expect to continue. But of course, we're also working hard here to reverse one or the other effect here. So I'm quite positive for operating free cash flow in the second half here.
Okay. Very clear. Thank you. And then a follow-up on the gross margin and raw materials. So the squeeze was 50 percent raw materials and 50% dilution from acquisitions.
During this second half, do you think you can recover any bit of that within the 5th of these 50 bps, I. E. The dilution from acquisitions become smaller or maybe price increases help you to lower the squeeze from raw mats?
I mean on the acquisition side, think this will be very similar. I mean, this is in the 1st year, we will see a similar effect also reaching into the second half year or to the end of the year. And of course, on the raw material and pricing side, it's still quite a volatile situation depending also on the region. So we're targeting, of course, to maintain this, but it's difficult to predict this exactly. But as Paul said, the target is really to maintain that.
Okay. Good. And the last question, can you talk a little bit about the EBIT loss in other segments, which is getting smaller and smaller? At this rate, when would you expect to be breakeven, even on that side?
Don't have any extrapolated. I mean, if you look at, let's say, the reduction of around €12,000,000 most of it has come through the Automotive segment, which is in there performing strong growth and profit improvement, but there's also some cost or lower cost in the central area. But the lion's share is coming from the Automotive business.
But if that continues, then you should be able to narrow that loss every year, right?
If this continues, then the EBIT will increase in the automotive area, which, of course, will mitigate any cost effects there. But as I said, don't extrapolate it. This is not necessarily a linear equation. But yes, clearly, there is a segment in there which is performing quite well.
Okay. Thank you.
The next question is from Ben Pomrehn from Vontobel.
Again, on the U. S. Construction market, we are now waiting and waiting for an infrastructure package in the U. S. What are your assumptions for your growth if we don't in 2018 and beyond if we don't see a new infrastructure program?
And would you be prepared
if we actually see a new infrastructure program in
the U. S? Would you be increased demand?
Thank you, Bernd. We're also waiting and waiting
and hoping that they will start. The good
news is we are really able to handle it. We invest in a lot of new capacity close to the mega cities, close to the infrastructure project. So yes, we can handle it. Our sales force is ready, factory is ready. I can always pre tell to the news what they do in U.
S. I think they need infrastructure project. If they're all around, yes, they need it. And if they release the money, we are ready to participate.
Okay.
Okay. And second question, if I may, you already mentioned your different procurement initiatives, but I understand that you are still predominantly buying, buying in Europe. Obviously, we are now seeing substantial capacity additions for some of your raw materials, especially in the Middle East. Could you be a little bit more specific regarding your current opportunities to identify and approve new suppliers, especially in the whole polyurethane market? Thank you.
Yes. I guess we one of our strengths is we really have everywhere purchasing department in all areas in all the bigger countries. We have excellent organization. They share information. So we are able to move products regarding the prices.
So for example, if the price really goes up in Europe, we go and purchase either in China or in U. S, we move products around. We have a supply chain. We know exactly how far we can go to make
the best price for us.
We see the development in the Near East. I think there is some interesting new factories coming up. Yes, we are on top. And I guess, I think you can be proud on the purchasing department to handle these difficult tasks so good. But therefore, also, we see it in the margin that we can quantify else on that level.
So confident that we have enough material and confident we will get probably one of the best prices in the industry.
The next question is from Phil Roseberg from Bernstein. Please go ahead.
Good afternoon, gentlemen. I just had one for CapEx acquisition and dividends. And I just wanted to get your views. We never actually got a very clear answer to that question from your predecessor. But what is going to happen to that free cash flow?
What's the intention for it? And does it mean any change in the pace of acquisitions or of development in general? Or is it an increase in the pace of returns of cash to shareholders?
Of course, we would also support the shareholders. However, we are very keen on acquisitions in years. We really feel we the construction market is now consolidating, and we want to be an important player on it. And therefore, we're pushing acquisitions. We like acquisitions on €100,000,000 to €500,000,000 That's the favorite one.
Not so easy to get that we're working on whatever we can. And then on the bolt on, we always like to see the efficiencies and see their best. So one of the major even increasing speed, we want to have an acquisition. So yes, the cash flow will remain invested in acquisitions.
Just a follow-up. You mentioned that the EUR 100,000,000 to EUR 500,000,000 are your favorite ones. Why do you say that exactly because they are the most attractive, because they are different products? Why do you say that they're your favorite?
We have a great history on integrating big to small to bigger companies between 105 100. We can integrate it very simple and see the synergy potential the best. And I think it's the fastest for us in the right size from the culture side, but also to acquire synergies. If you go to the real big ones like the EUR 1,000,000,000 EUR 2,000,000,000 that would really cover our organization. Not sure we would focus so much on the market as we do today on the customer side.
So that's the favorite one. But never say never, if the right candidate comes, we are ready and we would have the cash.
Very clear. Thank you very much.
Thank you,
The next question is a follow-up question for Martin Flueckinger from Kepler Cheuvreux. Please go ahead, sir.
Yes, thanks. My question has already been answered in the meantime. Thanks.
The next question is from Thorsten Wuest from BZ Bank. Please go ahead, sir.
Yes. Hello. I've got just one question basically on Latin America. As Martin said before, Latin America was minus 1% organically in Q2, whereas you flagged that Brazil is being difficult, but no other country now. Brazil accounts for about 5% of sales.
So I
wonder how badly Brazil is doing in order to bring the LatAm group sale organically down in Q2? Or is there other countries that were negative?
Yes. Thorsten, this is Adrian. As I mentioned, yes, of course, Brazil is the one which is most in the limelight and actually the share is in Latin America is actually even below 25% of sales. But as I mentioned, there is a couple of others more related where the economy is more related to natural resources where growth is quite slow or to even slightly negative.
So there are other countries that are negative in Q2 organically speaking?
Yes.
Yes. And just another one coming up to my head, which is on the raw mats. I understand you don't give a guidance, so to speak, in H2.
But can
you give an indication on the negative raw materials trend in the course of H1, I. E? Did raw mats commodity prices, the impact worsen or ease from Q1 into Q2?
I mean overall, as I said, it's quite a volatile situation really depending on the region, depending on the price. Also, we have Europe had really situations where it was even difficult to get raw materials. So there's not a clear pattern of development. And I would say the impact is probably the biggest around this time now.
Thanks.
The next question is a follow-up question from Martin Flueckinger from Kepler Cheuvreux. Please go ahead, sir.
Yes. Thanks for taking my follow-up. I was just thinking of another one. Coming back to your and this is a question for Paul, by the way. Coming back to your explanations regarding the gross margin expectation.
If I remember correctly, at the beginning of this you were hoping for or targeting a stable gross margin. Now the way I understood your answer beforehand, it wasn't very clear whether you would stick to that expectation or whether you had actually lowered it to the current level of gross margin at H1?
Current level. I would say it's current level.
Okay. Thanks.
There are no more questions at this time.
So if there are no more questions, thank you very much for your interest in Zika. This brings us to the end of our call. Goodbye and have a nice and excellent summer from our side.
Okay. Thank you very much. Thank you.
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