Sika AG (SIKA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Sika Half Year Report 2021 Conference Call and Live Webcast. I'm Moira, the Chorus Call operator. [Operator Instructions] 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 Communications and Investor Relations of Sika. Please go ahead, sir.

Thank you, Moira, and good afternoon, and welcome to our half year results conference call. Present at the call with me today is Thomas Hasler, our CEO; Adrian Widmer, our CFO; and Christine Kukan, our Senior IR Manager. We published our half year figures this morning at 5:00. Now Thomas and Adrian 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 Thomas to start with the highlights of the first half year. Thomas, please.

Thank you, Dominik, and welcome, everybody to this half year update of Sika. I guess for most of you this is a standard procedure. For me, it's the first time and the premier, so I'm excited to be able now to present to you the first 6 months results of Sika. And I'm also excited that I can start with record results on all key figures for the first 6 months. On the top line, we grew 23.5%, very strong, especially we have seen very strong growth momentum in China, and some European and American countries as well as an exceptional well business on residential and distribution outlet. Overall, we are gaining market share, which is our utmost target. We grew above market level based on our strategy, the pillars that we have outlined in the Strategy 2023. This contributed, of course, and also together with our operational leverage, our efficiency initiatives and the synergies from M&A to a record operating EBIT of CHF 685 million. And for the first time, we have crossed the 15% EBIT margin with 15.4%, another record. But then also further down, this was also, in the free cash flow, an overproportional growth of 26.4%. Nevertheless, it has to be noted that the first 6 months they were not a stroll in the park. We had a lot of challenges. Here, of course, the supply chain situation disruptions. The various disruptions to supply and logistics have also impacted our business. I would start there probably on the customer side where customers and here particular automotive was hammered by unavailability of semiconductor chips and other commodities, which led to CHF 4 million loss of vehicle build in the first 6 months. They recovered nicely from last year, but the CHF 4 million would have been the demand that they couldn't supply. And of course, and also for us is a lost opportunity. Other businesses were also impacted by this situation. And of course, also, we had a tough time securing the availability of our raw materials to make sure that our customers can be supplied on time. But through the organization, we took firm, early and decisive actions to counter this momentum from sales to operations, procurement, R&D. The whole organization was engaged in offsetting this supply chain challenges, and ultimately was able to deliver this outstanding result. We do have other highlights in the first 6 months, which I would briefly outline here. On the M&A side, we had 3 acquisitions closed in the first 6 months, Kreps in Russia, BR Massa in Brazil and DriTac in the U.S.A. We also signed the acquisition of Hamatite adhesives in Japan, which we intend to close in Q4 '21. Overall, you can see there is now, again, much more action ongoing on the M&A front when we compare to 2020, where we had a rather slow activity level due to COVID. In addition to that, we also expanded further on our organic footprint and build up production facility in Sweden as well as in Qatar. But our investments also go into our innovation pipeline. And here, we made the announcement with our very innovative reCO2ver process in processing concrete waste materials into raw materials for future buildup of cement structures. We also reinvest in our organization. Our organization, our 25,000 employees are the ones that are carrying this company forward, and we celebrated on June 11 a Global Sika Day, where all employees participated. And we were joining in activities locally and add activities from local social engagement, like we see here on the picture in Algeria at the beach, cleaning the beach, to barbecues and so on. It was a day to come together after the long COVID period where we had to stay home. And this was a great event also reinvesting in our organization. With that, we have another highlight that we announced earlier this week, the acquisition of American Hydrotech. It's not related to the first 6 months. As I just mentioned, it just happened this week. But it's another highlight, another investment into the future, showing the green roof activities in North America, where American Hydrotech has a leading position, roughly 30% of the market share in green roofs. And this is a position for us to grow further in this fast-growing segments, where green roofs are going to play a much more wider role going forward. And Sika has the leverage through its organization in North America to drive this momentum further. So now I hand over to Adrian to give you a bit more insight into the set of figures that we have communicated earlier.

