Sika AG (SIKA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Sika 9 Months 2021 Results Conference Call and Live Webcast. I'm Moira, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [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 Communication and Investor Relations of Sika. Please go ahead, sir.

Thank you, Moira. Good afternoon, and welcome to our 9-month results conference call. Present on the call with me today is Thomas Hasler, CEO; Adrian Widmer, CFO; and Christine Kukan, Senior IR Manager. We published our 9 months 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 9 months.

Thank you, Dominik, and welcome to all, and it's my pleasure to present you in brief the results of our 9 months period. Please go to Slide 2, which shows an overview of the achievements during these 9 months. It's a continuation of what we have presented in July. We have a continuous strong growth on the top line of 18.1%, reaching a total of CHF 6.8 billion. Also our over proportional EBIT evolution continued in these 9 months with 32.2% increase to above CHF 1 billion in total. Our EBIT margin has stayed at 15.4%, just at the level as it was at the 6-months mark. We also announced today an important change in the group management in which we have reflected our enabling and sustainability focus by giving more attention and reinforcing our innovation and sustainability drive by separating this from the operational efficiency and improvement on the quality and EHS side, giving these 2 areas, separate leadership and having with Patricia Heidtman, a new Chief Innovation and Sustainability Officer. Thirdly, I think, it is also for Sika relevant to say the key challenges are not -- we are not immune of the key challenges on the rising raw material prices and the supply chain impacts. It remains difficult to predict how this will evolve. We have a cautious approach to this, but we see every day, everywhere, some new elements coming in. So far, we have managed quite well, but we will see that later on when Adrian goes into more details. Please go to Slide 3. Here, we have seen our acquisition results mid of the year by adding now 2 more acquisitions, the one in Mexico, Bexel; and the one in China, Waterproofing Landun. Two great additions, which reinforce our footprint locally very much. At the same time, we are also close to complete the transaction with Hamatite in Japan, we expect closing in November. Next slide, please. And with that, I hand over to Adrian to give a bit more insights into the regional evolution as well as the financials.

