Ladies and gentlemen, good morning or good afternoon. Welcome to the Sika Results for the First Nine Months 2015 conference call. I'm Moira, 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 of Corporate Communications and IR of Sika. Please go ahead, sir.
Good afternoon and welcome to the Sika Nine Months Results Conference Call 2015. We published our figures this morning at 5:00 CET. Our CEO, Jan Jenisch, and our CFO, Adrian Widmer, will give you more details on the nine months results now. They will be ready to take your question. I hand over to our CEO, Jan Jenisch.
Thank you, Dominik, good afternoon to everyone. Thanks for joining. I will start right away. I think our numbers are quite satisfying in the Q3. You have seen that from the growth momentum, we were able to keep the momentum with a 5.3% growth in local currencies also for Q3. I'm quite pleased with this. As you know, we have quite some difficult markets, especially in China and Brazil and Russia at this point in time. I'm very happy that we could tackle the problems in these markets on one hand, and then grow in the other markets at the same time. If we accept China, where we have a double-digit negative sales year to date, if we exclude China, we have almost a 7% growth rate for the first nine months.
I'm quite pleased that we have extraordinary growth in many of our core markets like Latin America, Africa, Middle East, Eastern Europe, even including Russia as double digit, Southeast Asia, and the Pacific. Furthermore, we have a good situation in the U.S. where we have grown a 9.5% in the first nine months. Also here, very satisfying results. The good numbers I give to our CFO to talk about the profit and loss statement here. I'm of course, very pleased here with our further improvements in operating profit and also net profit. I think it's really great to see how our strategy delivers also margin improvement period on period.
We are now the fourth year already in a significant margin improvement. I'm very happy we can also show this in the maybe tougher Q3 compared to the first half of the year. Besides all this, I think, solid and positive set of numbers, I'm of course, very pleased that we have invested into the future with a very high speed. You have seen we opened now eight new factories in the United Arab Emirates, Sri Lanka, La Réunion, in Paraguay, our fourth factory in Russia, our second in Argentina, and then Nigeria and Ivory Coast. We will most likely open one more factory this year, which will be in the U.S., in Philadelphia. Also, there are still countries where we are not present. We have three new national subsidiaries in Myanmar, Tanzania, and Ethiopia opened, which brings our country list to 93 countries.
On the acquisition hold on, as you know from us, we were quite active with five acquisitions. Also here we have, I think, an excellent activity level here, which is very promising for our future results. With this, I would like to turn over to Adrian, who will give us some more details on the profit and loss.
Thank you, Jan. Good afternoon or good morning. 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 of this year. In spite of a very strong prior year period with a sales growth of 15.8%, we again achieved significant volume growth with sales up 5.5% in constant currencies, which was broadly in line, as we have heard, with the first half year of 2015. Emerging market growth continued to be healthy at a growth rate of 8.1% year-on-year. This including a negative China. Organic growth of 3.5% was complemented by acquisition growth of 2%, primarily coming from the five transactions we have consummated in the first six months of 2015. Again, all regions contributed to our growth in the first nine months.
In the region EMEA, sales grew at a rate of 4.4% at constant currencies, with accelerated growth in Q2 and Q3. On top of an organic growth of 1.6%, the acquisition of Axson, Duro-Moza, and Addiment Italia in Italy contributed another 2.8 percentage points. In North America, the healthy U.S. construction sector and the range of new products led to a strong growth of 7.7% in the region, offsetting a soft Canadian market. Despite the difficult market environment in Brazil as well as volatile currencies, gaining market share led to a 10.9% increase in sales in Latin America. Investment in new factories in Paraguay and Argentina, as well as the launch of new products, are paving the way for future growth. Growth in Asia Pacific remains positive at 1.3%. This in spite of a sharp business decline in China and driven by double-digit growth in Southeast Asia and the Pacific area.
The current year saw the acquisition of CTA, a leading tile adhesive and mortar producer in Australia, as well as supply chain and business expansion in Sri Lanka and Myanmar, as mentioned. Due to the strong Swiss franc and resulting negative foreign exchange translation effects of -7.4%, growth in CHF was a -1.9%. Negative translation effects were biggest in Latin America, close to -14%, and followed by EMEA with -10.8%, affected by a weak euro, while the impact in Asia Pacific was more modest at -3.5%. North America, on the contrary, exhibited a positive translation effect of +4.9%. Moving to the gross result. The gross result continued to develop very positively during the period on the review, with material margins expanding a full 100 basis points. Lower raw material cost and disciplined pricing led to this margin expansion, offsetting negative effects from currency movements in some markets.