Well, good afternoon. Good morning, everyone, and thank you, Thomas, here for the business summary and the highlights. I will now give you further insight into the financial results. Let's start with the top line again. We have, as you have seen and heard, delivered strong double-digit growth in all the regions in the first 6 months of the year with a local currency growth of 23.5%. Organic growth was 22.4% while acquisitions added 1.1 percentage points. In addition, this growth represents the residual impact of the 2020 acquisitions as well as the initial contribution of the last transactions, as just highlighted, namely DriTac, Kreps and BR Massa. Currency effects were relatively mild, reducing the local currency growth by 0.4% only. Negative currency development was primarily owed to a weaker -- sorry, to a stronger U.S. dollar and a number of emerging market currencies. Corresponding growth in Swiss franc was a strong 23.1%. Looking at the regions. We have the region EMEA, our largest region, which grew 24.1% at constant currencies. Organic growth was also here very strong, 21.9%, on the back of very solid growth across the region, particularly distribution business as well as renovation activities in the residential sector were very strong. Growth was most dynamic in Europe South, the U.K. and also the African continent. While the pandemic impact in Q2 last year provided an easier comparison, organic sales growth in comparison to 2019 was also double digit, and there is residual acquisition impact of Adeplast, the modern waterproofing as well as the newly acquired trade in Russia contributed another 2.2 percentage points of growth. Foreign exchange. Foreign exchange effects were mildly positive in this region in the first 6 months at plus 1.1%. Region Americas. Also, Region Americas recorded a growth in local currency, which was quite strong, 19.5%, and primarily organic. We saw a strong bounce back in development in Latin America, namely Colombia, Brazil, Peru and Chile throughout H1, while the U.S. was still a bit muted in Q1 but gained a good momentum in the second quarter. Particularly large-scale maintenance projects and new distribution and data centers were key drivers here. Foreign exchange effects continue to weigh negatively in the Americas in H1, with a negative impact of minus 3.7. Sales in Asia Pacific increased by 26%, driven by China with strongly double-digit growth rates across the board, particularly further increase of the available point of sales and the focused shop-in-shop strategy contributed to the strong sales growth. Southeast Asia, and particularly India, showed a partial recovery despite the prevailing difficult situation due to the pandemic. The situation was more difficult in Japan where the government stepped up lockdown measures to keep infection rates low in the runoff to the Olympics. Also here, foreign exchange impact then mildly positive at 0.4%. Finally, in the Global Business, as mentioned by Thomas, the -- this segment achieved a growth of 27.6% in the first half year. And here, while the volumes recovered compared to the pandemic-related shutdowns in Q2, the automotive industry experienced major bottlenecks in the supply chain for semiconductors. Also, geographical and OEM mix was unfavorable in the first half, but has started to reverse in Q2. And here, foreign exchange impact remained negative at minus 1.2%. On gross result level, and now we're sort of moving down the P&L. Material margin contracted by 130 basis points to 53.3% net sales. And this was primarily driven by strongly increasing raw material costs as a result of the global supply chain disruptions and strong demand. Through formulation efficiency initiatives, structural procurement savings and particularly pricing actions, we were able to mitigate a large portion of this increase. Acquisition-related dilution resulted -- also contributed a negative 20 basis points to the lower material margin. On operating cost level, and this includes both personnel costs as well as other operating expenses, they increased only on the proportionally by 9.1% in this -- versus a sales growth of 23.1% due to a very strong operating leverage, disciplined execution of the many operational efficiency projects across the organization and functions as well as a continued good synergy capture related to Parex and the other acquisition. As a result, we were able to significantly increase the EBITDA margin to 19.5%. This is up from 16.4% in 2020. As a result of the reduced CapEx in 2020 and the limited acquisition impact in terms of intangibles, depreciation and amortization expense decreased slightly in absolute terms to CHF 18.1 million in the first 6 months, providing further leverage. And as a result, EBIT increased very strongly by 67.2% to CHF 685.9 million. And a record EBIT ratio of 15.4%. Also here, a strong increase compared to the previous year, which was 11.3%. If we move below the EBIT, net interest expense also decreased by 15.6% compared to the same period of last year to CHF 21.1 million, and this is related to lower debt and higher interest income, whereas the other financial expenses decreased very sharply by almost CHF 10 million from CHF 14 million to CHF 4.4 million in the first half year of '21. This is primarily due to much lower hedging costs and also lower foreign exchange valuation impact. Overall, net financial expenses decreased very strongly by almost 35%. Looking at the group tax rate. Also here, we had a slight decrease from 25.8% in the previous year to 25.1% in the first half of 2021, on a slightly positive country mix with no major impact otherwise here. Also here as a result, net profit increased strongly, overproportionally to 79.5%, to a record level of CHF 494.7 million or 11.1% of net sales. This ratio is up from 7.6% in the same period of last year. On the back of this higher profitability and modest capital expenditure level as well as a disciplined yet higher net working capital buildup, and this is related to the strong volume development, operating free cash flow even exceeded the strong previous year level and increased by a further CHF 67 million to CHF 318.4 million for the first 6 months of the year. The balance sheet as at the end of June 21, therefore, shows a healthy cash balance of CHF 1.13 billion, which is seasonally lower than at year-end, due to the aforementioned seasonal working capital buildup effect, but also to the dividend payment of CHF 355 million back in April. As a result, however, net debt only increased by CHF 172 million compared to year-end 2020, to CHF 3.30 billion. Financial leverage based on net debt compared to a trailing 12 months EBITDA, reduced further to 1.7 turns on a reported basis, and this is down from 1.9 turns at year-end 2020. With this, I conclude my remarks to the financials and hand back over to you, Thomas, for the outlook.

Thank you, Adrian. Coming to the outlook for the fiscal year 2021. Here, we are positive and confident regarding the full year outlook, as indicated in prior statements and in line with our long-term strategy. We had, on the top line, further narrowed in our double-digit growth expectation to a mid-teen number of 15% plus/minus 2. And we remain confident regarding our bottom line evolution, providing overproportion of increase in EBIT and also reaching 15% EBIT margin for the first time in Sika's history. Looking further out, we can absolutely confirm our long-term strategic target for a sustainable, profitable growth, as outlined in our strategy.

Okay. Thank you, Thomas, and we are now ready to take your questions, please.

[Operator Instructions] The first question is from Yves Bromehead from Exane BNP Paribas.