Very good. Thank you, Thomas, and good afternoon and good morning to all of you. Following Thomas' business summary and highlights, I will now give you further insights into the results. Starting with the top line, Sika has continued, as you have seen, to deliver solid growth in all geographical regions with a local currency growth of 18.1% for the first 9 months of the year. Organic growth was 16.8%, while acquisitions added 1.3 percentage points of additional growth, primarily representing the initial impact of the consummated acquisitions this year. As Thomas has shown, this is particularly DriTac, Kreps, BR Massa, American Hydrotec and Bexel in Mexico. Currency effects have turned slightly positive for the first time in several years with foreign exchange impact contributing a 0.1% positive addition to our growth, which brings total Swiss franc growth to 18.2% for the year-to-date period. Organic sales growth versus 2019 also remains at double-digit level for the period under review. In going into the regions, starting with EMEA. EMEA, as you can see, grew 17.6% at constant currencies. Organic growth was 16%, driven by growth in distribution and the renovation business. And growth was particularly dynamic in Eastern Europe, the U.K. as well as the African continent. Residual acquisition impact from Adeplast and Modern Waterproofing as well as the newly acquired Kreps in Russia contributed 1.6% of growth. Foreign exchange effects also here in the EMEA region were slightly positive at 0.9% of contribution. Region Americas recorded a strong growth in local currencies of 19.3% for the first 9 months, pretty much in line with growth in the first half year. Despite the challenging supply chain situation, the region delivered double-digit growth, driven by strong growth in Mexico, Colombia, Brazil, Peru and Chile. The U.S. also grew double digit with large-scale maintenance projects and new build projects logistics and data centers driving growth. Acquisition contribution increased in Q3 driven by the newly acquired American Hydrotech and Bexel and contributed 2.3% in the first 9 months of the year. Although to a lesser extent than in the first half year, foreign exchange effects continue to weigh negatively in the Americas with a negative foreign exchange effect of minus 2.1% in the first 9 months. Sales in Asia Pacific grew by 20.7%, driven by China with a continued strong growth momentum and double-digit growth rates due to infrastructure projects and strong sales in the distribution business. India as well contributed to this dynamic performance in Asia Pacific, while Southeast Asian countries, and here, particularly Vietnam, Malaysia and Thailand are suffering from renewed COVID lockdown. The situation in Japan also remains quite challenging. Foreign exchange impact in Asia Pacific turned markedly positive in recent months and contributed 1.3 percentage points of growth in the first 9 months. Finally, in the Global Business segment, Sika achieved a growth of 9.9% in the first 9 months, but declined sharply in Q3 as expectations of a strong carbon rate recovery from previous year faltered due to the limited availability of semiconductor components. Given these circumstances, the automotive industry is now expecting flat build rates compared to 2020. However, we anticipate sustained growth similarly from an accelerated transition to electromobility and lightweight construction, once bottlenecks in the supply chain are easing. Foreign exchange in this segment remained slightly negative. Now moving down the P&L and going to the next slide. If we look at the gross result, material margin contracted by 200 basis points to 52.6% of net sales primarily driven by a continued strong increase in raw material costs as a result of global supply chain disruptions, energy shortages and solid demand. Through pricing actions, we were able to mitigate a large portion of this increased pricing component in the first 9 months was 3.5% of sales year-to-date with a higher run rate, of course. And formulation efficiency initiatives, structural procurement savings also contributed positively. Acquisition-related dilution effects in the first 9 months were 30 basis points. On the cost side, operating cost, which both include personnel costs as well as other operating expenses continue to increase on the proportionally at 8.7% for the first 9 months, and this compares to a sales growth of 18.2%. Due to a strong operating leverage, discipline, execution of the many operational efficiency projects as well as a continued good synergy capture related to Parex and other acquisitions. Consequently, we were able to increase EBITDA by 23.9%, with EBITDA margin up by 80 basis points to 19.3% for the period on the review. As a result of reduced CapEx in 2020 and the limited acquisition impact, depreciation and amortization expense remained flat in the first 9 months, providing further leverage. And as a result, EBIT increased strongly by 32.2% to CHF 1.054 billion and an EBIT ratio of 15.4% of net sales. Below EBIT, net interest expenses decreased by 16.5% compared to the same period of last year to CHF 32 million on lower debt and higher interest income. Other financial expenses decreased sharply in the first 9 months, primarily due to a lower hedging costs and foreign exchange valuation impacts. Overall net financial expenses reduced by almost CHF 15 million, or close to 30%. Group tax rate during the first 9 months remained almost flat at CHF 24.6%. This is 20 basis points up compared to the previous year on a slightly negative country mix. And also here, as a result, net profit increased over proportionally by 36.3% to a record level of CHF 765.1 million, or 11.1% of net sales, which is up from 9.7% of net sales in the same period of last year. With this, I pause and hand over back to Thomas for the outlook.

Thank you, Adrian, and please go to Slide #6. Our outlook for 2021 is the same as by the midyear outlook. We see sales growth in local currencies between 13% and 17%, an over proportional EBIT increase and an EBIT margin, which will reach 15% for the first time despite the challenging situation still ongoing on the supply chain and on the material price development. In addition, once more we can confirm our 2023 strategic targets for sustainable and profitable growth. And with that, I guess, we open up for the Q&A session.

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

I'll have 2. My first one is just on volumes and specifically looking at your local currency growth and with what you expect for Q4 pricing. It sort of means that there is a wide range of outcome here. Can you maybe help us to understand if we look at what happened in Q3 with some of the headwinds, including the summer cool-off and supply chain disruption? I guess some of that is easing into Q4. So how should we think about the Q4 volume outlook, given that, again, your outlook implies either a decline year-on-year or an increase of about 4% at the top end? So if you could help us here, that would be really helpful. And my second question is on gross margins. In Q4, given that you have more pricing, should we expect Q4 to be higher than Q3? And how soon do you think you could get back towards the more normalized range of 54%, 55%? I guess have you seen any normalization in raw mats here?