Non-material cost growth was slightly below sales growth. A disciplined cost management and volume leverage countered the effects from a strong Swiss franc. Personnel costs increased somewhat disproportionately due to a change in currency rates, primarily reflecting higher personnel cost in Switzerland. As far as other operating expenses are concerned, the expense ratio developed favorably on the back of efficiency increases, a reduction in transportation and logistics costs, as well as an overall disciplined cost management. As a consequence, EBITDA increased by 5.7% to CHF 612.8 million. Depreciation and amortization expenses increased only marginally year-on-year, and resulting EBIT growth was a strong 7.2% compared to the same period last year. Net profit after tax again improved over proportionally by 9% to CHF 338.2 million on the back of lower interest costs and lower tax expenses. Net interest costs decreased by about CHF 6 million compared to the same period last year.
This is due to a CHF 300 million bond repayment at the end of June 2014. Other financial expenses, on the other hand, increased by about CHF 12 million compared to last year due to valuation impacts and hedging costs in relation to heavily depreciating and fluctuating currencies such as the Brazilian reais, the ruble, and others. A tax rate of 25.8% largely reflects the lower base due to the gradual introduction of an industrial franchise system last year, with the main impact in Q4 2014. With this, I conclude my remarks and hand over to Jan for the outlook.
Good. Thank you. You have seen we have one more quarter to go for the yearly results. As you can see, we were a little bit cautious on the outlook here with the sales. Also we are a bit cautious with the margins as the Q4 last year, we had a very good run in the last quarter. We were a little bit careful here. We are at the moment a 5.5% sales growth. Of course, we tried to do that in the last quarter, but we are not sure if we can make it. Also for the margin, I was very happy that we could have the 10 full basis points in Q3, same as for the first half year. We are also not sure if we can keep that in the last quarter because, again, we have a very high comparison base.
Besides that, again, our markets are running well except for the markets where we have downturns, and we expect a good closing of the year. Okay. We are now ready to take your question, please.
The first question is from Mr. Erik Karsten from Berenberg. Please go ahead.
Hello. Thanks a lot for taking my questions. I wanted to ask about your pricing a little bit. You have a very strong price power historically. Can you help us understand how has pricing changed this year, and what do you expect in terms of pricing for next year as it looks right now?
Oh, yeah. That's a good question, and it's not an easy question to answer because while everyone expects we increase the price across countries, it's actually very individually how we have to do that. While we have a situation in the mature markets where we get a tailwind from the raw materials, and then, of course, maybe to keep the pricing is already a very good achievement. We have other markets, especially in the emerging countries where we had these huge devaluations in the currencies. You can imagine when you are in, let's say you are in Colombia and the currency dropped something like 30% to the US dollar, but your raw materials or your finished products you sell to the customer, you pay in US dollars, and then you invoice in pesos.
Here we talk about price increases of 10%-15%, while again, in some mature markets, we are happy to keep the pricing. Overall, we had a positive price increase. Let's say it was around 0.3% for the first nine months. Just to give you a little bit background, it varies a lot from country to country.
Very good. Can I just follow up? If we look at 2016 as it looks now, would you expect a similar picture then? I'm thinking, as you mentioned, raw materials have come down. That probably will give you a tailwind next year again. Do you think you can maintain neutral to slightly positive prices overall for the group next year?
I think when you look at our margin performance in the last four years, we really could improve basically almost quarter by quarter, this is also our target for next year. We believe we can have another overproportional margin improvement.
Very good. If I could ask one more question, how is your new product pipeline looking in terms of innovative products coming out for the next year or two?
Always. We made the changes in marketing and in R&D in the last three years, and we have now a fantastic focus on our seven target markets. All these markets have a pipeline of new products. It is our target. Each market of us is having an ongoing flow of new products. Which is very important to come back to your margin question. You need new products to continue with high margins or improve the margins.
Thank you very much.
The next question is from Mr. Martin Flueckiger from Kepler Cheuvreux. Please go ahead.
Good afternoon, gentlemen. Martin Flueckiger from Kepler Cheuvreux. Three questions, please. First one is on your market outlook for China and Brazil. In the fourth quarter in 2016, I was wondering how you see business conditions there over the next 3-15 months, and I was wondering what kind of performance you see for Sika in these markets, and possibly you could also make some remarks on the outlook for the U.S. infrastructure market. That would be my first question. Sorry, do you want to take one by one or so?
Yeah, I take one by one.
Sure.