I have 3, if I can. My first question is on margins. Can you maybe help us to understand how we should think about margins in H2 given the rising inflationary headwinds in Q3? And at this point, given what you're seeing in terms of raw materials, is it fair to assume margins in H2 should be lower than in H1? Or do you expect an improvement sequentially? My second question is on the divisional margin evolution. There's quite a big difference between Europe and Americas, which has improved in H1 still at very high levels versus the Asia Pacific and the Global Business, which saw some sequential margin decline versus H2 2020. Can you maybe give us some color here? And I'll leave my last question maybe to the end, if that's okay.

Yes, Yves, maybe I'll continue here with the second question you had on sort of the raw material evolution mix. It's clear the situation is quite volatile and dynamic, given the disruptions. Here, we have been facing it and still, obviously, difficult to predict the exact magnitude and particularly when the impact will be peaking. We are clearly driving price increases here to mitigate the situation. I think we're on a very good track, but it is fair to say that the raw material costs will continue to go up. But so will our pricing impact in the second half year as we have already initiated quite some strong actions and more will follow. Maybe more broadly on the margin evolution. Obviously, we are delivering here on all the different buckets of basically our model. I mean we have operational efficiency, which will clearly continue very good traction there to deliver the 50 basis points. Also in the second half year, we have an additional contribution on the M&A side. Also here, integration activity, synergy realization is going quite well. And we will also see further operational leverage. Obviously, the comparison will not be quite as easy as last year, given the recovery we already had in the second half of last year. And also the quite low cost level, but there will be further leverage to come in the second half year as well. And on the material margin, again, the expectation is not that we will have a significantly bigger additional impact looking out. There is typically -- sequentially the second half year is a little bit lower than the first one on the material margin. But as I said, input and cost development is still quite volatile and not entirely predictable. Maybe just a couple of words on sort of the regional margin development. I mean if you look across the regions, we have actually, in all the cases, quite a strong increase compared to 2020, the first half year. There is a different, let's say, seasonality typically depending on the region. So it's not quite fair to, let's say, compare it to the second half. The better comparison is the first half of the year, typically, as there is quite some differences in the direction. All the regions is quite clear, but we also have a somewhat different impact on the material margin side. But overall, we're actually quite happy with the development in looking at all the regions.

Maybe just a quick follow-up on the first question. I mean at the current spot levels of raw material, assuming they stay at this level when your price increase goes through, would you expect margin in H2 to reach at least the level of H1?

Yes. I mean the -- obviously, the spot levels are typically not sort of the best indicator for our business as we -- if we don't obviously have to don't buy spot typically. And some of the spot levels have peaked, but still very different development also region by region, material by material. And I would still expect a somewhat bigger impact in Q3.

And maybe just one last question for Thomas. Given your previous experience in the global automotive, can you maybe share your vision and strategy for this division? And where do you see the attractive opportunities medium term?

Yes. I mean there, we have to decouple a bit the short-term, let's say, turmoil in the automotive industry from the longer-term evolution of this industry. This industry is moving away from traditional combustion-driven vehicles into electric-driven vehicles. We have outlined that this even further, let's say, increases the potential for us to participate in this industry. And we have also major progress in these regards on the battery side, on the charger side, but also on the traditional conventional technologies, which also slightly changes. The adhesives, the usage of adhesives, the acoustic countermeasurements, they need to be tuned to the new setup of the cars. And that again gives for us -- or provides for us great opportunities as we have the competencies and the solutions to adapt and provide, therefore, more value to this vehicle. But absolutely, we are far from the peak production volumes of 2017, '18, where we reached CHF 95 million. Last year, it was CHF 72 million. This year, it may be CHF 82 million, but could also be CHF 80 million. I'm not too optimistic about the fast recovery on the supply situation. We still see that Q3 will have an impact. So -- but we should not be derailed by the short-term issues. Long term, this is for us a fantastic segment to be in. And we have a strong position also to support this industry into the future, into the CO2-neutral future of the cars.

The next question is from Yassine Touahri from On Field Investment Research.

I would have 2 questions. So my first question is that we've seen many building material companies along with private equity funds that have accelerated the purchase of construction chemical assets over the past couple of years. Do you see more competition on merger and acquisition? And in this respect, could you share the average multiples that you paid for your recent acquisition? Or maybe give us some color on the returns that you expect from those operations? And then I will have a second question, which is relative to raw materials. It's a bit crazy at the moment. What are you monitoring in terms of potential normalization? Are you -- what could be the trigger for raw material costs to come down? Is it related to the container liners? Is it related to force majeure issue? Is it related to the oil price? If you could give us a little bit more color about what we should monitor to better understand the development of the raw material situation.

Yes. Well, thanks for these questions. Let me take the 2 first ones. On the M&A side, I mean, we continue to operate in a very, very fragmented industry to start with. And I mean, you have seen our sort of strong execution on the M&A pipeline, which is actually continues to be quite full at various stages. And we have now also been able to increase execution speed again. Of course, there is competition in these transactions typically. But with many -- we have actually quite a strong and long-standing cultivation which sometimes goes over a number of years. And we continue to see very good opportunities for us and also our ability to continue to execute and close transactions from this regard. No major change compared to a couple of years ago. On the multiple side, I would say it's fair to say there has been a bit of a re-rating, but it's not been, I would say, excessive in terms of the multiples we pay. We're anyway not too hung up on sort of static multiples. We look at each case individually and what it will bring as a platform, as an additional growth driver, but also on the cost and synergy side. And we continue to see quite good opportunities. And there is still also quite a big range of multiples, which is typically sort of between, I would say, 9 and 12x.