Yes. Thank you. Yves, on the material margin, I mean, clearly, we see quite a strong adverse input cost dynamics, and there was clearly, let's say, at the beginning and even midyear sort of an outlook of possibly a normalization in the fourth quarter. I think there is probably a higher level of uncertainty whether this is going to happen. So we will continue to increase prices also in November, December and clearly also into next year. So here, clearly, in terms of exact material margin development, the situation is such that it's relatively difficult to pinpoint, but I think we have our reaction here set up and in place where we would, obviously, continue to act accordingly in order to protect profitability. And in terms of volume outlook, and there is also here a certain element of, let's say, supply chain difficulties, which, obviously, we have to encounter. I think we have managed relatively well, particularly if you look at, let's say, the growth in the third quarter, let's say, except on the global business on the automotive side, where there's a clear impact on build rates. Actually, also here with a much increased pricing component volume growth, which we have been able to deliver in spite of some of the supply chain difficulty. So all in all, we continue to be confident on our overall growth outlook for the year, and we'll be in that range also in the fourth quarter.

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

Three questions from my side. When I look at the sequential local currency growth, organic growth in Continental or Western Continental Europe, as far as I can see, out of the comments you have elaborated in your speech before. Then it looks like that the growth slowed down in the third quarter. Can you quantify if this is correct and also what has been the reason for this? That would be my first question. Then the second question would be on your global business. Normally, the fourth quarter is from a seasonality, the strongest quarter global business. We also expect this to happen this year. But do you expect a sequential demand improvement or the chip shortage issue basically still completely overshadowing the seasonality? And then the last question would be on Asia Pacific or not only on Asia Pacific, more basically your kind of retail customers, which are in the U.S. and Asia Pacific. Do you see there already a negative demand effect due to the inflationary effect? That would be my last question.

Thank you, Markus. I'll take the first one here on EMEA. If you just look at Q3, yes, it is right that volume development was not as strong as before this, I would say, is owed to sort of 2 elements primarily. On the one hand, it's sort of the comps, particularly in the Southern European part of EMEA during the last year where we have seen COVID catch-up effect in a sense that particularly during the summer holidays, actually, they were shortened and construction activities was maintained in order to catch up. This is an effect we have not seen this year. And secondly, also in EMEA, we have seen certain supply chain impacts, which have, to some extent, limited growth but we have clearly also pushed on the pricing side, not only in Europe but across the board.

Okay. May I answer your second question on the automotive business? It's a seasonality. Clearly, the semiconductor shortages putting everything more or less upside down. The industry was quite confident in midyear that the Q3, especially September would be a strong recovery after the summer break as they became clear towards the end of August that this is not going to happen. And actually, the acceleration of the impact of the shortage is piling up. Where we had in the first quarter, 1.4 million units lost due to this, it was 2.6 million units in Q2 and it is now at 3.4 million units alone in Q3 that were lost due to this shortage. And the Q4 so far outlook is 1.4 million advising with every update of IHS. So here, we see many unexpected plant shutdowns or partial work weeks across Europe, especially China. In Europe, we saw a 33% decline in September alone on the build rates compared to last year and last year wasn't the greatest year either. So here, clearly, the industry is really out of sync and has more problems to get back into the gears. So we expect, for Q4, the continuation of that trend. And as Adrian mentioned, it will probably be at 75 million units for the whole year, which is the same low level as 2020. And the expectation into '22 are still a bit open. But it could also still last well into '22 that this chip shortage will continue to help for the car production. Third question was...

Asia Pacific.

The inflationary effects on, in particular, Asia Pacific or the retail customers.

Yes. I mean if you look at the growth in Asia Pacific was actually quite strong and solid with sort of the differences across the region. I mean particularly in China, we continue to see a very solid growth, and this is across the board and -- but particularly also on the BFM side, on the retail side. In that sense, we have not seen any, let's say, inflationary impact on demand here in China nor in other countries. I mean where we see more impact, this is really, again, related to COVID-related measures, particularly in Southeast Asia, where we also have a good distribution and retail business relating to lockdowns or in Japan, also here being restricted on the business side. But on the inflation side, we haven't seen any impact to the business as of now.

