Sika AG (SIKA) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining. Our half year call today will last 60 minutes. [Operator Instructions] With this, I hand over to Thomas.

Thank you, Dominik, and thank you also for the introduction video. It almost says everything. We could go into Q&A straight. But I think we still follow the program. And first of all, also from my side, welcome. Good afternoon, good morning to all of you, and thank you also for joining us for our presentation of the half year results. It has been a strong half year. It has been a strong half year despite that we have still muted market conditions and supply chain disruption on and off over the course of the first 6 months. I think the strong results that we are capable to present today are the results of Sika's differentiation power, differentiation that is convincing customers that their business in our hand is providing them more value. And that has drove our outperformance in the industry, and it's the backbone of our results that we are going to present in more details in the next few minutes. But -- let me start with the highlights of the first half year. And here, as also highlighted in the video, it starts with the top line, CHF 5.59 million reported sales, a slight decline. But looking into local currency growth, 4% local currency growth, that's a tremendous momentum going from Q1 over the course of the half year into Q2. It is also coming with an improved profitability, starting again on the material margin, which has expanded by 60 basis points to 55.7 percentage points, and Adrian will go into more details behind those elements. It is also very visible in the results that the Fast Forward program that we kicked off last year, with some costs in last year is delivering excellent performance in the first 6 months and also for the remainder of the year, it's a significant contribution also to the bottom line to the profitability element. I would also like to outline here that this share gain and this outperformance is across the board. It happens in all geographies. It happens in mature as well as in emerging markets. We are playing on all the elements to drive growth. Also, when we look at the last element, what's the full year expectation with the momentum that we have seen piling up over the first 6 months, we have been confident and we have raised our expectation on the local currency growth from 1% to 4% to 3% to 6% for the full year '26. Now when we look into the regions and clearly outstanding here where when we look in the center, EMEA has contributed 7.7% growth in the first 6 months. EMEA was also the region that already had positive organic growth in Q1 and has further accelerated on that element. EMEA has also been the region that has been the earliest challenge by the Middle East conflict and the escalation. And therefore, also has been early on in modifying the supply chain setup, making sure we have stayed available to our customers but also have started to adopt the surcharges and pricing as the evolution of the input cost took place. Here, especially the Middle East has been a fantastic journey, starting with a lot of confusion with the breakout of the war. A few days of confusion, but going back to almost a normal procedure supporting our customers and also delivering to our customers the confidence that they do not need to stop any activities because they are with Sika, we have a trusted partner that makes everything possible to bring in materials to the construction side, while they continue to build. And based on that, we have also seen a recovery of the growth trend in the Middle East, actually even an acceleration in the Middle East. When you look at the Americas, we have seen a rather soft start in Q1. We still had some issues weather-related, but also the government shutdown had still some limitations, but we see a strong rebound in Q2, which is, to a large degree, also volume dependent and has contributed very nicely also to the group advancement. When we look into Asia Pacific, we still have a slight negative growth, but this is mainly related to our rebasing of our China construction business. It's over at the end of the middle of this year. So we will expect also that we see in the second half a stronger contribution from Asia Pacific overall. But besides the China construction in the first 6 months, we have seen a very solid high single-digit growth of the rest of Asia Pacific here, in particular, Southeast Asia. India, our growth engines, in particular, Vietnam has been absolutely blasting the performance in Southeast Asia. So here, we have a good momentum. And when we look at the group overall, the 4%, this gives us the confidence also for the second half that we can raise our local currency growth expectation. I think at the backbone of these results, here, we have to clearly say that the trust element being available to the customer, not only for value to performance solutions, but also the competencies that we provide the customers and then ultimately, also the confidence that Sika will never let you down. Sika is capable to support you in all aspects, including making the supply chain available when others are failing and cannot support the needs of the customer. This is also becoming more and more visible in our famous slide, the slide that shows the outperformance of Sika versus its peers. Here, we continue to aggregate the numbers as they come in. We have only Q1 figures in here. But very soon, we are also going to update this slide. As you can see, the outperformance is more pronounced in Q1, and we are also quite optimistic that this outperformance in Q2 and in the remainder of the year, we'll further expand and contribute in a visual way to underline our market share gains in still muted environment. While we have, let's say, our challenges from the markets, Sika's investing. Sika is investing in the cycle into mature markets, into automation, into efficiencies. Here, we have 3 elements in North America and in Europe. Clearly best-in-class automation in full scale, a large-scale motor factory in the New England territory giving us great opportunity to leverage