Sika AG (SIKA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Sika Half-Year Report 2020 Live Webcast. I am Alice, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The slide webcast must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Dominik Slappnig, Head Communication and Investor Relations of Sika. Please go ahead, sir.

Thank you, and good afternoon, and welcome to the first half year results conference call. We published our figures this morning at 5:00. Now our CEO, Paul Schuler; and our CFO, Adrian Widmer, will provide further details on the results and the outlook. Afterwards, we will be ready to take your questions. With this, I hand over to Paul to start with the highlights of the first half year.

Okay. Thank you, Dominik. Good afternoon, everybody, and thank you for joining our webcast today. I'm happy to inform you about our business development in the first 6 months. Despite full lockdown for up to 3 months in many countries, Sika was able to continue to grow by 2.9% in local currency and reached sales of CHF 3.6 billion, negative currency effect of 6.1%. That's a decline in Swiss francs of 3.2%. Due to the impact of the coronavirus, organic growth was negative at minus 10.5%. In April, March and also May, the business impacted by the coronavirus pandemic in almost all subsidiaries, so we are in 100 countries. In June, Sika record a positive organic growth again as lockdown measures ended or were relaxed. At the end of the first half year, business activity started to normalize, and the dynamic in the construction sector picked up. With our local management structure and empowered organization, we were able to quickly implement measures to protect our employees, customer and suppliers but also to consistently manage costs and, at the same time, maintain business activities and capture opportunities to gain further market share. Sales in local currency increased in the region EMEA, Americas and Asia Pacific. In the segment global business, we saw an effect of the strong decline for global car production rate. EMEA was mainly impacted by the coronavirus at the beginning of the second quarter, with extensive lockdowns in Italy, France, Spain and the U.K. Already in May, an improvement was seen. And in June, the region achieved a single digit organic growth. Overall, the impact was limited in most Northern, Eastern and Central Europe countries. Southern Europe showed a clear improvement in May. Middle East and the U.K. showed a more mixed picture, slightly improved in June. Despite partial lockdowns in Argentina, Chile, Colombia and Peru and higher infection rates in Mexico, Brazil and the U.S., Sika saw an improvement in Americas region in June. For this month, Canada recorded a strong performance with positive organic growth. And in the U.S., the distribution business achieved a double digit sales growth. In Latin America, the development continues to be uncertain, as most currently are still in partial or complete lockdowns. In the Asia Pacific region, numerous countries were in lockdown during longer periods in the first half year. We were happy to see that several companies were back to growing in June, in particular, China, with double-digit sales increase. The development in China was supported by the Parex business. It is wide network of distributors, which proved to be quite resilient throughout this crisis. Many countries in Southeast Asia stayed longer in quarantine. With this, I hand over to our CFO, Adrian Widmer.