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

I guess I have 3 questions, hopefully, quite brief. Firstly, on the pricing. I think last time you reported, you were talking about hoping to get to, I think, 4% price effect for the average of 2021. Is that still the case? Or are you revising this guidance higher now that you're hoping to increase prices further in Q4? And I guess related to that, are you confident that your customers who have taken a lot of price increases this year are going to be happy or at least will tolerate more price increases, especially now that demand is normalizing? That's my first question. My second question is on the Americas region, actually, a very strong performance in the third quarter. I remember in Q2, you had some disruption on U.S. chemicals, and you lost a bit of volumes. Have you sorted these issues now? Did you -- I think, you had to import some of the chemicals from China into the U.S. Is it still the case? And lastly, just the 7 acquisitions that you mentioned, could we have an indication of overall sales contribution on a full year basis?

Yes. Maybe on the pricing side, quickly to sort of also here repeat, we have a 3.5 percentage point pricing impact year-to-date from about 2% in the first 6 months. So here, we're on a good trajectory in terms of impact, vis-a-vis our guidance from today's perspective, I would see 4% impact for full year as the minimum. It's probably all going to be more as we continue to increase prices. In terms of receptiveness, I think, it is very clear. I mean if you look around and obviously, our customers are faced with this in other areas as well. I guess to call them that they're happy is probably a bit an exaggeration. But clearly, this is something which is very sort of visible not only in building materials, but really across the board. To that extent, we continue to be successful in being able to increase prices. In the U.S., here on the volume side or the Americas, yes, we had quite a good development in Q3. A large part is also Latin America, where we see good growth, continued growth across the board. We mentioned a few countries where we have seen specific strong developments, but also the volumes in the U.S. are quite solid. This being said, we're still faced with, let's say, daily challenges, obviously, to secure all the raw materials in the right form at the right time. I mean do you hear the, let's say, negative impact or a challenge not over. But I think clearly managing relatively well if you compare it to others.

Third question is about acquisition sales contribution.

Yes. And on the overall impact on an annual basis, and we will not see all, obviously, being materializing here. Hematite will only come in, in November, but the full year impact is around CHF 340 million of all these selling.

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

I would have 2 questions. My first question would be on the appointment of Patricia Heidtman as a new Chief Innovation Sustainably Officer. Could you tell us a little bit more about her background? What was the decision process to change the group management and what will be target over the next few years? And then my second question is on cost inflation. What are you monitoring when we look at 2022, could we see a normalization in freight rate? Could we see the supply coming back? Could we see the demand from some material normalizing? What are you monitoring to assess whether prices could go -- continue to go up or might normalize on what?

Okay. Let me elaborate on your first question about the change in the group management. For many years, we had a strong focus on CTO, on the R&D, on the innovation pipeline, which is the backbone of our strategy for many, many years. Recently, we added the operational efficiency still under the same leadership also the operations as such, being managed through the technology head. And then adding to that over the recent years, also the sustainability topic, which became much more relevant has been managed by this single function on group level. And we have clearly seen all these pillars are very vital and contributing nicely to our overall performance. But it is too much and may risk that we lose some focus here. And therefore, we decided that the forward-looking concerns like innovation and sustainability are reinforced on the one leadership. With Patricia, we have a strong well-known individual with an excellent drive for innovation and also driven by sustainability that will have this focus area and Frank our CTO up to now, which has presented excellent results on the operations side is focusing more on the operational side and leveraging our operational footprint, at the same time, also focusing on improvements on other ESG relevant aspects as quality, safety and so on. So this is a reinforcement of the organization, giving clear leadership to future concerns as well as to current concerns as in operations. And maybe, Adrian, on the...