there, but then also our expansion into emerging markets in South America, in Africa, in Asia, clearly investing where the demands are strong or where we also see outperformance possibility by leveraging our competencies in operations and supply chain. It's also worthwhile to mention here supply chain availability, our footprint, global footprint has enabled us to also benefit from the challenges that recently have been seen globally. And this is also one of the core strengths of Sika to utilize new routes in case needed to best serve our customers. Acquisitions, absolutely a core element of our strategy, the bolt-on acquisitions that enhance our organic growth, two great examples, the one closed Finja in Sweden, closed the end of January. It's a fantastic acquisition. We also see in the first few months already a strong contribution and reconfirmation and an expansion of our integration targets and synergies. So this clearly also giving us a broader platform in Scandinavia, in the Nordics, and we also see the first wave of implementations in Denmark, in Sweden, in Finland and in Norway. So a fantastic typical bolt-on acquisition to build on. And then on the right-hand side, you see the Akkim acquisition, an acquisition that very much builds on our strengths on the sealant and adhesive side. Akkim, a Turkish-based manufacturer with a strong footprint in the Middle East, in Central Asia and Africa. And here also enabling to leverage our European as well as our American and Asian business with these skills and with this possibility that Akkim brings to us. We still expect closing in Q3, as we have announced earlier, and we will further update you on Akkim in the near future. I have to come back to Fast Forward as Fast Forward has been the program that set the tone in the second half of '25 in two ways. One way in addressing some structural elements, in particular, our China business, but also some other larger markets opportunities, driving more efficiency, also implementing these initiatives in '25 with onetime costs that are behind us that we have applied in '25, giving us already in '26 a great opportunity to leverage. And we are fully on track to get the CHF 80 million in savings in 2026. In the first half, we have good momentum. We have a run rate of around 80% by the middle of the year, and we are confident that we see the full impact of Fast Forward in the second half It is also clear that Fast Forward is an investment program, an investment program in future efficiencies here mainly also driven by the investments into digitalization. Sales excellence, supply chain excellence in the innovation excellence are the three contributors also here. We have shaped our understanding and our investments since we last have talked about it, and we will also hear in the near future. We also communicate further on how Fast Forward is going to provide in the next 18 to 24 months decisive elements of efficiency. But not only efficiencies on the cost side, but also gain market shares by having digital solutions for our customer, enabling them for better shorter supply chain, but also in their project business helping them to be more successful in their field. We have been all excited about the World Cup in North America. I think that has been a global event. And for us, at Sika, for me personally, I like to watch the game. But I must say I also like very much to watch the stadiums. And I think here, a remarkable contribution from Sika, all 17 stadiums in North America have been built or have been substantially renovated for the World Cup this year. And this has been a great journey to see how our Mexican, Canadian and American workforce have helped to create these wonderful stadiums, these impressive stadiums for the games. And when you look on the screen, you see all the contribution. It's a wide portfolio of solutions that Sika is providing. You can go either from the roof down to the basement. You have all the flooring. You have also the concrete in there. You have the specialty solution, the sealants. You have the fire protection, the specialty grounds. It goes across many, many application fields. I would say probably doesn't if not 50 to 100 different solutions go into such a renovation or new construction. And it is a fantastic landmark contribution that Sika has. And here, this is also relevant in terms of contribution. And when we look from, let's say, the World Cup '26 into the near future, the World Cup 2030 is around the corner. We have a lot of activities in Morocco, in Portugal, in Spain already lining up for making sure those stadiums are also properly up to date. And the latest one we just finished is the Bernabeu stadium in Madrid that is ready for the World Cup, which is a fantastic stadium as well. And even if you look a little bit further out, in 2034, Saudi Arabia will be the host of the World Cup, and they have already started also here with fix projects, making sure they are ready when the games are on. A more internal highlight for us is clearly also the feedback that we got from our organization. As mentioned, markets are challenging. Supply chain is challenging. So the organization is on their toes, making sure customers are served. And at the same time, we have asked our organization how they feel, how the engagement level is, and we had a fantastic outcome. 88% participated in the survey and the engagement level went up by 2 points to 88 points. This is outstanding. It's far above industry standards. It is also higher than 2 years ago, and it is for me a clear testimonial of the strength of the organization that puts together, serves the customer, but see also the purpose and the meaning of the individual contribution and highly tight through our strategy and our initiatives on local level, regional level, on group level. Makes me very proud to have this achieved in times where many things are challenged, but this is the continued strength of Sika. Building trust, insight is also building trust to the outside to our customer, and that delivers the results that we have seen in the first 6 months, which leads me over to you, Adrian, to talk a bit more about the results.