Well, thank you, Paul, and good afternoon. Good morning to everybody listening here. Following our CEO's business summary and presentation of the highlights, I will now give you further insights into the financial result. As just heard in the first 6 months of the year, the business continued to show growth of 2.9% in local currencies in spite of the worldwide corona crisis, which strongly affected the business in the March to May time frame with the biggest impact in April. Acquisitions added 13.4% growth, while organic growth declined by 10.5% in the first half year. Currency effects reduced local currency growth by 6.1% or by CHF 225 million in absolute terms to an overall sales decline of minus 3.2% in Swiss francs. Negative currency development was primarily owed to a weaker euro and a number of emerging market currencies. Region EMEA grew 3.2% at constant currencies. Organic growth, thereby, was a negative 8.5%, while the acquisitions of Parex and Adeplast in Romania contributed 11.7% of growth. COVID-19 impact across the region was quite different, while Southern Europe experienced a strong negative impact in March and April and started to recover in May. The dark area, Eastern Europe and Northern Europe, showed a much milder impact overall. Due to the weak euro, foreign exchange effects were strongly negative at minus 5.8%. Region Americas recorded a growth in local currencies of 2.6%, while organic sales development at minus 8.8% was negative, primarily driven by extended lockdown measures in many Latin American markets. North America, overall, showed a lower impact and an improving trend after the trough in April, May. Negative foreign exchange effects for the region were most pronounced at minus 7.1% on the back of a weaker U.S. dollar and strongly depreciating currencies across Latin America, in most cases, between minus 15% and minus 25% against the Swiss franc. Growth in Asia Pacific was a strong 21.8%, driven by acquisitions, which contributed 30.8 percentage points of growth. Organically, China showed a strong recovery from the COVID-19 impact in Q1, posting solid growth in Q2, while many markets in Southeast Asia have been impacted by extended lockdowns for a number of months. Organic growth in the region was minus 9% in the first half year. Foreign exchange impact was minus 5.5% and, therefore, also significantly negative. Finally, the segment Global Business was hit the hardest, with sales declining by 21.3% in local currencies against the backdrop of a very weak market and declining car build rates in the first 6 months of the year. This was particularly driven by widespread full shutdowns of the car manufacturing plants in the Americas and Europe for about 2 months. Negative foreign exchange also hit here in this region with minus 5.4%. On gross result level, we have managed to improve material margin substantially by 80 basis points to 54.6%, driven by a combination of reducing raw material costs, structural procurement savings and pricing. Excluding acquisition-related dilution effects of 40 basis points, organic material margin development was a positive 120 basis points year-on-year. On operating costs, these include both personnel costs as well as other operating expenses, including acquisitions. Operating costs decreased slightly on the proportionally by minus 0.5% versus a sales decline in Swiss francs of minus 3.2% due to a strongly negative operating leverage during April and May as well as a slightly higher cost ratio of acquisitions. However, due to strong cost control and fast adaptation of the cost base, we were, on a like-for-like basis, able to decrease other operating expenses over-proportionally compared to organic sales development, while personnel costs, which are more fixed in nature, showed a lower decline but were also reduced substantially on a like-for-like basis. As a result, we were able to maintain a high EBITDA margin with only a slight decline from 16.7% in 2019 to 16.4% in 2020 on a reported basis. On a currency-adjusted basis, this represents the same absolute EBITDA as in the same period of 2019. And excluding acquisitions and one-offs, EBITDA margin in the first 6 month was flat. Depreciation and amortization expense increased strongly by 29.1% versus the previous year to $183.4 million in the first 6 months. This was driven by additional fixed asset depreciation and intangible amortizations coming from acquisitions. As a result, EBIT declined by 14.8% to CHF 410.2 million. Moving below the EBIT line, net interest expense decreased slightly compared to the same period of last year by EUR 1 million. Residual impact of our Eurobond issuance in April last year was more than offset by missing prefinancing costs related to the acquisition of Parex during last year. Other financial expenses decreased by CHF 4 million from CHF 21.5 million in 2019 to CHF 17.5 million in the same period this year. Group tax rate increased from 24.5% in the previous year to 25.8% in the first half year across 2020 due to country mix and shift in relative profitability. However, underlying expected tax rate has not changed. As a result, net profit decreased by 16.7% to CHF 275.6 million, down from CHF 330.7 million during last year. On the back of the measures taken and the clear working capital and liquidity focus, cash generation remained strong in spite of the difficult COVID-19 environment. Operating free cash flow even exceeded the previous year level and increased by CHF 75 million to CHF 254.7 million during the first 6 months of the year. Cash from operating activities increased by CHF 58 million, driven by lower net working capital buildup, lower cash taxes and positive cash impact from hedging transactions. In addition, CapEx was reduced by CHF 16 million compared to the same period of last year. Cash flow from financing includes the maturity and repayment of a bond of CHF 160 million in March as well as the dividend payment of CHF 326 million in April. The balance sheet as at the end of 2020, therefore, shows a healthy cash balance of CHF 557.6 million, which seasonally tends to be lower than at the year-end. Net working capital is CHF 174 million lower compared to June 2019, reflecting strong focus on working capital management. Gross financial debt was reduced by CHF 70 million compared to year-end, while net debt increased CHF 355 million due to seasonal effects. With this, I conclude my remarks and hand back to Paul Schuler for the outlook.

