Sika AG (SIKA) Earnings Call Transcript & Summary

Good afternoon, and welcome to our half year results conference call. Present on the call with me today is Thomas Hasler, our CEO; Adrian Widmer, our CFO; and Christian Kukan, our Senior IR Manager We published our half year figures this morning at 5:00. The presentation to the half year is well published on our website. As this is a call only, we were not presenting the slides. These are a basis for our discussion. With this, Thomas Hasler and Adrian Widmer will provide further details on the results and the outlook. Afterwards, we will be ready to take your questions. I hand now over to Thomas to start with the highlights of the first half year.

Thank you, Dominik, and also welcome and good afternoon to the audience. It's my pleasure to provide you introductory comments to our past 6 months results. And overall, I would say, it's an impressive performance despite very challenging circumstances. For the first time, we have reached about CHF 5 billion in the 6-month period, very much in line with the CHF 10 billion year-end goal for the top line. And more impressive, I believe, also on the operating EBIT that we were able to achieve a very strong performance. I won't go into the details of the figures and leave that up to Adrian further to guide you through these. But I would make the connection to some of our key highlights in 2022, which are, again, we were able to close 2 transactions -- 2 acquisitions, both of them in North America, the 1 in Canada and the other 1 in the U.S. Also in this period, we did close -- we closed 2 divestments, which as you know, for Sika, we are not divesting so many. So it is a bit of an unusual picture, but it's part of our strategy. And we have, as announced last year, been able to sell our protective coating business as well our injection equipment manufacturing units in the first half of the year. This is also a connection to the figures since we were able to gain here on the transaction quite some nice profit, which flows into our operating EBIT. Other than that, I think it's very important to understand that these 6 months were far from being normal, we were challenged especially in Europe with the incidents and the war in the Ukraine, which brought many changes to the business. And we see that the European business overall, from a decent start, has been challenged furthermore over the course of these 6 months. And this is besides Western Europe, the only region where we also saw that besides the fantastic price increase element also of the volume element had a negative trend in all the other regions. And here, I would like to outline the Americas have provided a very strong growth based on price, based on strong volume growth and also some acquisitions in the regions. This is also then contributing to the excellent overall growth that Adrian will go deeper in detail. We had challenges in Asia, which are related mainly to the lockdowns in China, which were giving us quite some difficult times in March, April. But I can also state that our strong performance continued after the lockdown actually also during the lockdown and China in our business terms, is back on track. And here, we have 1 important element of our strategy, especially contributing to this growth momentum is that the further market penetration we are working on from 130,000 points of sales increasing to 165,000 point of sales, which is giving us a strong boost on the overall growth in China. But this is also relevant in the other markets where we still have a relatively fragmented situation and the opportunities for us to gain market share and to build on this is everywhere available to us. Another element, which I would like to outline in the first 6 months is that we see the strong resilience of our refurbishment and repair business, which is also in challenged markets, a solid contributor to baseline growth since many of those activities are mandatory in nature and are not postponed at all. And for us, an important element of our overall top line performance. We also invested further in our footprint globally, especially in Africa, we opened 2 factories to reinforce our strategic move to capture the potential or the huge potential of this continent. At the same time, we also invested in Bolivia in a new plant. And also for the huge American admixture market, we opened a new factory in the U.S. We are planning to continue on this path, reinforcing our footprint and staying close to the markets and the customers independent of the local challenges being there and benefiting from those investments. This would conclude from my side, the overall introduction. Maybe coming back to the acquisitions. I think we have highlighted also the MBCC progress in the half year report. And here, maybe just notice that this transaction is progressing well. We have strong interaction with the company. We are making progress on the antitrust approval list received many important unconditional approvals in countries like China, Japan, Brazil and many more. And so here, we are on track to reach our targeted closing by the end of this year. So all overall, a very busy 6 months, many challenges, unforeseen challenges, but Sika style, we take them pragmatic and turn them into opportunities. And as a result, we are able to deliver what we have communicated earlier today in the media and through the presentation shared with you. Adrian, further details?