On the -- let's say that the picture and the trend for next year, what the raw materials are concerned. I mean, to some extent, obviously, it is a bit of failed crystal ball reading in terms of the exact impact and the exact development going forward. I think from today's perspective, it is quite clear that raw material cost inflation will also be prevalent in 2022. Thirdly, in the first half year, I think as always, it will be a combination of different factors. Obviously, we're monitoring here feedstock price development, but also any other factor that could impact, obviously, the production of our raw materials. And here, I think, we're as close as we can be given that this is very much forward looking. Obviously, also the energy side is something which has or can have an impact, particularly when it is used for production of raw materials. We believe we're, let's say, relatively close in monitoring the situation, but also we -- I mean, we don't have a clear visibility now to what extent and how long this will continue in terms of inflationary development. And what we particularly focused on is, obviously, our actions and countermeasures in order to mitigate this situation and then here, pricing is clearly one important element, but also having alternatives for certain applications and making sure we can satisfy demand.

The next question is from Bernd Pomrehn from Vontobel.

Yes. In your presentation published today, you mentioned that sustainability initiatives are positively impacting operational costs. Could you please elaborate on this? What major opportunities do sustainability initiatives provide in terms of cost savings? And then the second question, just can you provide, please, an update on the targeted CapEx for the current year?

Start with the CapEx. Here, we will continue to be below sort of the 2.5% to 3% on the CapEx spend for the full year. I would clearly say this is going to be at or below CHF 200 million, we will not exceed that mark this year.

On the sustainability and operational efficiency. I think we showed an example at the Capital Markets Day, the need for lower footprint products is requiring that we are revisiting main product lines and upgrade them. And this is an opportunity to really bring in smarter raw materials. And I think we had the presentation of the China motor initiative, where we are bringing in motor solutions or, let's say, cement solution with 30% lower CO2 while providing us the opportunity through smart formulation to also bring the overall costs down. So it is a cost improvement as well as a performance improvement as well as a CO2 -- significant CO2 reduction. So this drive for sustainability is also touching all products that we currently have in the pipeline and there is an opportunity to upgrade not only the CO2 footprint, but also to look with a fresh pair of eyes into the whole setup and optimize the formulation. So this is a significant opportunity that we showed at the CMD as one example.

The next question is from John Fraser-Andrews from HSBC.

My 2 questions, please. The first one on the operational leverage, the nonmaterial cost growth that was flagged in the presentation at half the sales growth. Could you just elaborate on that, please, to just what's behind that? I'm aware that last year you cut a lot of costs out temporary, and have you become more efficient on that as you've grown sales this year? So that's the first question. And then the second question is in the end markets in construction that you're serving. You've called out residential as the key driver of the growth in the first 9 months. Perhaps you could comment on the nonresidential sector, whether that's been a drag for static and whether you're seeing any benefit in infrastructure yet, so it was a feature of the Capital Markets Day, but whether you're seeing that in the numbers we see today.

Okay. Let me start with the first question on leverage and operational efficiencies. And these are really the 2 elements here driving the good cost leverage on the operational efficiency projects, and this is really an ongoing program where we have many, many different initiatives on local, on regional and on global level to, let's say, drive efficiency across the value chain and a lot is centered around, let's say, production, logistics, footprint and these are really ongoing elements and initiatives and dedicated programs in the various areas. And as also reported on this during several occasions, but also on the Capital Market Day. This is one of the drivers here of cost leverage and profitability improvement basically contributing 50 basis points of improved profitability on an annual basis. And let's say the pure, I would call it, operating leverage is really driven by the fact that, obviously, the various sales initiatives, be it cross-selling or otherwise have a positive effect in a sense that we don't have to add additional cost at the same pace as we add basically resources also fixed assets contributing here, as you can see in sort of a flat depreciation and amortization development this year. I mean these are really the 2 elements which we basically drive on an ongoing basis.