Okay. Thank you very much, Adrian. Sika's outlook 2020, despite the coronavirus crisis and this impact on business operation, we confirm our strategic targets 2023. This means that we aim to grow by 6% to 8% a year in local currency until 2023, and to target an EBIT margin of 15% to 18% from 2021 onward. The execution of our growth strategy will continue to deliver sustainable profitable growth. From June onwards, we have seen a positive trend in the construction market, and sales volume are steadily returned to normal levels. Global construction activities is gaining momentum, thanks to the gradual reopening of construction site around the world. For the remaining part of the year, we are expecting more favorable market. With the anticipated improvement in sales volume, we expect an over-proportional EBIT increase for the second half of this year. Okay. Then I would ask, if you have questions, please open the question session now.

[Operator Instructions] The first question comes from the line of Yves Bromehead with Exane BNP Paribas.

I'll have just 2 questions, if I can. The first one, I just wanted to come back to the comments you made on the restructuring and integration costs. I think you said that it would -- EBITDA would have been flat, which implies a CHF 40 million type of hit. Can you confirm this is the degree of those costs? And given that you're talking about restructuring costs, what savings should we expect in H2 or even in 2021? That would be my first question. My second question is on the recent development of your main input costs. Is it fair to assume at this point that your H2 gross margins will be higher than in H1?

Good. Well, thanks for the question. I'll start with the second one. And we typically have due to mix effects in the second half year, as a tendency, a somewhat lower material margin without any, let's say, input movements. And so you should not necessarily assume that material margins will further increase in, let's say, a percentage of net sales basis due to this. But the input cost development has been quite favorable. We have now seen some slight increases here and there. But with the relatively overall lower volumes, there is, at the moment, at least at this point in time, no significant upward pressure. Then maybe to the first question on EBITDA, I was referring to, let's say, relative EBITDA organically, if we excluded one-offs that this was basically flat in percentage terms this year compared to previous year. In terms of onetime costs related to the integration of Parex this year, this was below CHF 10 million, but we had additional one-offs, particularly also relating to investments in efficiency programs and also some structural adjustments in areas where we see volumes to be depressed a bit longer, for example, in automotive.

Are you able to quantify that?

It's together, roughly at the same level as the integration of onetime costs relating to the Parex transaction last year. So between CHF 15 million and CHF 20 million altogether.

The next question comes from the line of Tom Wrigglesworth from Citi.

A couple of questions, if I may. Could you give us some of the kind of most recent color in terms of the exit rate from the second quarter by region, such that we could understand how things are shaping up for third quarter, assuming, obviously, no further shutdowns? That would be super helpful. And then I just wanted to touch on the kind of the cost savings stroke costs incurred in the first half. Are there temporary cost savings in this number that are actually going to kind of come back? And are there cost savings that might offset that? How should we think about the kind of the ebb and flow as business normalizes? I assume travel goes back up and some of those overheads come back in.

Thanks, Tom, for these questions. I'll start with the second one. As we have also published, we have received about CHF 60 million of, let's say, support measures on the personnel side across the globe. And they are obviously tied to programs like [indiscernible] survive or furloughs, but we have also taken other measures and basically reducing some of that, of the costs, which are tied to volume and ongoing business as well as some more structural measures, which I have just alluded to. So that's -- the first part is more shorter term, which, obviously, as volumes and business normalizes, the cost base would increase again accordingly. In terms of the sort of the ongoing initiatives, I think, particularly on the integration of Parex, we're doing well. We have also expedited this. So we clearly believe from this -- from today's point of view that we should exceed the EUR 30 million impact for the full year on the Parex side in terms of synergies. So that's going quite well overall. In terms of business activities by region, I mean, here, we, of course, continue to see quite a mixed picture. And obviously, June, in isolation, is probably not just to be extrapolated, but I think we have seen quite a good recovery in EMEA in June, with single digit growth in June, whereas the Americas, particularly Latin America, are still more subdued due to these ongoing lockdowns in many Latin American countries. Also, Global Business, obviously, although car build rates have started to -- or car production, rather, have started to bounce back slightly more pronounced in North America, here we have seen some improvement, but still obviously negative with the exception of China.