Thank you very much, Thomas, and welcome to all of you. Following our CEO's summary and presentation of the highlights, we will now go further into details as to the financial result. Starting again with the top line, we delivered a very strong double-digit growth in all regions in the first 6 months of the year, as you have seen with local currency growth of 19.5%. Organic growth was a strong 15.5%, strongly driven by pricing, while acquisitions added 4 percentage points of additional growth in the first 6 months. This represents the net impact of the many bolt-on acquisitions we have closed in 2021 as well as in the first half of 2022 and the divestment of the growth in protection business in Germany. Currency effects were relatively modest, reducing local currency growth by 1.5 percentage points. Negative currency development was primarily owed to a weak euro. This all corresponds to a growth in Swiss francs of a strong 18%. In looking at the regions, Region EMEA grew 12.9% at constant currencies. Organic growth was 13.4%, while the divestment of the Corrosion Protection business had a negative scope impact of 0.5%. After strong growth in the distribution channel over the last 2 years, this part of the business saw softness, particularly in Western Europe and the U.K. and particularly in Q2. Conversely, growth in Africa and the Middle East has continued to be very dynamic at double-digit rates. Foreign exchange effects, as already indicated, were significantly negative at minus 5.3%. Overall, regions Americas recorded a very strong growth of almost 36%, particularly in North America. Key growth drivers were infrastructure projects and commercial construction. The mining sector also gained traction, particularly in markets such as Canada, Peru and Chile. Acquisition growth driven by 6 bolt-on acquisitions in the last 18 months, contributed 8.4 percentage points of growth in the region, while foreign exchange effects were also positive with an impact of 3.7%. Sales in Asia Pacific increased by 17%, driven by China, which in spite of COVID-related lockdowns in Q2 grew double-digit in the first half of the year, particularly the distribution business, as indicated in China benefited from continued strong growth dynamics while the direct business was more significantly impacted by the lockdowns. Also, the Indian market was very dynamic at double-digit growth rates, while Southeast Asia has been exhibiting an improving trend at high single-digit growth rates. Acquisitions contributed 5.5 percentage points growth, while foreign exchange impact was mildly positive as well, at 0.7%. Finally, in the Global business segment, Sika achieved a growth of 13.2% in the first half year with an acceleration in Q2, most notably versus the negative core build rate growth in the first 6 months, particularly in Europe, which continued to be impacted by supply chain constraints. Acquisitions contributed 5.7 percentage points of growth, while foreign exchange impact remained negative, minus 1.2%. On gross result level, material margin contracted by 390 basis points to 49.4% of net sales. This is down from 53.3% in the previous year. While strongly increasing pricing impact of around 14% for the first 6 months, started to overcompensate continue with absolute raw material costs increases during Q2. Relative material margin in percent still decreased due to the base effect related to the strong pricing component in the top-line. Dilution from acquisitions accounted for 30 basis points on material margin level, while ongoing formulation efficiency initiatives contributed positively. On operating costs, which include both personnel costs as well as other operating expenses, these developed strongly on under-proportionally, on the personnel cost side, an increase of 8.8% versus the top line growth of 18% was under-proportional due to a solid operating leverage and contained personnel cost increase. Other operating expenses decreased by 2.7%, supported by a profit resulting from the divestment of the Corrosion Protection business in Germany, but was negatively affected by expenses in connection with the acquisition of MBCC Group with a positive net impact of CHF 140 million. Contribution of the many operational efficiency projects continues to be in line with the targeted 50 basis points of profit improvement while higher logistics and travel costs as well as initial impact from the recently consummated bolt-on acquisition weighed negatively. Overall, EBITDA margin increased to 19.7%, up from 19.5% in 2021. With CapEx modestly above depreciation rates and the higher amortization due to acquisitions, depreciation amortization expense increased by about CHF 13 million in absolute terms to CHF 194.2 million, but under-proportionately providing further leverage. As a result, EBIT increased strongly by 22.7% to CHF 841.9 million and an EBIT ratio of 16% of net sales compared to 15.4% in the same period of last year. On a like-for-like basis, excluding one-offs and the initial dilution from acquisitions. EBIT as a percentage of net sales decreased by 120 basis points compared to the same period of the previous year. In looking at the items below the EBIT. Here, net interest expense increased by 18.5% compared to the same period of last year to CHF 25 million. The increase is related to the bridge facility for the MBCC acquisition. Other financial expenses increased as well by about CHF 14 million in the first half of 2022, primarily due to higher hedging costs and hyperinflation accounting impacts relating to our activities in Argentina. Group tax rate in the first half year of 2022 remained virtually flat at 25%, about the same level as in the previous year. As a result, net profit increased by 21% to a record level of CHF 598.8 million or 11.4% of net sales, also this up from 11.1% in the same period of last year. On the back of higher capital expenditure back to more normal levels after the reduced CapEx during the pandemic as well as higher seasonal net working capital buildup, given the strong top line development and higher inventory values relating to significantly increased raw material costs. Operating free cash flow was CHF 39.7 million, a decrease of CHF 278.7 million versus an exceptionally high previous year period. The balance sheet at the end of June 2022 shows a healthy cash balance of EUR 693.5 million, which seasonally is lower than year-end due to the aforementioned net working capital buildup and the dividend payment of CHF 446 million in April. However, net debt only increased by CHF 251 million compared to year-end 2021 to CHF 2.8 billion, supported by an additional partial early conversion of our outstanding convertible bond of CHF 123 million. As a result, financial leverage based on net debt compared to EBITDA of the last 12 months is unchanged at 1.45x on a reported basis. With this, I conclude my initial remarks and hand back to Thomas for the outlook.

Thank you, Adrian. And here, despite all the volatility that we have observed in the first 6 months and which we also expect to continue for the remainder of the year. we can reconfirm our statements from February that we are going to achieve our targets well above 10% net sales growth, CHF 10 billion for the first time in 2022 and an over-proportional EBIT evolution for the full year. This would then lead back to you for eventual questions, and we are happy to answer.

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

My first question is on the guidance. I just want to understand whether you think you can reach an over proportional increase in EBIT if it was not for the one-off gains in H1 '22? My second question is if you can help us to understand the difference in gross margins within Q1 and Q2 and what we should have in mind for H2 in terms of price cost spreads. Are we moving closer to parity? And last but not least, can you help us to give us some granularity on the financing structure for MBCC? Do you completely exclude equity as an option? And if debt is a privileged scenario, how committed is the interest rate -- for example, I think on some of the RCF and other type of debt structure that you made to take further. Thank you very much.