Okay. Then maybe I answer the second question on the construction markets. Yes, it's correct. The residential market has a slightly higher growth pace than the nonresidential, but this is mainly also driven by incentive programs that are starting to kick in to upgrade for energy reason Facade, especially applications are high in demand in countries where the subsidies are already in place. This doesn't mean that the nonresidential business is not growing. It's growing at a lower pace, but especially when we look at the commercial area and here, data centers and distribution centers are high in demand and providing a lot of healthy growth for us. And yes, it's true on the infrastructure side, I would say, so far, it's business as usual. We don't see yet the big announcement turning into an increased level of activity, but we expect this to then show further probably movements going into 2022. But also there are nothing, let's say, negative, but it's just not yet showing additional inputs from the government programs that are in discussion or announced.

The next question is from Patrick Rafaisz from UBS.

I have 2 follow-up questions, please. The first one is on Americas, and you talked already a little bit about the solid volumes in the U.S. and recovery you're seeing in Latin America. Looking specifically at Lat Am in South America, how far would you say have we come in terms of recovering to pre-COVID levels here? What I'm trying to get at is, is there further recovery potential ahead in 2022? Or will that be pretty much done this year? And the second question is a follow-up on pricing, gross margins and raw mats. And there were a couple of questions on that already. But given the lag effect of price increases that you'll see in -- coming in Q4. And of course, pricing is currently running at probably 6%, judging by your numbers. Do you think the gross profit margin will sequentially improve again in Q4 from what you're seeing today? And how long do you think will it take for you to fully compensate raw mats. You mentioned it could -- input cost inflation could last until H1 2022. But will it take that long as well for you with price to catch up entirely? Or could that already be achieved a bit earlier? So will you be back at your usual gross profit margin level at 54% to 55% for 2022? Or is that too early to say?

Okay. Thank you, Patrick. Let me answer the first question on Lat Am recovery. It's difficult to say how much of our exceptional growth rate in Lat Am still is less in regards to the recovery. I would clearly see that Lat Am is outperforming because of the, let's say, latest investments over the past 3 years in building and creating their stronger footprint, the acquisitions that we have done, but also the new leadership that we have in place across the whole region. It's not Lat Am alone. We have a lot of very positive influence by having the Americas regions using the operational and the logistic excellence from North America, now also across Latin America and this is driving a lot of the results. So it's clear we are gaining market share in Mexico, in Brazil, in Chile, in Argentina, and this is clearly above what the recovery is. To -- let's say, to put this in numbers, it's difficult, but I'm convinced the results that we see are the results of the organic evolution of the organization and the leverage that we have across the whole region America.

Then maybe secondly, on pricing and material margin. Maybe 2 elements here. On the one hand, let's say, at least the sort of long term seasonally, Q4 is not necessarily the strongest material margin quarter. I mean this is something we have to consider on the one hand. But I think more importantly, obviously, the input cost evolution is still very dynamic. So it is very difficult to pinpoint now what exactly the material margin will be. But particularly on the pricing side, as you pointed out, the trajectory is actually quite good. We will continue to also here add additional sort of pricing to -- in Q4 and also going forward. I mean looking into 2022, clearly, we see here a continued need also to further increase prices. The development will particularly in the first half year, be that we will continue to increase prices, and we have to see how the input cost side is developing. In that sense, it is too premature to tell where we will end up in terms of material margin from today's perspective, but obviously, the 54% to 55% looks quite ambitious given input cost dynamics and also the fact that just mathematically, I mean, if you have a substantial price increase component even when it's fully mitigating the cost increase on the material side in absolute terms, you will still have a relative impact on the material margin and with this type of price increase you can actually see that.

The next question is from Daniel Jelovcan from Mirabaud.

I just have 2 questions. First of all, I was quite positively surprised when I looked at your personnel costs only up 8%, so substantially below the top line. I mean when I look at the left and right in the world, the whole world talks about wage inflation and I mean, Carlyle yesterday said that it was tough to get enough qualified people, and they have to pay much more and so on. And I wonder why you are so much on the control for the personnel cost. Or is that of a lag effect maybe that you will feel that maybe especially next year? And the second question is yes, Carlyle yesterday, they said they had 23% organic growth in the third quarter in the construction material and they were talking a lot about roofing and reroofing especially in the U.S. Is that an area where you're not that strong? Or are you in different areas? So just to understand the big difference between them and you in terms of growth.