Very good, and thank you, Thomas. Thank you for sharing here the highlights of quite successful business execution in the first half of '26. I would like now to provide further details on the financial performance of the first half year, starting again with the top line and the bridge of our first half year revenue performance. As you can see here and driven by a very strong Q2, as we have heard, organic growth was 2.9%, adding close to CHF 250 million of organic growth in the first half year, further 1.1% of acquisition contribution taking Sika to 4% local currency growth in the first half year. Excluding China construction, which as we have anticipated, continued to be about a 1.5% headwind to the first half top line result outside of China. We grew 4.4% organically compared to the 2.9% of the whole group on a reported basis. If we look at Swiss francs, we delivered revenues of CHF 5.59 billion, just slightly below the previous year, driven by still a very strong adverse foreign exchange impact of minus 5.5% or more than CHF 300 million. Foreign exchange impact softened a bit in Q2. And from today's perspective, we expect less headwind in the second half from foreign exchange with an approximate 3% to 4% negative foreign exchange impact for the full year on group level. In the second half, we will also face somewhat easier comparatives in China given the actions we undertook from mid-last year onwards. But so far, we continue to see a subdued market. So no help from a market perspective overall. If we look at growth on a sequential basis, here, we show a clear trend reversal with an organic growth of 2.9% in the first half year. This marks a change in trajectory versus the previous 3 periods. If you look at M&A contribution, fairly stable, 1 percentage point here across all the periods. Also, that's how you should think about Q3. Whereas in Q4, following the closure of the Akkim transaction, which is planned were expected for late Q3 then a step-up in acquisition contribution in the fourth quarter. Now let's look at the full P&L here on a summarized basis, a move down from the sales line. In the first half year, we delivered a further expansion of the material margin to 55.7%. This is up 60 basis points from the same period last year, which reflects, obviously, procurement scale, efficiencies but also pricing amid increasing input cost, but also includes here the higher cost pass-through of, for example, transportation costs, which do sit on the OpEx line, but are passed through and have an impact here on the gross result. If we move down, personnel costs declined by 3% as our Fast Forward execution is well on track and is compensating underlying wage inflation and also M&A-related headcount additions. Adjusting for M&A, our headcount is down by more than 1,000 year-on-year. On the other hand, other operating expenses increased by 2.7%, largely due to the significantly higher transportation and supply chain. Cost directly and indirectly related to the situation in the Middle East, but with a corresponding pass-through as just alluded to here on the top line, positively impacting material margin. As a result, EBITDA came in at CHF 1.063 billion, pretty flat year-on-year, given here foreign exchange translation with margin expanding 10 basis points on EBITDA level, also here, including a further 20 bps drag on foreign exchange. Also on EBIT level, pretty similar improvement, 10 basis points versus last year on marginally lower depreciation and amortization charges, net profit of CHF 552 million in line with last year. Here, the foreign exchange impact was partially offset by lower interest expenses, and being reflective of a good cash generation. And correspondingly, EPS slightly down CHF 3.43 versus CHF 3.45 in the same period of last year. Operating free cash flow of CHF 139.6 million, which I will cover later. But maybe first, I'm looking here at the EBITDA bridge and sort of peeling out a bit better the various profitability buckets here delivering the 30 basis points profitability improvement on EBITDA level on a constant currency basis and 10 basis points on reported basis, clearly here, the strong material margin was the main contributor, but also here with 50 basis points improvement, our Fast Forward program, both elements were offsetting here the increase in certain costs, largely related to the conflict in the Middle East, notably transportation and supply chain cost alongside some one-off items. We passed through these transportation cost increases to our customers, as mentioned, and sits here in the recovery of -- or these recoveries, it's in the material margin. Exiting the first half, the run rate of our Fast Forward program is about 80%, as Thomas mentioned. So well on track to deliver here the full CHF 80 million in 2026 as anticipated. On the M&A side, we continue to see good synergy capture relating to NBCC with an incremental positive margin impact of 20 basis points in the first half of '26, bringing trailing 12 months synergies to CHF 195 million, up from CHF 182 million in the full year of last year, also here well on track to deliver the CHF 200 million to CHF 220 million then in 2026. And on the new acquisition small initial dilution of 10 basis points, largely related here to initial purchase price accounting impact. And excluding the 20 basis point FX impact, our first half year margin expanded 30 basis points year-on-year, which underlies here the solid execution, both on the Fast Forward as well as on M&A-related synergies. Now on cash flow. Here, very similar cash generation as in the first half of last year, although against quite a different backdrop compared to 2025. Here in the first half year, the only difference here is a one-off tax payment, which reduced here operating free cash flow below previous year level. If we look at the components here on profit, pretty similar as well while obviously impacted by foreign exchange as well. On working capital, same seasonal increase, although here against a very sort of different backdrop, very strong growth compared to the previous year, and our sales accelerates receivables rise with them. Also given the Middle East and input cost increases here also our materials are valued at the higher level. and we're also carrying somewhat higher inventories to service our customers at the same time, very, let's say, diligent working capital management overall. And then on the tax line here, the increase is purely related to a onetime payment that has been accrued and was now paid out which makes the difference. If it was not full up payment, we would have been slightly above the previous year level of CHF 186 million. Now net working capital typically comes down in the second half, which we also expect in '26. And we also do not expect any further year onetime tax items of any significance. So for the full year, very confident to deliver an operating free cash flow in line with our strategic target of more than 10% of net sales as cash generation here is heavily skewed towards the second half due to seasonality. And with this, I will pass it back to you, Thomas, for the outlook.