Okay. Thank you, Steve. On the guidance, we continue to look at the overall performance. And here, all the elements play a role, including the one-offs, which we have outlined in the first half to have quite a positive push from the divestments, which of course, won't happen in the second half of the year, but we will have still, let's say, one-offs in relation to the MBCC transaction. So this will certainly balance a little further over the course of the year. In total, we expect an over proportional growth of the EBIT, how much and how far this goes, it's too early to outline now, but we are confident that this will be the final result and also leaving some margins in there beyond the one-offs.

And maybe here on the material margin, somewhat similar answer here, obviously, given the volatility, not only on the input cost, but particularly also on the pricing, which has been very strong and increasing. Obviously, this base effect continues to play a large role. In terms of the general mature margin development, I would say, in a normal year, absent strong input cost increases. Typically, the second half year is marginally lower. But obviously, given the trend and the dynamics and the very strong pricing development and actually starting to overcompensate absolute input cost increases. I think there is a likelihood that obviously second half of 2022 will be showing higher material margins than the first half. But this is not really our primary focus. As just alluded to, the target is clearly to deliver over-proportional EBIT growth and whether there is then a relative dilution on the material margin driven by pricing is probably secondary, but obviously, clearly aiming at improving this margin going forward and also in the second half of 2022. Maybe if I can also then take the next one on the financing. And here, clearly, our view has not changed. The takeout, the envisage takeout of the bridge for the MBCC transaction continues to be based on combination of cash existing credit facilities and bonds and does not include an equity element to do so with our strong deleveraging profile that will work also in this environment. And maybe talking about the environment. Yes, interest costs have increased over the last few months, but we are still confident that we actually put a good financing in place here at competitive rates. I would estimate probably the interest cost attached to the full transaction to around CHF 70 million on an annual basis.

The next question is from Elodie Rall from JPMorgan.

So if I can come back first on your margin guidance for 15% to 18%, including one-off. If we take into account H1 that you reported, did that imply that in H2 margins, we need to be above 14% and that includes the negative one-off from NBCC costs, and I'm not aware of any other positive one-offs yet, and that compares to 13.5% more or less right on underlying for H1. So I understand price cut will be more spoil. But can you just summarize a bit the elements that makes you feel confident to achieve in H2? so that's my first question. And my second question is on Europe. We've seen volumes declining in Q2, so could you give us a bit more color if it was just due to hard comps or if you do expect this to continue to decline in H2? And a follow-up on Europe as well in terms of margin. This is the region where we've seen about 200 basis point decline, I think, in H1 on an underlying basis. So is it something that we should expect as well in H2? Or you have a better outlook for H2 in Europe.

Yes. Well, thanks for the question. I'll take the first one. Yes, I mean, you're sort of mathematical calculations here are correct, and there is indeed the different elements. Also what we're typically talking about in terms of our margin buildup and evolution. I mean, clearly, here on the input cost versus pricing element with a clear expectation looking at also how we're trending here towards the end of the second quarter, a positive evolution in terms of continued overcompensation of absolute input costs, this will clearly continue as we continue to also push pricing in an environment where at least some of the raw materials show some form of flattening. I think the situation will remain quite volatile. And in that sense, also unpredictable, but certainly, the likelihood has increased at some stage, we will see an inflection point here. So on that element, quite positive dynamics overall. In terms of the one-offs, yes, we will have additional costs related to the acquisition of MBCC, not expecting here additional one-off gains, but we will also continue to drive here our operational efficiency and elements with the many initiatives that continue to deliver good results. We'll continue to have impact positive synergies from the acquisition, most notably Parex with another CHF 20 million on an annual basis and also initial dilution here from the many bolt-ons we have done over the last 12, 18 months is rather getting smaller. So all in all, confident that in spite of here all the moving elements that we will achieve this over-proportional EBIT growth for the year.

Okay. And then your second question related to Europe or I would say, Western Europe, in particular in regards to the volume trend in Q2, that's correct. We had a negative volume trends in Western Europe. Here, it must be noted that, of course, the prior year still was benefiting very strongly from a backlog that was built up during the pandemic period and we had very strong distribution sales with a activities on home improvements post COVID. So this has been a very tough let's say, benchmark in the first half. But we also saw last year that for the remainder of the year, this has more normalized. And so also now for the second half, we expect there that the comparison level will be more in line with what is a normal business cost. And therefore, we believe that the negative trend won't further let's say, accelerate or be more pronounced rather that it probably will also bounce back to some extent. On the margin side, it must be clearly noted that the current gap that you mentioned, it's going to be further, let's say, narrowed by the strong pricing elements that Europe has in place. It has a certain delay. But here, we also expect a catch-up on the material margin overall, as Adrian has indicated and probably a little bit more in Western Europe and in other parts since there we had this delay a little bit more pronounced. And we will also have positive benefit from the operational efficiency gains where Europe early on has been addressing very strongly since this volume decline then unleash also more potential to contribute from that side. So we are confident that Europe will demonstrate a nice improvement in the second half and help the whole group to reach its targets in the 2022 year.

Okay. The next question is from Priyal Woolf from Jefferies.