Okay. Maybe then your question regarding the raw material. I can take that up. It would be almost too easy to say we do have one indicator to guide. What we can clearly say is that it is very, very different from the regions from Asia, China or outside China, Asia, from North and South America and Europe. So we have to stay very close to the base chemicals. There the force majeure player role, but this role is really more regional than global. We can clearly see also that the traditional, let's say, shortages and then the importation from other regions is not happening at the moment. So that's why these shortages tends to prolong longer than usually. And also that the return to normality will take more time. So therefore, our expectation that Q3 is kind of going to be the peak. It doesn't mean that Q4 is normal. It will just be a bit better than Q3, hopefully. But here, really, we have to look at all these regional aspects, where, for instance, in EMEA or North America, some of the raw materials are actually on allocation. They are still available on a high price level in Asia. And for us, I think we cannot change those circumstances. But with our global footprint, we have done quite a good job in making sure that we help each other. So we bring raw materials from one region to the other to help out and compensate the inavailability or also the peak pricing in certain locations. But there's not one that really drives it across the globe. This is very, very specific to the situation. There are a few suppliers of base chemicals in North America and Europe and China, in Korea, and the situation is different from those places to each other.

The very strong increase in shipping rates or containers have an impact on your costs? And could we see a normalization of the shipping rate in the coming -- in next year or maybe in 2023 when you've got more container liners that are coming on the market?

Okay. I got the question. I hope you can hear us as well. So yes, good point that the transportation limitations are not going away so soon. We don't see a free-up. Actually, we see further increase in costs. The containers are not coming back. The ships are not coming back as we would hope for. So this is going to last into '23. And the short lead times that we used to have and, let's say, rather modest transportation cost between the regions, this will probably not come back also in 2022. We have to expect that to remain a challenge.

The next question is from Matthias Pfeifenberger from Deutsche Bank.

Two questions from my side. Sorry to come back on the margin point. I appreciate you mentioned, obviously, a higher input cost in the third quarter. But last time I heard you say that you were going for price increases of 3% now before -- we spoke before the quarter, I think you're now going for 4%. So incrementally better. And also the higher top line guidance would suggest even better contribution from operating leverage. So is this really what's happening in terms of material margin? Do we expect -- do we have to expect a weaker margin in the second half? You said previously that material margins on a full year basis would trend down to the lower end of the 54% to 55% range. So are you now saying it's rather going to be 53%? Or am I missing something in terms of mix? Or related to that, maybe do you expect a strong residential and distribution momentum to slow down? Are you already seeing something like that?

Thanks for the question. I think coming back to sort of the input costs dynamics here and already as previously indicated, it's been very sort of difficult to have sort of clear visibility, particularly on the time line, what the impact there will be. I think it's fair to say that the dynamic has certainly still stayed quite high. And as commented, we expect this to be a bit more prolonged. And hence, also, the yet again increased action on the pricing side. But I think important to understand is that this is a temporary effect. And I would also, from today's perspective, say that we will stay obviously below the 54% for the full year. But we will continue our path here. We will compensate this at some stage. We do this in a sort of very sort of measured and sustainable way. And particularly when it comes to the tipping point, where input costs will decline again, we will be able to retain that benefit. So it's more a timing, and therefore, it's also relatively difficult to exactly pinpoint the quarter impact this will have. But we are here basically on a very good track in our execution.

And then your second question was in regards to residential and distribution business. Here, this is certainly a key driver during the pandemic that we saw much more momentum there than in on-site and on large projects. It's still going strong. But it's correct that we also expect that it will rather than come down a little bit in the future, it won't stay on that level. At the same time, of course, we also see now a clear indication that the investments from private and governments are picking up. Projects are coming again to the forefront, especially in North America. We have very good momentum also in Europe. So this is, to us, not a concern. It's just the balance of the 2 that will generate for us, let's say, the underlying base market growth. And then with our activities, where we want and are above the market trends, this will fuel future growth independent on these 2 segments evolution.

The next question is from Chaudhry Mubasher from Citigroup.

Just 2 please. You provided some commentary around the weakness in the APAC margins. And I think you highlighted that there was some integration costs. Is that related to the tariff integration and putting deco products in a higher number of stores? If it's not the case, can you just update us to how many stores we are with Sika products? And how do -- how should we see that margin tracking in the coming years as the integration continues? And then the second question is, I apologize, back on the margins. Given that the second half is expected to be a bit more of a headwind in terms of raw mats, so potentially lower than the 54% to 55% guidance range. But then on the other hand, you've kept your EBIT guidance at 15%. So is there something that you're doing between kind of the material margin and the [ EBITDA ] that's helping you or giving you the confidence that you can achieve that 15%? So just some thoughts on that would be helpful.