Good. Thank you, Adrian. And on the outlook, we raised our full year guidance for local currency growth from 1% to 4% to 3% to 6%. This is not based on expected market recovery. This is purely based on our industry outperformance in the given market. We expect the market to remain muted in the second half of '26. We also expect that we will see more inflationary cost coming throughout the year as well that the pricing element compared to where we started in our assumption in February is going to have more weight in the full year contribution. Our EBITDA margin, we guide for 19% to 19.5%. At the same time, we feel comfortable with the consensus in absolute Swiss francs level as put together yesterday. With that, I would like to hand over to you, Dominik, and open then for the Q&A.

Thank you, Thomas. we'll start now for Q&A. [Operator Instructions] And first question goes to Ben from Goldman Sachs.

Thomas, Adrian and Dominik, my question was just on the outlook for top line growth. If I think about some of the sequential drivers into the third and fourth quarter versus your second quarter, you should benefit more from pricing. I guess, some of the headwinds from China should become less and should also have some of the scope contribution from Akkim in the fourth quarter. These all sound relatively positive when you think about the bridge of the 7% constant FX growth you delivered in 2Q. Is there anything that you're seeing in terms of volume momentum or any areas that you're cautious into the second half that may drive the top line performance too slow? That's what you saw in the second quarter. I guess is there some element of conservatism baked into your full year guidance of 3% to 6% constant FX growth.

Yes. Thank you, Ben. And yes, I mean, I can follow absolutely your logic on the evolution. And also we have a pretty strong confidence into the Q3 performance, but we have to be list. We have seen Q1 very different than Q2. We're confident about Q3, but Q4 is too early really to name. Anything that happens in the Middle East still may have a ripple effect. We have the meet terms in the U.S. So we have elements that are difficult to calibrate. So I would say, yes, it has a bit this unknown included so that we don't just build on the Q3 and extrapolation into Q4. So that's -- we don't see anything in particular, but we also don't have the visibility for Q4, like for Q3.

Okay. Thank you, Ben. And next question goes to Ephrem from Citi.

Sorry for the delay, some tech issues. Two very quick questions. Firstly, on your revenue growth. I know you don't particularly split out volume and price as it's quite difficult in your business. But would it be fair to say that almost all the growth that we have seen in first half and what do you expect in the second half has largely come from price given that your competition has been quite muted in terms of what their revenue growth they have reported? And second one, in terms of the increase in other operating expenses from the chart, roughly half of that is transportation cost, which I suppose is diesel. So in a scenario where kind of oil prices come down, would you expect that kind of cost to reverse sort of around CHF 300 million if I kind of read the chart correctly?