Yes. Maybe I'll take the first one here on the personnel cost side. I mean across the board, I think, yes, on the one hand, I think, we managed this quite well. In terms -- and I was referring to operational leverage and not having to add, let's say, as much resources or as many resources as growth are increasing. So that's one element. If you specifically look at the sort of the wage inflation, there is a certain element of it if you compare it to, let's say, previous years, there is a bit of a higher inflation on the personnel cost side, but it's relatively limited. It's also not in all the countries the same way. There is countries. And here, I would point out that the U.S. but this is more prevalent, but we also work a lot on optimizing and making our processes more efficient in order to be able to mitigate this. I think, let's say, the impact is more than on the customer side to actually find qualified labor to actually do projects. We have some of it in our factories, but overall, we have been able to manage quite well so far.

Okay. And then maybe on the second question on Carlyle, I cannot give you details on the 23% on Carlyle, but certainly, our roofing business is doing very well. We are in the commercial, in the large projects, less in the residential, which may be part of the answer, why maybe in the summer season and considering especially also last year's COVID situation, there may be some other elements that are playing a more important or pronounced role for Carlyle. Our roofing business is doing strong. We had in roofing some issues with raw materials availability that certainly is not a secret. This is one of the areas in the U.S. that has been more impacted, but still so we were able to deliver the required volume sometimes with some extra efforts, bringing in stuff from Europe or from Asia, but our roofing business has a solid growth. And it may not be comparable one-to-one with the Carlyle business model being more diverse. We are also more in the new builds than in the renovation and more in the large projects than in the small residential activities.

The next question is from Manish Beria from Societe Generale.

Yes. So my first question is on Europe. So I know it has been asked before, but I will ask it again, no? So if you see the volume growth in 3Q in Europe, that was flat versus 3Q '19 level, the volumes, yes? And it was up 9% in first half '21. So there is a huge difference from 9% to flattish kind of thing in Europe versus '19. So really what explains that? I mean I'm still not able to reconcile. I mean I understand there has been some supply chain issue, maybe 2 percentage off from that. But still, there's a lot of gap to fill up. So please see if you can explain that.

Yes. Yes. Thanks, Manish. Again, on Europe. If you look at volume growth, you're right, it's more or less flat, and I was giving the 2 reasons. I mean particularly on the availability side, here, we have seen some areas where we have been more limited than in the first half year. And so that's really one of the reasons. If you look at also the geographical composition, and here, I was alluding to Southern Europe, the impact there. There is also the Middle East where we have seen a slower growth in Q3, which basically is explaining here the difference. It's, obviously, also not always quite linear if you look throughout the year. But really not many more specific reasons here why in Q3 here the growth was more limited than before other than the elements I've been alluding to.

Okay. So okay, good year. So the second question is basically on this raw material and pricing again. I understand you want to go back to 54% to 55%, but not clear when that will happen. So my question really is here, like, okay, there is some inflation that continues. But let's see, I mean, this inflation doesn't see an acceleration from here. So the inflation -- the raw material remains at a very, very high level, and you are doing this pricing. So the next year pricing will be such that gives you gross margin expansion or really the gross margin expansion really depends on the raw material pulling off from here. So you -- of course, you explained, I mean, the price cost, I mean, can be neutral, but you can still have a negative impact on the margin. So my question here is, I mean, the raw mat stays here. So will you get to a pricing that gives you some margin expansion, but not only covering the price cost?