Good, yes. And on Asia Pacific, the regional margin again. It's -- I mean, it's not so much a question of onetime costs. But there's also a few, let's say, compare the development of the margin in Asia Pacific compared to last year, I mean, we had about a sort of a 300 basis points improvement here and relatively speaking, which is actually quite similar to the other regions. EMEA was a bit higher. I think here, we can, let's say, see that there, obviously, quite good development on sort of efficiency and leverage. Whereas in Asia Pacific and you mentioned it, particularly the sort of the former Parex business, we'll obviously continue to invest in growth where the leverage is a little bit less pronounced, but obviously very strong growth, increased penetration. As I mentioned before, we're quite happy with the development overall. It's just some bit of regional differences. If you go back and compare it to 2019, we have obviously additional amortization effect in the year coming from M&A. And here, obviously, Parex, we had a large impact in Asia Pacific. It's more of -- 50% of the Parex business is actually in that region, again, most notably in China. But overall, actually quite a good development. On the overall EBITDA guidance and here, very clear, we sort of absolutely continue to be very firm and confident on this 50% debt level. Again, as said, the second half from a, let's say, operating leverage perspective, given the strong recovery already in the last half year, second half year of 2020, is a bit less pronounced. But we will continue to see leverage. We'll continue to execute on the other areas, which will also contribute here. And then obviously, we have the material margin impact, which particularly in comparison to the second half year of last year, where we were at 55%, which is historically, clearly, the high point and was driven by still declining input cost last year is a bit more challenging. But again, mostly timing, and therefore, we believe we're quite well on track.

The next question is from Arnaud Lehmann from Bank of America.

Three, if I may. Firstly, on COVID costs. I mean I'm sure you haven't been traveling that much in the first half of this year. But I guess, things are starting to get back to normal progressively. So how much, let's say, savings did you have in 2020 related to COVID around travel and marketing? And has any of that come back in the first half? Or when do you expect it to come back? And what could be the order of magnitude ? Secondly, very impressive performance on the top line in the first half, including in the second quarter. Do you think Sika gained market share relative to some of the competitors in the first 6 months? And if that is the case in which region, in particular? And lastly, if you don't mind saying a word on your recent announcement around the recycling of old concrete technology or that works? And how much potential could this business have?

Thanks, Arnaud. I'll take the first 2 ones. On COVID and that's -- or the related costs. It's probably a bit a question how you look at it. In terms of, for example, the positive impact we had last year on reduced, let's say, salary and labor costs due to the sort of the various programs available worldwide. We had a decrease in cost or a positive impact last year of around CHF 26 million in the first half year, which was not available again this year across the group. In terms of travel cost, we're actually still, if you compare first half year, first half year at around the same level of last year. Obviously, a bit skewed in terms of quarter. Certain increase in the second quarter. Whereas in the first quarter last year, we were still at sort of the normal level. That's actually quite balanced. This will continue to increase slightly, but also not expecting this to go to the 2019 level in the third quarter. So it's rather a gradual increase again to sort of more normal levels. But overall, I think we're managing this in a quite a disciplined way in terms of also the cost buildup and particularly in combination with all these efficiency programs we have running.

Okay. And then coming to the question regarding our concrete recycling process recover as we launched this earlier in H1. We are now building up the first industrial plant in this regard. We have prototype plants going, which indicate a very strong case here that we can, through our chemicals, make this process not only efficient but also that's the output, the fractions that come out of this process are of higher value, meaning active ingredients which can be placed into concrete as supplementary cementitious material. And this is one element where we can, let's say, monetize this process. And then another very interesting aspect and still to be verified that in this process, we can roughly bring 50 kilograms of CO2 back into the mix, and it will be absorbed by the recycled material and also act as active ingredient in the output. And this offers, of course, for us the possibility that we can, here, go into the certification of the process and again add value for the user of such plans. And thirdly, it can be clearly noted that with our, let's say, info campaign, we have generated a very high interest from the market. And that we are here now working with many strong partners, bringing this as fast as possible into the next phase. Very promising, but still to be said that we still have to do some more work on the verification. But exciting project, top innovation from Sika.

Just my question around market share. Do you think you can gain market share in the second quarter?

Absolutely. That's our underlying measurement, how we are we looking to the different segments. We have our, let's say, baselines and we monitor how we are doing against those baselines. In some industries it's by, let's say, given standard of -- from the market in -- out of its build rate, like in automotive. So absolutely for us, internally, we want to see that we grow above the market. And that's, in most cases, also what we see delivered in the first 6 months of 2021.

The next question is from Cedar Ekblom from Morgan Stanley.

I've got one question on your China business. You've delivered a very strong increase in your store rollout in that region over the last couple of quarters, and it continues to be a very big driver of the revenue growth story in the Asia Pac region. I wanted to understand where you think you are in the organic growth story in China. How many more quarters of double-digit growth do you think we can look forward to from an organic perspective? And then can you also talk a little bit about how you see the M&A opportunity in China? Is that something that you would look to in that market? Or is your strategy very much focused on organic growth there?