It's Priyal here from Jefferies. So I think I've got 3 questions. The first question is just a follow-on to the discussion on gross margin. So we're hearing quite a lot about Rhine River levels at sort of all-time lows. And I think that's quite an important supply route for some of your input chemicals. And I know it impacted you at the back end of 2018. Is that something that is causing issues yet, either in terms of input availability or input costs? And if it isn't, yet, I mean, how worried are you about this as we go into the second half of the year. The second question is just with regards to MBCC. I mean today, you're talking about closing the deal by the end of 2022, which I think is a slight pushback from say in the second half of the year previously. In light of this, is there a possibility that the scale of divestments to ensure that you get this through antitrust is potentially higher than what you were expecting a couple of months ago. And then the third and last question is just a follow-up on Europe, given that volumes have been a little bit weaker and you're starting to see signs of normalization, particularly in the distribution channel, has this played out in terms of more difficulty in terms of pushing price increases through in that particular region?

So I understand the first question was to availability on the input side related to the Rhine level, which was an issue a couple of years back Here, I mean, yes, that was quite a challenge at that time. We have so far no indication that we are facing similar struggles. I think the industry is better prepared in this regard and less dependent. It is one of the elements, I would say, is nowadays where we say we have many challenges on the transportation side, cost side. And so at that time, let's say, the Rhine level was kind of an extraordinary and had a huge impact. But I think the supply markets have been able to overcome many of these challenges at higher costs. And also this one here, I don't have on the radar, let's say, major changes. There are other elements that I think are more relevant in these regards. Then maybe on the MBCC side, Note that this -- the timing has been a target for the second half. We are in the second half. We don't want to raise the expectation that tomorrow, we are announcing closing of the transaction. So that's more, let's say, a more precising of the messaging than anything else. And also on the scale of the divestment, there is no fundamental change. It's more, let's say, the administrative hurdles and the processes that we go through that require time. And here, we need to be a bit patient, which we usually aren't, but this is an official process. And here, we need to be bit flexible to allow room for this. And we make progress, which has received last week 2 jurisdictions, unconditional clearances. So it's work in progress and nothing that really changes the attractiveness of the deal overall. And then the third question was.

The third question was just on European volumes and whether that's impacting ability to push through pricing?

Of course, there is a theoretical link to this, but I think we have demonstrated that our pricing power is a bit, let's say, beyond just the arithmetics. I think it's important to note that during this in availabilities, the force majeures and so on that we have been able to supply even on the worst conditions. We were managing more than 50 force majeures from the supply side without having disrupted our supply possibilities. And customers look at all the elements. And of course, they are not excited and especially when volumes turn negative, the pressure is on, but I think our proposition on the pricing is very strong, and therefore, we are also successfully, let's say, decoupling from this short-term expectations.

The next question is from Matthias Pfeifenberger from DB.

It's actually two to give you hint a little bit. Are you pushing more prices into the third quarter? Or is this basically enough, you're catching up and you're seeing the input cost peak in the second quarter already? And then related to that, in a recessionary environment, probably next year, input costs might normalize. But if they don't, are you looking to recover your material margin to the previously historic levels?

Maybe on the first one, material -- what was material margin. The pricing yes. Unfortunately, on the input costs, and this is not just raw mat, this is also transportation, energy, which are still on the rise, we are not seating and we're not discontinuing. So in Q3, this element will further be pushed, has to be pushed. We cannot absorb. And we -- as I mentioned before, we have to also bring the message across. This is an absolute must. We cannot absorb this still rising cost on multiple elements. So pricing, of course, is still in Q3, a topic for the organization. And then about '23, that's a bit early on to speculate what will happen. There are so many scenarios on the geopolitical front that is hard to predict. I don't want to go down that path and make any forecast. But what I can say is whatever comes we will deal with, and we will turn this in an opportunity to demonstrate that we can perform better than the market and better than our peers. That's my aspiration. And what the weather will look like next year, we will take it, and we will take the measures required in agile, pragmatic and timely fashion.

Okay. And then maybe just a theoretical question on that point. You still have an 18% margin target in place for the medium term. So can you reach that without restoring or partially restoring the gross margin?

Yes. I mean, our -- this is the target range. And of course, within this range, as you can say, if the gross margin, if the markets are, let's say, in good shape, then it's probably going to be on the upper side. And if the conditions are less let's say, positive, then it's more on the lower side, but we always guided for a range. It's not a progressive increase from '15 to '18. And here, of course, if we would see that on the input side, the margins are recovering faster, it will also then contribute to the overall EBIT margin.

The next question is from Dow Harry from Redburn.

Harry Dow from Redburn. Three questions, please. First of all, is just a bit more color around your exposure to gas at the group level and particularly in Europe, this is quite a lot of concern at the moment around the availability of gas going into the winter. Just maybe a bit more color on -- I know it's a small percentage of costs, but if you physically can't get hold of any kind of how does that impact the manufacturing processing, Can the processes be adapted to another fuel source. The second question is just on sort of other operating and employee costs. I think both of them are down now quite materially as a percentage of sales, I think down 200 basis points. And that's to do with the mismatch between the top line price inflation and operating cost inflation. Do you think that mismatch can be sustained into the future? Or should we expect as a relative percentage of sales for those costs to rise? And then just thirdly, I think a big hit to margins in the global business, and I understand that's because of long-term fixed contracts of pricing. Do you have any idea of how long it will take to sort of cycle out of those and how long it will take to bring the margins back up in the global business?