Otherwise, I'm getting older and older, and I will maybe forget the first question. Yeah, that's a great question. Everyone talks about China. I always say China is very different from industry to industry, from market segment to market segment. I answer the Chinese market from our perspective, where we are selling to the infrastructure projects and for the industrial construction market, and then only a smaller portion for residential. We see this year a huge decline in the market in construction, something 20%-30%. In our concrete business, we are maybe the front runner in construction because the concrete is poured at the beginning of a project. We have a huge decline in China. We expect to see the bottom, not this year. We believe the bottom we see second half of next year in China.
For China, as always, I'm positive for China in the long run. We are now getting a lot of repair jobs in China, refurbishment jobs. The market will go from new build to repair and refurbishment, and we have adapted our organization to that. We're not pessimistic in China. We take a hit in the sales this year. We expect for us already maybe stable sales next year and the bottom to be reached somewhere maybe in the first half of the year. China will, on a lower level, grow again in construction. For Brazil, we see it similar with the only exception that the decline at this point is smaller. I believe the bottom will be reached later.
Okay, thanks. Maybe for the U.S. infrastructure market, if I remember correctly, you had some question marks, say, three months ago or so.
I'm excited about the U.S. already since last year. I think I shared with all of you already last year that we are very bullish on the U.S. market. We see close to double-digit growth for us in the U.S. already since May of last year, and it continued until today. Especially the big cities are growing with all these high-rise buildings for residential but also for office. Plus, we see a lot of work done for new factories, but also for refurbishment of older factories. Infrastructure has still not come up. This would be the icing on the cake because we believe the residential and industrial market will continue to be good. If we see some improvement in infrastructure, that will be great.
Okay, thanks. Maybe my second question, coming to your mortars business, I was wondering whether you could talk a little bit about the dynamics in demand for mortars in Q3 versus Q2. What kind of outlook you're expecting there for Q4 in 2016? Possibly, if you can talk about that, are we going to see acquisitions? Are we going to see new factories being built?
Oh, yeah. The mortars also in Q3 was our fastest-growing technology with almost 12% growth. Our expansion in this field is very satisfying. You will also see that our acquisitions in new factories are very much around mortars. This year in the acquisitions, we bought in Mozambique a mortar factory. In Australia, we bought Construction Technologies Australia, which is also mortars with two factories. Then in the U.S., we bought BMI, a mortar factory in the San Francisco area. We had until now three out of the five acquisitions were in mortars. Also our eight new factories were mostly connected with a mortar production line.
Okay, is that going to continue in 2016?
Oh, yeah. Again, our pipeline is quite well-filled. We have many investment projects coming up the next 12 to 18 months for new factories. I'm almost saying, the speed this year, if we open the plant in Philadelphia, we will have nine factories this year, and that's a lot. We have opened well over 30 factories in four years, that's a high speed, but looks like we have six to eight new factories also for 2016.
Okay, great. Thanks. Maybe my last question, coming to raw material prices, I was wondering whether you could talk about the overall raw material portfolio in terms of pricing in Q3 versus Q2, and also hear what you expect going forward to Q4, particularly.
I think was it beginning of September when we saw this, when the decline in the crude oil started, also because of the sluggish demand in China for chemical raw materials, we see quite some favorable raw material pricing now going forward. At the moment, we expect to have a bit of a tailwind going into the first half of next year.
Okay, perfect. Thank you so much.
The next question is from Christian Arnold from Bank Vontobel. Please go ahead.
Yes, good afternoon. I have a question. Actually, first, a follow-up question on China and your assessment on the market. Did I understand it right, that you expect the infrastructure new construction market to bottom out in the second half of next year, but on the back of more refurbishment work you expect still Sika to have stable sales in 2016?
Again, let's face it, we have a double-digit sales decline this year in China. However, our team is fantastic in China. They saw this coming already in Q4 last year, and they made the adaptation, especially to get the risk profile down, so we're talking credit policy, and also not to make stupid decisions for low pricing or something. They did a fantastic job. However, we believe the decline will continue the next three, four months. Again, we believe the bottom hopefully will be in the second half. With our other projects, I think currently in my budget, we believe we're going to have a stable sales for next year in China.
Okay. Could you remind me how much of your sales in China is actually done within industrial applications?
In industrial, I'm open to give you. Our overall sales in China is around 4% of our group sales.
Yeah. Okay.
We have quite a good spread around our seven target markets.
Okay. It's a fair assumption that the big bulk is construction-related.
Yeah, we have quite a strong business with automotive.
Okay.
They're building a lot of trucks, buses, and automobiles in China, and we have been very successful. Actually, if I am giving you the number right now, our industrial sales in China is higher than group average.