Yes. Thanks, Ephrem. Happy to answer this. I mean in the first half year, I mean, we have you also reported in the first quarter that we had in Q1 about a flat price and a slightly negative volume. And here for the full first half year, we have seen both. There is about 1.5, slightly higher price for the first half year and 1 to 1.5 percentage points of volume growth in the first half year. On the transportation cost, yes, this is also a cost that has obviously hit us very quickly this largely fuel related. We also have some other topics, for example, in the U.S. in terms of availability of drivers. But largely speaking, yes, this is also something that can or could reverse, but we have been quite quick and transparent including that into pricing or surcharges.

Let's go now to the next question. The next question is from Elodie JPMorgan.

I'll follow up on the previous question on costs. But the question is, if costs actually do come down at some point, what will you do with pricing? I mean we understand pricing is on the rise as costs have increased, but there is hopefully a scenario where cost will finally is? And what would we do with pricing? And how much of that will be linked to fuel surcharges? And if I can squeeze one on current trading in July. That would be quite helpful to have some color.

Okay. I take the first one. I think, Elodie, the proactive pricing measures that we have taken and all input costs, I mean, we talked about the transportation, and with a certain delay also then the raw material cost increases. We have seen that prior to the restart of the activity that there was some plateauing on the cost side since the war has started again. We see the reversal. So it is really difficult to predict in which direction it goes. But to answer your question, it is also very clear, we have been communicating openly to our customers about the input cost, and we apply it through surcharges and to price increases the cost towards the customer. And of course, if there's a significant cost decline on transportation or on the raw mat side, then there is also a certain relaxation to be expected. But at the moment, I don't think we are going to see any of that in Q3. It's rather again, a bit on an escalation mode. But you're right, this is a sensitive topic. We are with our customers, but we also have to be here balanced in our approach to offset the input cost. We have a positive price cost ratio, but we also have to be conscious about not going there too far.

Yes. And on current trading, I'm really not sort of big shifts in pattern. Of course, some months are always a bit difficult to predict, for example, here in the South, obviously, with holidays, but also the quite extreme heat. But overall, not really a different pattern.

Thank you very much, Elodie. And -- so the next question then goes to Priyal from Jefferies.

Sorry, I'll just ask on China. So I appreciate you've obviously said that your rebasing annualizes out as we go into the second half. I just wanted to see if there was any comment in terms of current trading with regards to the underlying market being down double digits in H1. But also just the latest in terms of pricing dynamics there as well. Obviously, the market is still challenging. You've had scenarios previously where pricing has been used as a mechanism to gain share amongst some of those competitors. Just any sort of update on that would be very helpful.

Yes. We are -- we just recently have been to China, Adrian and myself to follow up, and we came back with confidence that our measures that we took last year in Q3 and also the structural adjustments, bringing on the construction side, the element of renovation or refurbishment more pronounced into the play is showing first signs of progression, which is good. The market itself is still not showing any recovery. The market is still down. But our internal measures are showing both on the top line as well as on the profitability line that we are progressing in line with our expectations. So here, we have seen on both sides, on the direct business as well on the indirect business momentum that is reconfirming our assumptions. We also have recently seen that the central government is considering a massive investment program on the infrastructure side, meaning infrastructure in a broad sense, including the tech industry, not only roads and transportation. So I think the central government certainly is not pleased with the evolution and is planning also here to further stimulate. So -- yes, it's currently still muted. It's still in a declining mode, not as much as last year, but we also have our business, our controllable under control. And we also see that the government is here also pushing hard to make here a turning point for the construction industry overall. As you mentioned, China is a very challenging market also when it comes to price expectations. Here, I think we have found our way out of this dilemma as we turn this around. We have made calibration to our offering. Let's say, the lower add value products have been taken off. That's part of the reason why we have this rebasing. But the middle and the higher value offerings are going well, and we can also defend the price and we can increase our margins in that field.

Perfect. So the next question goes to Vitushan from Bank.

And I hope you can hear me. So just a question on Americas, please. So in Q1, you indicated that the backlog of approvals following the U.S. government shutdown have largely been processed and should become more visible in project execution during Q2. So given the sequential improvement in the Americas this quarter, could you tell us if you have seen any contribution from these projects in 2Q, please?