Yes. Thanks for the questions. I'll take the first 2 here. In terms of, let's say, our energy cost or importance as part of the conversion cost or the cost in general, they're relatively small. I mean, energy costs accounts for less than 1% of sales. So from that point of view, our exposure is not that big, talking about Europe in the production process. We also have, in most places, let's say, backup and alternatives to basically replace gas as a fuel. So from that point of view, also exposure relatively small with obviously alternatives also in terms of factories, particularly outside of Europe. And obviously, the element of gas being important for some of our suppliers on the raw material side, I mean, that is certainly an element we do not have under control ourselves, but the direct exposure and alternatives relatively small. And on the employee cost side, yes, I mean, overall, the operating leverage, particularly also related to the strong pricing element as part of the top line is quite pronounced. If we look at the underlying employee cost increase. So also here, we see a certain inflationary element, although it's relatively, let's say, contained, as I was alluding to -- if you look at and compare it to sort of a normal year, what we have seen here in the first 6 months, there is probably about 1, 1.5 percentage points of, let's say, increase on top of sort of a normal year. Obviously, not to forget that we have been operating for a long, long time in many countries with more inflationary environment. I would still expect this rather to continue to increase to some extent, but within the range which we can manage.

Okay. I answer your question 2B, which is what's related to global business and pricing and margin recovery. It is very clear that in global business with the automotive key accounts, let's say, the delay in adapting the prices is more pronounced than in other market segments. Here, the long-term contracts, which for some parts of our business apply, which are model dependent products or parts to open up such contracts is a very timely -- it's very time-consuming discussions. And we have achieved, let's say, major concessions, which are very often, let's say, also a part of an overall strategic decision-making providing, let's say, retro payments for delivery of the path to adjust also charting on going business and also combining with new business awards that come then in our direction. And here, yes, it is stressful to see that the gap is slowly catching up, but this is a more longer-term catch-up that will take place. The relative power that we have in the relation is quite strong. We just need to be here a bit more let's say, conscious in the way we reach this. And so this is not a straight one-on-one discussion. It has all the strategic elements that must fit and we get concessions there, which make me feel confident that over time, this gap will come back to -- or we'll close and come back to the level. It won't be past, but it is also combined with, let's say, an acceleration on deepening the business relation with this type of customer.

The next question is from Cedar Ekblom from Morgan Stanley.

Just 2 follow-ups for me. In terms of European volumes in the second half, should we be thinking about volumes being down year-on-year? I appreciate that in the second quarter, you obviously had a difficult comp effect. But it sounds like the project business is actually softening quite a lot about the sort of repair remodel, distribution chain also under a bit of pressure. So is it actually underlying growth here that we need to think of as down year-on-year in 2H? And then secondly, on the remedies to get over the line. Are the competition regulators requiring that you agree the asset sales? Or are they allowing you to get that deal confirmed on the anticipation that assets will be sold, just to think about the time frame?

I think on the European volume, the -- as I mentioned before, the trend still is negative. But the baseline will improve. So here, we expect that this will be -- this will level out, but at the same time, I would say here, the volatility probably are the highest looking at the global volume evolution in the second half, we are very positive about the Americas outlook, at least far into the second half. Also in China, we see this and those in other parts it's correct. Europe is a bit of a question mark. We expect it to be not, let's say, a continuation of the negative trend, but it could be. That's not excluded. And it would, of course, also then require us to adapt our working model and be in line with that. But so far, signs are still in line with our expectation. But yes, this may also come back to the question that were asked before about the supply guarantees on energy and gas, which would have quite an impact on economy here in Europe. So we are not as negative as others, but we are cautious, and we believe there will be also some upside on the volume side. And then your question in regards to MBCC, that was the deal structure and fundamentally to have a difference there.

No. So the question is, if you need to sell assets, in order for the competition regulators in relevant countries to approve that deal. Are the regulators requiring that you actually find a buyer for those assets, before they are willing to approve it? Or are you being allowed to sort of commit to selling assets in the future and then they will approve the deal? That can delay the deal.

The deal -- and we are dealing with many, many regulators. And the 1 thing I can share with you is they are certainly not aligned and have all a different opinion. But in short, there -- the closing will not be substantially delayed because there may be obligations to keep separate or to allow for the closing. So we have different requirements that we have to fulfill, but they are known and they are taken into consideration when we make our overall judgment.

The next question is from Manish Beria from Societe Generale.

So I just have this clarification. So you said the underlying margins are down 120 basis points, but I calculate 200 basis points. So just trying to understand, so this 90 basis points is just coming from the scope impact, right?

Yes, Manish, to confirm. There is different elements here. What I have been referring to is basically a true like-for-like, which also excludes the initial dilutory impact of the new acquisitions, which is also about 70 basis points on EBIT level, and that's basically a large part of the difference. And then there is -- if we were to go into a true like-for-like some additional smaller elements, but this is also exactly the reason why we don't go into this in general, I think being quite transparent on the big elements so that you can make the math. But many of these elements are just ongoing part of our business and how we execute our strategy. But that's probably the bigger element you're missing in sort of your calculation compared to what i have alluded to.

This 70 basis point dilution means like CHF 35 million impact on the group. The acquisition revenue in this first half was CHF 200 million. So I mean 15% margin normal, so CHF 30 million. So you have this difference. So that means the acquisition was contributing negatively to the first half or something like that.