Okay. So I take the question, Adrian. On the store penetration of the rollout in China. This is -- again, this is a market that is by itself growing very fast. There is a change from on-site to pre-bagged solution. So this, by itself, is giving us a growth potential of, let's say, 4% to 6%. And then we have a very aggressive growth plan, which certainly is expecting double-digit growth also in the coming years. For how many years, that's a bit a loaded question. But the expectation is that the underlying business evolution would support this, and we are also investing in this regard so that the, as you mentioned, the stores but also the footprint, the extension of the footprint is a top priority for us. So we see our opportunity here to play an important role in China in this specific segment. Then in regards to acquisition. Acquisitions are a topic everywhere. We see them as a means to further accelerate and extend our organic strategies. And therefore, also in China, this is absolutely an option. And I just remind that we, what is it, 18 months ago or maybe 2 years ago, we made an acquisition into an adhesives company in China. It has very well performed. It is nicely integrated. So we don't see any reason why we would exclude China. Even so, let's say, the prospects they look a bit different than a typical European or American company, and we have to deal with certain, let's say, issues or situations. But we have a strong team in China. We can handle this. We can integrate. And therefore, China is, clearly, the market for us also up for acquisition.

The next question is from Patrick Rafaisz from UBS.

Two questions from me, please. The first is on the growth outlook or guidance you provided, the 13% to 17%. Now given the 23.5% you reported for H1, this leaves quite a wide range for the second half. What are your scenarios for the lower and the higher end of that range in terms of local currency growth? Is it really the pipeline execution, M&A? Or it also uncertainty around the organics? Then the second question is on the acquisition this week of Hydrotech. Do you also see an opportunity for green roofs outside of the U.S.? Is that something you would be looking to roll out across the globe as well?

Okay. Thank you, Patrick, and absolutely correct. The aromatic works, of course, in this case, we have an expectation of 4% to 11%. That's the range for the second half to make up our mid-teen expectation for the full year. And yes, in here we see some, let's say, further recovery possibilities, which would push it up to the upper range. But we also have to be cautious. We see that the pandemic is by far not behind us and some markets like Southeast Asia are going in the wrong direction. We have there further lockdowns and the incident rate is coming up. The vaccination rate is rather low. Questions around the effectiveness of certain vaccinations. So also China is not excluded. It could become a topic. So we have many, many factors that we have to factor in. As mentioned before, we see that on the automotive side, for instance, rather compared to last year, a negative probably evolution in the second half. So far from normal, and therefore, I think the range of 4% to 11% is actually pretty narrow and considering all these variations. On...

How much M&A would you build into that?

I mean we have the M&As that have been announced that includes also our latest one, the Hydrotech announcement. So that's in. But other than that, we cannot factor M&A in that we have not yet closed. And then to your questions in regards to green roofs. Here, I would say that the green roof trend has its origin in Europe. We have many more green roofs in Europe than in North America. North America, I would say, is just about to get started. That's why we are also excited that we can leverage our competencies from Europe over to North America and further utilize this platform. It's, of course, demand-driven. And in the past, the demand wasn't that big in the U.S. But certainly with the regulations changing, with the building codes changing, there is a lot of momentum there. And I think we are spot on with this acquisition to benefit from the growth potential in North America.

And since you already have a green roof business in Europe, that's sizable enough that it's worth mentioning?

The roofing business in Europe is a little bit different in its structure than in North America. North American roofing business is very much system-driven. So that means you're selling full system, where European roofing systems are more divided into different components. And there, we participate with our solutions, but less on complete systems like the Hydrotech, which offers a complete system. But that's -- again, the markets are different in Europe than in North America. Yes, we -- absolutely, we have green roof in Europe, but not the same way as in North America to bring it to the point.

The next question is from Markus Mayer from Baader-Helvea.

I have 4 questions, 2 add-ons and 1 -- and 2 more in detail. Maybe I'll start one by one. Can you quantify the effect of the chip shortage at your automotive customers in the first half? And also what you expect for the second half? That would be helpful. Maybe that's the first question and follow-up with the other questions afterwards.

Okay. Here, I can give you quite precise numbers because these numbers are collected by IHS from the car manufacturers. In the first quarter, it was 1.4 million units that were impacted. And in the second quarter, it was 2.6 million units that were not built due to the shortages. And that is a rolling forecast, which currently comes close to 1 million for Q3. But you have to see these numbers are updated every month, and I can just give you an indication. 1 month ago, the indication for Q3 was down at 300,000. So now we are close to 900 million, almost 1 million. So if you ask me what will it be in a month, it's probably again about 1 million. But these are recorded by carmaker, by model and so on through the association.

And this is also then linked to the volumes or the demand you see from your customers, because normally are growing 7% to 10% ahead of the market, so that's basically linked then also to your demand?

Yes, absolutely, yes. Clear.

Okay. Okay. Then my second question again would be on this market share gain. You already answered this. But can you give us any specific regions or competitor groups, maybe smaller competitors, where you have gained market share, I guess, that smaller competitors might have had more supply chain issues than you and, as such, you might have the chances to get market share? And also how sustainable do you think are these market share gains you have had in the first half?

This is a bit tricky. This is similar to the question on the raw materials and the indicators. We are very close to the market, which means that when we talk country by country, we are very specific. Also our, I would say, M&A activities give us a very good understanding. Our management locally has a very good understanding on the local situation, who is participating to what percentage in which segment. And then, of course, we are following up on those figures and do this then with the individual countries to compare the evolution of us versus the rest of the market. But this is really only, I would say, in automotive where we have precise numbers globally speaking, by customer, by region, that's probably the most precise. But when it goes then down into the construction segments, we rather then take the French, the German, the U.S. by itself and look at the specific market figures. There are also numbers from the associations, but then we have to break it down more specifically into our real competitors and the market participants.