Yes. I mean if you look sort of across sort of a longer period of time in an environment where there is, let's say, stable input cost, I mean we typically have sort of a 50%, 75% basis points of sort of net price effect. And obviously, this is something which we will continue to drive. This is different across the countries, depending on the circumstances and many different factors. But yes, in an environment where we have stable prices were slightly declining, we can clearly expand our margins. And it is, however, very difficult to sort of pinpoint when this inflection point will be given all the, let's say, elements out there. And secondly, that's the other element which is really ongoing, and it goes into this operational efficiency improvement initiatives, there is also many initiatives basically touching material margin in terms of improving formulation. And for example, as we also have talked about examples here, but also specific procurement initiatives, structurally looking at our procurement also structurally looking at certain recipes from a procurement point of view, very closely working with R&D. So this is also an ongoing element. And last but not least, it's the innovation side where, obviously, new systems typically come at the higher margin than the ones that are being replaced. So also here, this is a continuous gradual effort to maintain and improve our material margins. And this, obviously, in spite of the situation now is very much continuing.

And also the last one, maybe, like I read your press release today, you see a 50 basis point expansion through operational efficiency, but you also add their formulation efficiency and things like that. So the question is really this 50 basis point is just on the OpEx line? Or it also includes your formulation and procurement efficiency?

Yes. Good question. It's only the OpEx line, the 50 basis points, where we specifically have a target out, yes.

The next question is from Remo Rosenau from Helvetische Bank.

In Q3 alone, the automotive business was down 18% organically. This must have had a pretty strong negative operating leverage in the third quarter alone. So in H1, you had 11% EBIT margin. Is it fair to assume that in the global business in the third quarter, the profitability was going down to a very low single-digit EBIT margin?

Yes, it is fair to assume, obviously, that this has an impact on profitability. This is relatively pronounced and volume impact in terms of having a negative operating leverage. And yes, profitability in Q3 in global business was single digit, yes.

Okay. But it was still profitable?

It was still profitable, yes.

Okay. And did I get you right in one of your previous answers that looking forward on the whole automotive situation, your best guess is that the Q3, Q4 will not be much changed in terms of the whole supply situation? And in the first half of '22 probably as well so that we might end up with global car production. I mean this is all guestimating, it's clear. But we might end up with -- I mean, volumes in '21 being the same as in 2020 and in '22 probably as well.

That would be a very negative outlook at the moment, CHF 75 million for '20, probably the same this year. The best guess is it's around CHF 80 million, CHF 81 million, but it requires, of course, that some of these limitations will really recover and it won't happen so fast. So in the first half, probably still we see some issues there. But it can and will not last forever. So I think to assume a CHF 75 million for next year, that would be very, very conservative, and it would also be, I would say, quite catastrophic to the industry and its suppliers, at least for those that are fully dependent on that industry. For us, we can mitigate that. We are working on the future on the electrification. We have higher content. But of course, we can also not overcome, let's say, the volume effect. And as you asked the prior question, of course, we also see that we cannot offset things like the build rates completely, but we remain at least profitable, and we can work on the future and future challenges that the industry still is facing in addition to these short-term issues.

Okay. And my last question. Apparently, one he is left and right that the chip produces basically select which car manufacturer receives how many chips also a bit depending on how they've bidded in the past. I mean you have many customers in that field. You have some insight. I mean could you probably tell us who is faring better in that sense, who receives a bit more chips than others?

Okay. I try to phrase it this way, and this may be a German expression. But as you shout into the forest that it comes back to you. So that means more or less, yes, there are clear differences between the different producers, the car manufacturers. Some have a very strategic long-term relationship with its suppliers and I will call the premium manufacturers into this category. I would also call the Japanese traditionally into these categories. And then you have others that are much more opportunistic that try to force by sheer force and the volume suppliers into, let's say, conditions that are not so favorable and the chip supplier certainly at the moment are on the -- at the longer side of the stick, and they are not going back to provide those customers with the same, let's say, attention as the others or the alternative consumer of these high-quality chips.

Thank you, Remo. For this last question, and this brings us to the end of the call. We take this opportunity to highlight the date of our next publication. We publish our sales figures for 2021 on January 11. And with this, we thank you for listening in and for your interest in Sika. We wish you all the best. Bye-bye.

Thank you, and bye-bye.

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