Certainly contributing under-proportionally and you also have to take into consideration that the business we sold off is also included here, which obviously also provides an EBIT gap. But yes, that's actually quite a typical picture of, let's say, newly acquired companies, on the one hand, incoming profitability is lower, but particularly in the first few months, there is quite significant purchase price allocation effects, particularly impacting the first few months of the transaction.

Okay. Understood. So out of the 70 basis points, just to confirm, 30 did come from the gross margin, the acquisition Okay. And now if I look at the other OpEx that you report, I mean, even if I exclude this. What you've talked about the dilution from the scope, still looks like double-digit growth. If I exclude the gains and things like that, exceptional there. So just trying to understand what is -- why it is growing so fast because we thought, I mean there is because of leverage and things like that. Now the leverage that you're getting is just from the price -- but underlying is rising very fast. So what is the reason this other OpEx line is rising so fast?

Yes, there is some smaller one-offs in here as well. That's 1 element. And the second one is, indeed, as I have mentioned in my summary, there is certain cost elements, obviously, that are increasing compared to the previous year, for example, travel, which is pretty much back to pre-COVID level you have on the logistics cost certain disruptions. And again, circling back to comments Thomas made. Obviously, that's also elements we put into our pricing offers to efforts to basically pass on to our customers. So in this side, this is also included. But yes, there is some underlying, let's say, cost developments, which we have to pass on and ordering.

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

Two questions on my side, please. Firstly, have you seen an update on MBCC performance year-to-date in the first half. Do they have similar pricing momentum as you have? And have they been able to manage the cost inflation and protect their margins? So are the trends at MBCC as far as we can tell, consistent with the trends at CCA? That's my first question. My second question is a bit general, and I apologize for that, but obviously, a lot of talks around recession in Europe, maybe in the U.S. as well. And we keep referring to how the business behaved back in 2009. And obviously, sure you remember, there was a good level of resilience. If my model is correct, the top line was down like mid-single digit, excluding currency. So quite a good resilience. What -- how has it changed since 2009 in terms of penetration of the products in terms of the exposure to distribution, obviously, in terms of size, that would make it behave similarly or differently in the next recession?

Well, thank you, Arnaud. Maybe starting with the first question here, obviously, without being able to go into too much detail. But in terms of development, a very similar picture in terms of solid top line development also similarly impact on material margin. For example, as obviously in the quite same environment. I mean, as we have also reported upon signing of the acquisition, some of these elements are, let's say, less strong as in our case, but in terms of directionally actually going very much in the same direction also in terms of performance according to forecast or budget and pretty much in line with this. And in terms of your second question as to how would you -- or how would we view the business today versus, I'd say, that the financial crisis, you mentioned where, indeed, we had quite a small impact on the top line and recovered this within 12 months and at the same time, actually improved relative profitability in this year. And I think if you compare Sika today, and this goes to the comments Thomas has made a very strong resilience, very balanced on the one hand, geographically but very importantly, a high share of repair and refurbishment business, more than 50% in mature markets, even rate of 70% or more. Part of it, you cannot actually just push out. You have to do. So this part has rather increased compared to 10 or 14 years ago. So in that sense, I would say, resilience has rather increased in many ways how a business is set up and the geographical spread. The other thing that typically goes with a recessionary environment is obviously that input costs come down quite quickly. And here, our price stickiness is quite significant on the one hand from a, let's say, time lag point of view but particularly also fundamentally that due to the fact that we're selling systems and solutions here, the pressure is not that big, which allows us to then also address the fixed cost element in Dutch and environment. So I would say, in summary, very much the same at least as 10 or more years ago in terms of how we would use such an environment.

Maybe to add to that, I think also some of the markets have different dynamics in 2008, 2009, for instance, the automotive market was saturated and had a huge impact by the change. This time, I think that the market is very short and the backlog is huge and the transformation to e-mobility is very high in demand. So this will be very different than 10 years ago. And also on the incentive programs, the stimuli that have go together with the Green deal, they will not try out these incentives to convert the energy saving initiative in the countries will also stay and the demand there will also be less impacted by a general recession. So there are multiple parameters also in the market as they are quite different than years ago beyond what Adrian just said with the portfolio and our, let's say, multiple lag presence in the market.

The next question is from Remo Rosenau from Helvetische Bank.

Yes. At some stage in your presentation, I heard Schindler say that China is [iniscernible] contracted, I mishear that? Or was that correct? And could you elaborate a bit on China, in particular, because listening to Schindler this morning, which of course, is a totally different industry. The outlook on the property developers and housing was pretty bleak. Of course, again, that's not your main field of action of still. So could you elaborate a bit on China?

Okay. Thank you, Remo. And yes, I won't comment on Schindler's business. I'm not into that statement so much. But our business has quite an impact with the lockdown. It was going very strong last year or also the beginning of this year, and then the lockdown had quite an impact. It never stopped. Our direct business had a more pronounced slowdown because construction sites were limited and the project work stalled. On the distribution side, our growth momentum, which is far above 25%, came down to double digit, still well above 10%, double digit, but it was able to find additional sales points and access to the market, and it was well distributed over China. And this has been lifted in the beginning of May. And when I say back on track means that we now see that both divisions, the distribution as well as the direct business have come back to sales growth as prior to this lockdown period and driving overall strong China performance. And we are also optimistic that this will continue the segments we are in are of course, different than the, let's say, the business of others. We have here a lot of infrastructure activities. We are in selected markets in the direct business and less, let's say, exposed to the residential market condition.