Okay. Very good. On Latin America, you again achieved impressive growth rate in local currencies in Latin America. During your H1 conference call, you were talking about Brazil as a difficult market that we know. At that time, you were extremely pleased about Mexico. You were talking about a very good construction market in Mexico. Now we hear out of the cement industry that Mexico is somewhat slowing down, and I wonder if you could share your observation for this market and the outlook for this market.
Yeah, that's a pleasure because Mexico also in Q3 goes full steam ahead, and we have also invested a lot. We took over a bitumen membrane factory from Texsa. We have invested in new capacities for liquid waterproofing. We made some investments in Mexico, and our sales is up close to 20% and also in Q3. We are very pleased with Mexico. We see a lot of activity also with all these factories serving the U.S. market out of Mexico, we are very pleased.
Okay. Maybe a last question. You have not talked about product mix. Is it a fair assumption that partly at least, of your margin improvement, you also benefited from a product mix shift? If I think about the mortar business, highly profitable, growing, clearly double-digit. If I think about the Chinese concrete business being clearly negative. Is it a fair assumption that you also benefited from this product mix shift, and could you quantify that?
No, we don't see that. You are right when you assume that maybe the concrete admixture market in China is a bit lower margin than our other business. That's correct. We have also other effects which goes in the contrary direction. We don't really see much from the product mix. We also measure the countries overall, and we see a solid margin development there across board. Again, based on our pricing, we monitor the pricing monthly. All our managers are measured on the gross margin, and also we have a huge focus on new product introduction for everyone.
Okay. Thank you very much for answering my question.
The next question is from Mr. Patrick Appenzeller from Helvea. Please go ahead.
Yes. Good afternoon. I have a question on the margin. You mentioned that in the fourth quarter, you expect a slowdown here of the margin expansion. I would interpret it that you do not expect any more margin expansion on year basis, so probably flat in fourth quarter versus this year as last year. Is that a fair assumption? On the outlook on gross margin, I think you indicated already that you might expect some further improvement given the tailwind from raw material. My last question is, you have now talked about all these new factories you have put in place in the recent few months, and I would just wonder how much this impact is. Is there any kind of quantification you can do? Is that more or less than 1% of annual sales, for example, for next year, which this can all contribute to sales?
Is that less than 1%? Just to give us a feeling how much organic growth that contributes.
All right. Maybe on the Q4, I'm just a bit cautious here. I think we're going to see a solid Q4, don't be wrong. Last year, the Q4 was very pleasing. We had the monster Q4 2013, and then we were very pleased to beat it in volumes and in margins. That's why we're just a bit cautious. Let's say we get a huge winter in November in Europe, we don't want to grow any expectations. I think you're going to see a solid quarter, and you can expect our closing to be pleasing and the margin will be up, of course. I'm just not sure if I can deliver the same margin improvement we have seen in the first nine months. This will be challenging for us.
All right.
The second question?
Gross margin improvement.
Huh?
Gross margin and raw material.
For next year, was that? Of course. The margin for next year. Here, again, I like our system that we really improve the margin quarter by quarter now in the fourth year. This is also our target for next year, and I'm confident we will give you the guidance on the 12th of January what we expect for the full year. I think we will stay with the strategy. We will try to grow as we grow, and then we will go for an overproportional EBIT improvement, as you have seen from us. From the new factories, they are a big part of the strategy, of course. We have not really revealed the numbers now, but you can imagine having nine new factories this year, they should contribute to the organic growth quite a bit for next year.
We don't feel comfortable to really give you numbers by new factories. It's, of course, our growth plan to do that.
Okay. Fair enough. Thank you.
The next question is from Mr. Tobias Loskamp from HSBC. Please go ahead.
Oh, yes. Good afternoon. Just two questions, please. First one is basically a follow-up question on your supply chain. I was wondering, in the first half of the year, you have made comments that there have been a lot of, let's say, unnatural high number of force majeure with regards to your supply chain. I just wondered if you can give us an update whether the situation has been easing. The second question that I have is on your automotive business. What's your current view on how Sika could potentially be impacted by the diesel scandal at Volkswagen? Also, what's your take on, let's say, automotive demand next year globally? Will this be impacted or not? Is there any preparation that you're doing for that case?
On the automotive business to start there. Volkswagen is a customer of ours. I think we are much more connected to the overall production rate because we deliver basically every car manufacturer in the world, we deliver including the Chinese ones. We feel quite strong that we rather move with the overall car production rate. I think as I said in calls or discussions before, especially in automotive, we have a very nice innovation pipeline, and we expect from our people to grow at 8% to 10% in a flat market because of all the new products, especially for bonding. Now, for next year, this is difficult. I'm not an expert on the economy, given the low crude oil price, I could imagine that we rather see a very positive car demand last year.