Okay. Understood. Then my third question would be on D&A and CapEx. D&A went down somewhat and that's about a little bit basically. What should we expect then for the second half or the full year? The first half D&A a good run rate for the second half. And given this high demand we currently see, are there any changes from the CapEx guidance assumptions for this year or for the next year, and also the potential for D&A for next year.

Thanks, Markus. I'll take this one. And obviously, last year, we had a lower than, let's say, average CapEx spend. We were also quite restrictive on newer projects. That's also something you can still see in terms of the cash out in the first half of '21. I would expect that the second half is going back to, let's say, more normal levels in isolation, which means 2.5% to 3% of sales. And in combination for the full year, I would probably not expect a cash out that is meaningfully more than 2% of sales.

Okay. That's very helpful. And then last question again on this concrete recycling. If I remember correctly, the BASF has such a technology now is owned by Lone Star. Can you explain me the difference of your technology versus the BASF technology? And if I remember correctly, BASF already presented this technology at least 2 years ago. And therefore, I'm not sure if you're the market-mover advantage or if BASF technologies already in the market. Maybe some more information on this be helpful as well.

Okay. Maybe we take BASF out of the equation because this is no longer related to BASF, it's NBCC. That's the name of the Lone Star acquired company. And I assume you are referring to the NBCC LT-3 technology.

Yes, exactly. That was it, yes.

Yes. That's a different process. That's not comparable to our reCO2ver process. LT-3 is another way, but it's not -- it's a way, a path to reduce the cement by bringing in calceated clay and replace the cement in this way. Our process is taking the waste material, breaks it down again and makes it an active ingredient. It's not just, let's say, separation milling and recycling. So these 2 processes have nothing in common. But of course, in common is the drive to reduce the cement consumption for concrete and there are multiple ways. And LT-3 is something that our R&D is working on helping our customers to reduce their footprint. So we have absolutely no, let's say, bad feelings about it. It's just it's a different approach. And many other companies are also engaged on the LT-3 side. Many companies are also engaged on the crushing -- concrete recycle. But again, that question that recycling in the traditional way and our reCO2ver is really unique and different to those.

The next question is from Manish Beria from Societe Generale.

So I will take question one by one. So the first question is on the M&A. So I thought at the start of the year, you were talking about doing a couple of large deals. But it seems you are progressing well, but still a smaller ones. So just any update, I mean. You're still pursuing those large deals? Or it has not worked out?

Okay. Well, let me take this. I'm not sure whether this came across in the right way. I think we have been commenting and this continues to be the case that we're obviously -- M&A for us continues to be very important to look and deliver additional growth platforms. That our pipeline is quite full. We have some limitation in execution and continue to do so. I mean given the market composition, the fragmentation, the number -- or the large number of transactions will always be small and midsized deals. But obviously, we are also looking and are open to look at somewhat larger transactions. There is not that many available that make sense. And this is, of course, also something we continue to do. And I think I would put Hamatite into that basket or bracket, a transaction that will close sometime in the fourth quarter. But clearly, we're not limiting ourselves to the small bolt-ons, but continue to work across the spectrum.

Yes. The second one is also on the margins, but not really talking really about margins, but in another way. So we know the pricing. So you did 2% pricing in the first half. You say 4% pricing for the full year, that implies 6% pricing growth in the second half. So we know the pricing more or less. So raw mat is 5% higher in the first half. So what is the raw mat inflation in the second half? Is it 10% or much above that?

Yes. Again, it's a bit crystal ball reading, given the evolution, but also that the regional differences Thomas was alluding to. Again, we assume that the material cost inflation in the second half year will be higher than what we will see in the P&L in the second half. But how much exactly in which quarter is, and from today's perspective, very difficult to say. Again, a very important message here. I mean we continue to do this, particularly on the pricing side in a very sustainable and targeted way. And we'll also, obviously, adapt our pricing levels depending on the evolution here. And eventually, we will be able to catch up and basically deliver the full pricing impact, mitigating and reversing that margin trend.

So if I'm getting you correct, you are seeing the second half gross margins will be better than the first half 2021 margins, correct? Sequentially, it will be better, the gross margins.

What would I say is that the, let's say, the input cost increase compared to the first half year will be higher in the second half, probably peaking in the third quarter. And obviously, price impact will also go up. The timing is a bit difficult to say. On a full year basis, as I said, we expect this to be below the 54%. But we should not be dropping below the 53%.

Okay. I understand. And also if you can quantify the scope impact on EBIT in first half 2021. So what was the acquisition that you have done? So what was the impact on the EBIT from those acquisitions in the first half?

Yes. On the EBIT, that's very, very limited. We had about CHF 45 million sales impact. And typically, EBIT levels, particularly initially, also given the PPA is clearly below the group average. So it's only a few or a couple of million.