Would you say that the growth in China which is very good to hear that it continues is mainly based on increasing new penetration in the market, still together with Terex? Or is it still more the overall market?

I think it's both, very clear. The market penetration that the distribution is demonstrating is just -- it's a continuation of what has been established several years back, and we are reaching more and more cities in more and more rural areas. Our market position is strong. We have a leading position in this segment, it's the tile accepting segment. This gives us great opportunities to go further and build up more sales points. But also on the direct business on our infrastructure business, engineered refurbishment business, we are seeing positive volume trends. So here, we see the market also in our favor coming back and eventually also going to benefit from further incentive programs by the government to push let's say, the overall recovery of the economy past the lockdown period.

The next question is from Jaideep Pandya from On Field Research.

I actually want to follow up on the last question. There is a fair amount of backlog right now of these unsold or rather presold buildings that have not been completed in China, almost 40% since like a few years now. And it's got to a point now where there's social revolution going on and there is a fairly high degree that these local governments will push these developers to complete these buildings. So in that scenario, do you see a chance for acceleration in growth in sort of Q4 2022 through 2023, if a lot of these unsold or uncompleted rather buildings are completed? That's my first question. And the second question is around your raw materials. What do you see with regards to availability of raw materials from a regional point of view? Because none of the raw materials that you buy, especially in North America have been very tight. So has the availability significantly improved for your business?

The first question is related to the residential market in China and will this further increase our growth momentum. That's a good question. When you grow 25% to 30%, how much more can you really relate to a single element to say now we're going to 40% growth, if that happens, it's just not -- it's just not real. I mean -- we have a tremendous momentum there. It is fueled by many elements. But also, it is also a question what the capacity is of the organization to grow. I think with the 25% to 30%. We have demonstrated that we can build on our model, and that's healthy. And if there are more elements helping us to grow. We will capture as much as we can. But also here, I mean, this is a growth mode that have we seen in any other industries where we are in, and we have to be realistic. We are building factories almost in a 6-month period to catch up with the demand, and we are talking here about large scale factors and soon to be announced, more factors are following. So this is, of course, all playing together and just to opportunistically take everything in and at the end and not being able to fulfill -- we have to be a bit cautious. So we see these elements, but at the same time, we don't want to overload and to speculate on such elements. And then your second question on the availability. The availability has somehow improved. North America, as you outlined, still tight. The overall costs haven't come down. So this -- the availability has improved in general. Cost levels have, let's say, kept at very high levels. And this is a volatile situation, which made them very quickly change again. At the moment, I would say it's not on the top three of the concerns that we would see on the supply chain side. It's rather what was mentioned before that the energy, energy collapse, If there would be a shutdown on gas in Europe, that would be a concern we would have and other elements. But the availability was last year very, very much. That's when I referred to the 50 force majeure. We still have force majeure. That's not gone, but it's of a different magnitude. It's more down to probably a dozen or so that we are dealing with currently.

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

I have other 3 questions, if I may, or 3 questions kind of areas. First one is on your order book. If you compare your order book versus the past months or quarters, has the order book improved or made unchanged or even worsened and also has the volatility of the order pattern increased? That would be my first question. Then my second question, I also took a comment that you said you expect second half margin will be higher than the first half margin this year. Was this comment made on the underlying EBIT or on the reported base? That's just a clarification question. And then the last question part, several add-on question is again on the portfolio effects. This divestment one-off some one-offs, Am I right that they are mainly in EMEA and that has and also this M&A costs you or the MBCC integration costs, basically or add-on costs, are they also mainly EMEA? Or how are they spread and also what magnitude of further MBCC costs do you expect for the second half?

Okay. Maybe I take the first question on the on the ordering pattern and the order book. I think this is, of course, very different from segment to segment. As I mentioned before, the order book, for instance, in automotive, this is long lasting and is very healthy and demonstrating also the need for e-mobility solutions. So that's very positive. That's in comparison to last year, a substantial increase in magnitude. Others are more short-term distribution business here. This is somehow within weeks and months that the pattern may change. So the Q2 in Europe, in Western Europe, where we had negative volume trends. This comes with relatively short notice. And then, of course, the typical direct construction order book when we have roofing projects, when we have flooring projects that's somewhere between 9 to 12 months going into -- when we look at infrastructure projects where we have a visibility of the next 2 years. But in reality, the booking for our components start probably 12 months ahead with the specification selling going first 12 months. So this is a wide variety. There's no change in the pattern. This is nothing -- nothing substantial. That's the nature of the business of the segment and the overall order book, I would say, is healthy. That's not giving us any concerns. There is no artificial delay or hold on any of these elements visible so far. And that makes us also confident that in short and near term, we are going to be able to deliver what we have outlined in the outlook.