A lot of big pickups with V8 engines in the U.S. and some more also cars in other parts of the world. For the raw materials, you ask about the force majeure. Yeah, he was right. We saw a very high number of force majeure, so close down of production lines of factories in the first half, which didn't maybe let us take full benefit from lower crude oil pricing for our raw materials. I think that has eased now, that situation. Also, I think we have the overall demand has slowed down in Q3. We expect rather a favorable situation for us for next year.
Okay. Thanks for that. Last one is on the European business. Can you give an update whether you have seen, from your point of view, any changes in market dynamics in any of the countries, and particularly during the Q3, or has this been fairly the same trends as you have seen in the first half of the year?
Again, for us, it was pretty much in line with the first half of the year. We have a very beneficial situation in Eastern Europe. We have, of course, issues in Russia with the currency and so on. Here you saw that just a few weeks ago, we opened our fourth factory in Volgograd in Russia. We are quite confident about the Russian potential. In the other Eastern European markets, we grow double digits. We are very good there. Also the other emerging areas in Africa, we grow around 20% the first nine months. That keeps running. In the Middle East, also double digit. In Central Europe, we have, let's say, flat markets in Germany, slightly negative in France. We see recovery in Spain, Portugal, quite nice, actually. They really bottomed out around about 10 million tons of cement consumption. Now we see some activity again.
That's pretty much, I think, the status for the Europe or EMEA region.
Okay, thanks a lot.
The next question is from Mr. Martin Hüsler from ZKB. Please go ahead, sir.
Yes, good afternoon. I have three questions. Maybe the first one to the other operating expenses that came down quite significantly in the third quarter. If I calculate it correctly, it's about CHF 25 million lower than it was last year in the third quarter. I think you mentioned about lower transportation costs. Can you give us maybe some more insights into this development and how fourth quarter should continue? That's maybe the first one.
Okay. If I can answer this. First of all, you also have to consider the translation effect here. If you talk absolute numbers, which in Q3 was actually quite significant and even a bit over proportional in other operating expenses. This would essentially, on a comparable foreign exchange basis, be flat or a slight increase. Really different than to the volume growth is lower transportation and logistics cost through negotiation, but also different route planning, also some insourcing, and generally quite a disciplined cost management. Of course, we have about 100 operating companies. There is always a number of initiatives going on. It's difficult to predict very specifically the fourth quarter. There is a bit of up and down, and if you look at the third quarter of last year, this was probably on the high side.
It's really a mixture of a number of effects, but particularly the translation here, of course, in absolute terms, has a big impact.
Okay. Thank you. The second question, did you face any extraordinary costs in relation to the defense against the Saint-Gobain takeover trial in the third quarter, and can you give a number there?
Okay. You know that Sika itself has not started any court proceeding, but however, we were asked into court by other parties. I think up to date, we have about 14 proceedings in court, and of course, we have to defend ourselves. We have some, of course, involved there, and we don't reveal any numbers, but we do this as cost efficient as we can. I think you can maybe see from our results that we are managing this quite well.
The last one, I didn't find a cash flow number. I was just wondering if the positive trend from the first half continued in the third quarter as well. Actually an increasing in the operating cash flow also in the third quarter.
In terms of the cash flow, of course, the fourth quarter is by far the biggest. This is then also the biggest impact. It's difficult to give you an exact number, but I would expect a slight improvement year on year. Yes.
For the full year?
For the full year.
Okay. Thank you very much.
We have a follow-up question from Mr. Eric Karlsson from Bodenholm. Please go ahead, sir.
I wanted to ask about the M&A pipeline. You touched briefly on it, but how do you see the outlook there for doing more deals? I think you've done five year to date. How do you see the outlook for the coming 12 months?
Yeah. We have an active pipeline in all our markets, in all our regions. Then of course, the difficulty is always to get the company to agree. As you know, we are trying to buy the companies with the consent of the management. We have a lot of prerequisites to really make a deal. The number is really fluctuating a lot. We have a full pipeline, and I hope we can have some good news the next couple of months, we have to see. Wait and see how we can close more deals.
Sounds exciting. Thank you very much.
Ladies and gentlemen, there are no more questions at this time.
Okay. Thank you very much for the interest in Sika and your questions. Goodbye.
Yeah. Goodbye. Thank you.
Bye-bye. Thank you.
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