Talking about Asia Pacific. I'd probably add here that we had a great -- good results in China. It's on the right way. We really could improve in May and June. And then also Australia was quite strong. New Zealand was in lockdown coming back now, Philippines, Malaysia, and Singapore still closing lockdowns. So this hurts a little bit, but also Vietnam and Thailand are back on stream, so positive June and also positive in July.

Yes. No, no, that's -- so still ex -- if we take out M&A, still probably the group still kind of -- we might see the group back to organic growth in the fourth quarter. Is that realistic, assuming that there's no change in -- we continue on this unlock, broadly speaking?

No. I hope earlier, but assuming there is no second wave coming, we should be on the way to achieve that in this year, next 6 months.

Next question comes from the line of Martin Hüsler with ZKB.

So my questions are about the margins in the regions. And if I calculated correctly, I saw that the EBIT margin in Europe or actually in EMEA was increasing, even though you had quite a dip in organic sales. Can you give us the reasons behind that surprise, I would say? And maybe then talking about the other regions, profitability, there was, of course, quite weaker. What were the main drivers? And last questions, turning to Global Businesses. EBIT margin there was quite low. And I was wondering whether this was mainly due to capacity measures that you undertook and that cost at the beginning? And what do you see for the second half?

Okay. I take the Global Business. We have to see that in starting already early of the year, their production all went back. And then the major customer around the world closed shop for at least 6 to 12 weeks. And we have specialized factories there, so we really had to suffer in the Global Business. And on the other side, you get it right. We also took measurements to reduce our footprint to the volume we expect, around CHF 70 million. Last year, it was more towards CHF 90 million. So we really adapted the footprint in automotive, and we see that in the EBIT margin. I hand over to Adrian for…

Yes. Thanks, Paul. Martin, on the sort of the regional EBIT margins, I mean, there is many factors affecting sort of the relative performance here. I think in EMEA, there is a number of points to mention here. On the one hand, it's -- on the material margin side, here, we had a particular positive development compared to sort of the average of the group. That's one factor. We also have to see that in terms of the impact, as mentioned before in sort of Central, Northern Europe, DAC region, for example, a relatively sort of milder impact also leading to sort of less negative operating leverage here. And then some of the, obviously, support measures extended by governments are predominantly available in Europe. And maybe to the Americas here, 2 things. I mean, particularly Latin America with a big impact, big volume impact also less easy to basically, well, get support measures of any sort also exchange rates and significantly impacting, that's really the driver there. And in Asia Pacific, it's also a combination of a number of things. But also, let's say, relative margins, particularly in Southeast Asia and typically very profitable countries with quite an impact as well in the second quarter.

Okay. Just maybe one short add-on. I understood correctly. You said that in June, the whole group was on an organic growth path again. But listening to you now, I think it was only EMEA that is actually having organic growth and then all the other regions not. Well, is this correct or not?

It was also Asia with a small organic growth.

And U.S. was fair, close to last year. Or last year, the real issue we really had is the lockdown in the countries. If we don't then produce or stop every activities in Argentina, that just hurts. But overall, we are on the right track now. And like I say, we're going to release more and more of these lockdowns. That good for you, Martin?

Yes.

Next question comes from the line of Martin Flueckiger from Kepler Cheuvreux.

Firstly, I would just like to go back on North America. Is it just me or did you achieve a larger organic sales decline in North America compared with EMEA? And if yes, why was that? And in this respect, if you could also provide an outlook for North America in the second half. My understanding is that you're still rather cautious on Latin America. That's my first question, and I'll take one at a time.

Okay. I agree. We are cautious on Latin America. We see the increasing COVID cases, and we see that different measurements is a COVID stock measurement in Latin America, so they opened. They closed. They're reopened. So therefore, we don't see it correctly. Difficult to say what goes on with the U.S. In the moment, we are, on last year's level, a little bit below last year's level at still going good in north -- in U.S. Canada has an organic growth. It was quite nice, so from that side, we are pleased with the performance in North America. We will see what's going on, increasing cases, but we assume they don't close the job sites and they don't close the distribution. So we're still positive that we can handle the next 6 months. Is that good for you, Martin?