And Markus, here, the next 2 questions on, let's say, the margin topic, what I was alluding to that there is a likelihood or a good likelihood that material margins in the second half year are going to be higher than in the first one. In terms of obviously, overall EBIT, I just can again confirm that we are confident and committed to an overall over-proportion EBIT growth for the year. Obviously, taking into account these various variables and components we have been talking about. And to the one-offs, the largest part of, let's say, the divestment gain is in region EMEA. There is about CHF 20 million of the whole in the other segment or in the services segment as well as all the acquisition-related onetime costs. It's also in this other segment. Overall, CHF 28 million. The expectation for the full year is around CHF 50 million.

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

I'll have 2, please. The first one, Adrian, you're very clear about the expected trajectory of gross margin in half 2. Have you already seen an inflection point in Q2. So have you seen the gross margin actually pickup from his trough. And your confidence for the second half, is that based on price increases that you've already announced yet, so impacts or price increases to come or both? So that's the first question around gross margins. And then the second one is the scope of the business, these points of sale in distribution, which is obviously an engine in China. Just to clarify on that, Thomas, did you say you're back to sort of 25% sales growth in China on the back of that from the debt to total digit in the first half, I think you said. And are there any other regions? Is the pickup in Southeast Asia? Is that down to the point-of-sale rollouts that the part strategy?

Yes. Thanks, John, for these questions. I'll take the first one. As you have addressed it to me, in terms of the inflection point, obviously, it's a bit the question what you're referring to in -- I was commenting that in absolute terms, we have in Q2, basically, reached a point where we are now basically overcompensating absolute input cost increases. Now due to the strong pricing component of the top line -- this is not yet true for the relative material margin development. So here, we have not seen basically material uptick from the trough. So this is to comment again, will depend on the relative developments of input costs, but particularly also continued pricing. And yes, here, we continue. This is not obviously something which is planned on group level. That's really but also planned and implemented in the local organizations. And I can just tell you that there is continued price increases on a monthly basis many already announced and to be implemented others if the situation warrants it will come. And these are the elements that will be here ultimately driving then also material margin in relative terms again in the other direction.

Okay. And then, John, to your second question. Yes, it's correct that the growth rates have reestablished that 20%, 25% rate at the distribution business in China, very much driven also by the expansion in the market. And this expansion model or this distribution model is exported into Southeast Asia. That's correct reflected in also there, for instance, in Indonesia, we had 1,500 point of sales a year ago, and we are currently at 3,500 point of sales. So that model is copied and will also drive further the growth momentum is just, let's say, on a magnitude level, of course, that's very significant for Indonesia. There's 2,000 point of sales more in China. In here, it is 35,000. So this is just -- it is -- the traction is there in Southeast Asia in the Philippines, in Vietnam, in Indonesia, in Malaysia. So we are copying this and it contributes, but of course, not as visible as the Davco business in China.

The next question is from Patrick Rafaisz from UBS.

Three questions for me. The first one is on pricing. And I think you've been pretty clear on the magnitude here in the second quarter around 15%. Just wondering, are there any notable differences across regions? Or is this a pretty consistent number. And that's the first question. And then 2 questions on MBCC. The first one, I'm just wondering with the market having derated, of course, year-to-date is revaluing the assets an option you might have before the closing or is the price fixed? And the second question is with what you've learned in the meantime and year-to-date development for the business and potential remedies, can you update us on your thinking on the timing of the synergies and the integration costs? And specifically, has your view on the synergy mix changed in any way. I think it used to be a bit more top line and less cost or the other way around as any of that changed?

Good. Well, thanks, Patrick, for the questions. In terms of pricing, there is indeed -- I mean, obviously, the trend is very similar. But in terms of the magnitude there is differences across regions. And this is also pretty much to do in most cases with underlying input cost increases. I mean here, clearly, let's say, pricing as well as impact on the raw material cost side is the biggest in the Americas as well as in Europe, whereas Asia is actually quite a bit lower on both levels. And this is at least partially to do, let's say, with supply, particularly also out of China with a lot of disruptions when it comes to sea freight and the whole logistics chain that actually also availability in the Asian markets has been better than in other areas and therefore, also less push on input cost side. So that's the general picture, obviously, also somewhat different elements depending on the business and the country. And on MBCC, maybe firstly, here, important, I mean, we really don't see any, let's say, change to the long-term value of that business. I think this also goes very much for the synergies. Here, no change in basic with perspective. But contractually, I mean, there's no element of renegotiation in valuing, but again, also not necessary as this is a very strong business. And also in this environment, this has certainly not changed. In terms of the synergy composition or the -- basically the timing of it, obviously, all a bit dependent when exactly we closed. But in terms of the progression, also here, no change from today's perspective, and we continue to feel very confident and comfortable with the guidance, CHF 160 million to CHF 180 million we have and we have quite transparent about it. I mean there is an element of either, let's say, attrition or then reduction due to a potential sale included. So also here, depending on the eventual scenario, no change. In terms of the actual one-time cost. And as I said, we will have about CHF 50 million this year. We would then see the sort of the lion's share of the total and CHF 200 million basically the next year to the tune of about 80 and then the rest of it in the 2 years to follow. There are no more questions at this time.

Okay. Thank you very much. So this brings us to the end of our call. We take this opportunity to highlight that the date of our next Capital Market Day will be the 1st of October, and it will be at the 4th of October, excuse me, and this will be held in Zurich. And with this, we thank you for listening to our call and for your interest in Sika. We wish you all the best, and have a great summer.

Bye-bye.

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