And the last one. So just trying to understand. I mean, you have already given your guidance about this operational efficiency that will bring you 50 basis point margin expansion, then there are formulation and procurement efficiency. So just to get it right, I mean, this is different from the operational leverage, I mean. So what about the volumes you get -- you'll get from margin improvement because of operating leverage. And this is -- this operational efficiency, formulation efficiency is top of those operating leverage, is that correct way of thinking?

It is correct that these are 2 different things. When we talk about the operational efficiency initiatives, these are structural, continuous, specific improvement initiatives, which we do on a local level. There is also regional and also global programs. But dedicated initiatives which will lift EBIT margin on an annual basis by 50 basis points. And here, we're very well on track to deliver this 50 basis points for the full year 2021 as well as we have done last year, and then we'll continue to do in the years to come. The operational leverage, when we talk about this, this is more sort of the volume effect on leveraging the existing fixed cost and resources and not including the specific improvement initiatives.

The next question is from Christian Arnold from Stifel.

Sorry to come back on the gross margin topic again. But I mean, assuming your 4% price increase or planned price increase and your view on the raw material being peakish in Q3, is this price increase sufficient to go back to your 54% to 55% gross margin range next year?

It will clearly depend on the development of the input cost increase, the magnitude and also the timing and basically the tipping point. But again, here, we're actually quite sort of measured and clear in our approach to the extent it will need more, we will do more. It's more a question of timing. Again, it's a bit difficult to very much pinpoint this in detail when and then how much. But it's clear that we will move back into the 54% to 55% range.

My second question would be on EMEA region, there you were talking about this very dynamic performance of the private residential sector. I wonder if there was a difference between Q1 or Q2. Has there been a change in the momentum? And what's your view on the residential sector in EMEA going forward? And maybe then also compared to the commercial sector and infrastructure sector, what are your expectations here for the EMEA region?

Maybe in terms of the momentum. Obviously, the comparison is a somewhat different one. Obviously, last year, the big pandemic impact was in Q2, so obviously, this was everything. In terms of the underlying momentum, we have not really seen a difference or a meaningful slowdown in the activity. It has remained very robust. And I think just also coming back to Thomas' comments, I mean these -- let's say, the distribution residential sort of refurbishment has been quite dynamic, continues to be dynamic. It's probably fair to say that at some stage, it will come back to, let's say, more normal growth levels. But we clearly do not anticipate that there will be a reversal or that certain demand has been sort of advanced. Clearly not. But also, this will then be complemented and somewhat replaced by particularly the initiatives driven by the various governments, be it the stimuli packages on the infrastructure side, but also the building envelope and the drive for more sustainable solution and also how you can operate buildings. And this will continue to have a very positive impact on -- particularly on the refurbishment side.

Okay. Is the commercial sector ready to tackle this sustainable construction already, yes, in the short term?

Absolutely. I mean this is -- when we had this high impact soon after the peak of the COVID, it was probably more private-driven activities. But the applicators doing this, they are also in the area of the commercial buildings and they are ready for this. It is -- the demand will change and demand will probably be fueled by many initiatives to upgrade the building codes and that will then also, let's say, further incentivize renovation on commercial buildings. Well, residential probably will then, at that time, be a bit less in the focus. But the applicators doing the job, they are diversified and ready to move into the commercial part as well.

The next question is from Alessandro Foletti from Octavian.

I try to make it quick. I just have 2 more. One on restocking, I heard many other companies reporting now that they were saying there was restocking effects in H1. Did you notice anything of that? And can you quantify?

Yes. And Alessandro, I'm happy to do so. I mean restocking is really not an issue in our business. I mean if you think particularly of sort of the direct project business, I mean these systems we deliver there typically for a certain application, a project, which you either do or you don't. So it's not feasible also from a logistical point of view to really sort of stock these materials if you don't need them. So there is very little in this. And I think also in most of the distribution channels, these are big volumes. You might see this in one or the other country, if, let's say, a big price increase is announced from, let's say, one month to the other, but it's very, very limited. And on a global scale, there is no impact on our business.

Okay. And then my second question on the recycled concrete. Can it be used in all applications? Like remember when we were in New York and we saw this tall high-rise building that require super, super strong concrete because they are the top one stock every day and so on. Could you imagine recycling concrete and using it all in this type of application, I don't know, tunneling or bridges?

I can imagine many things. And of course, the question will be, what kind of a waste stream do you have? If you have a high-quality waste stream, you can most likely also expect to get a high-quality output that you then can reutilize also for, let's say, the high-end applications. If it is more a mixture, then you have to be more careful and then probably you will rather use it in, let's say, mid-grade or in the lower-grade concrete. But I mean, theoretically, it's really input related. And if the input is clean and this is of high quality, I couldn't see any reason why not. We are not yet there because we are in the, let's say, scale-up phase. But from a theoretical point of view, absolutely visible.

That was the last question.

Okay. We thank you for listening to our call and for your interest in Sika. We take this opportunity as well to highlight the date of our next Capital Markets Day. It will be held in Zurich at October 7. So please note this down in your agenda. We wish you now all the best. Stay safe and have a great summer. Bye-bye. everybody, from my point. And of course, thank you all. And I hope next time we have more opportunities to meet face-to-face. In the meantime, maybe on an individual basis, looking very much forward to meet you in person sometime in the future. Thanks.

Thank you very much.

Thank you.

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