Yes. It's good for my first question. Sorry. My second question was on the automotive business in Q2. I was just wondering whether you could explain what appears to me to be a significant difference in the rate of outperformance in Q2 versus Q1. Am I right in my conclusion? And if yes, why?

I would not say it's -- we have 2 situations there. The market came down by 35%, the production rate, and we came down by 23%. Yes, we couldn't outperform. One of the main reason is we are -- have a very strong position here in Europe. And the market here went more back than in China. We have a strong position in China, but we could not outset it. In U.S., we're still -- a good way, but yes, we suffered a little more in the second Q than in the first one. But this is more a mix of products and customers, and we should continue to outperform the market in the next 6 months.

And my third question, and I'll go back in line. When excluding the one-off items from the operating loss in other segments and activities, can you explain what is the reason for the fair amount of volatility in the result of the corporate line? And if you could provide a forward-looking guidance, that will be very much appreciated.

Yes. I'll take this one. I mean there is -- this year, but particularly also last year, to a larger extent, there was these one-off items in there related to the Parex transaction. I mean, if you back that out, and this year is these one-timers were more in the regions as opposed to central because that's more than the sort of integration and operational measures. So the actual difference in central cost is not that big. If you want to model or have a number for the full year, this will basically be around CHF 125 million to CHF 130 million for the full year where central costs are concerned.

The next question comes from the line of Xintong Ouyang from On Field Investment Research.

Can you hear me?

Not so well.

No.

Not so well? Is it better now?

Yes. You have to speak louder, if possible.

Okay. Is it better now?

Yes.

Okay. Perfect. So I have 2 questions, if I may. The first one is on the outlook for H2. I remember that you mentioned, hopefully, a V-shape rebound at the end, say, in the second half of this year. And I'm just wondering, how much of your business can actually be told from the order book? And what is the current situation that you're seeing from your order book in the sense that how much visibility you have? And also do you see any negative impact on your order book because of the coronavirus for the rest of the year? And the second question is on the cost-cutting measures. So I understand that you have done some kind of cost-cutting structural-wise but temporarily, but then most of the -- most of them might kick in the second half of the year on your account. So I'm just wondering is it possible to provide any more, say, quantitative indicators on the level of cost savings so that we can factor that into the account?

Okay. I'll take the first questions. The order books enter the next 6 months. Our way to work is we work with job sites, and the job sites are -- the pipeline is quite full, but, usually, the customer orders the product and we ship it the next day. So we say our pipeline on project we're working on is very remarkable throughout the world. The question is just if there is a next lockdown or not. So we will -- we feel very strong in our pipeline. So we don't have an ordering book, but we have a project pipeline, which seems very, very strong. But also, on the other side, it's -- we are in refurbishment, and refurbishment we sell 40% over distributors or our building merchant. And there, we have a strong position, and we feel strong there that we can continue. The big risk is that of a second wave, then it's challenging. If not, then we should have a strong second half.

And Xintong, on the cost side, yes, I mean, it's just a combination of temporary measures and, of course, also taking advantage of the variability of certain expense items, particularly in other OpEx, travel and marketing costs, maintenance and so on. But also, structurally, as we have invested in efficiency measures and also making some structural adjustments, I mean, this will very much depend on the business development in the next 6 months. But as we clearly say, we believe that with more favorable volumes, we will be able to increase our profitability higher than sales growth, whatever the sales growth is going to be.

I see. Just 2 follow-ups, if I may. The first one is on the project, say, RMI or project pipeline, I'm just wondering, what you're seeing now, is it a catching-up effect because of the coronavirus? Or it's actually because, say, there are a lot of new projects coming in, and they're going to translate into, say, Q4 or H1 in 2021? Which type of project are you seeing? And the second one, I just want to confirm that you were mentioning the gross margin, and you don't expect any improvement above the 120 basis points that we saw in H1. Is that it?