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Edited Transcript of SIKN.S earnings conference call or presentation 25-Jul-19 1:00pm GMT

Half Year 2019 Sika AG Earnings Call

Baar Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Sika AG earnings conference call or presentation Thursday, July 25, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adrian Widmer

Sika AG - CFO & Member of Group Management

* Dominik Slappnig

Sika AG - Head of Corporate Communications & IR

* Paul Schuler

Sika AG - CEO & Member of Group Management

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Conference Call Participants

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* Bernd Pomrehn

Bank Vontobel AG, Research Division - Analyst

* Daniel Jelovcan

Mirabaud Securities Limited, Research Division - Analyst

* John Fraser

HSBC, Research Division - Global Equity Head of Building Materials and European Building Materials Analyst

* Martin Flueckiger

Kepler Cheuvreux, Research Division - Equity Analyst

* Martin Hüsler

Zürcher Kantonalbank, Research Division - Research Analyst

* Simon David John Terrant Rowe

Henderson Global Investors Limited - Portfolio Manager

* Thomas P. Wrigglesworth

Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst

* Tobias Weimann

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Sika Half Year Results 2019 Conference Call. I am Emma, 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 is my pleasure to hand over to Mr. Dominik Slappnig, Head of Communications, International (sic) [Investor] Relations of Sika. Please go ahead.

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Dominik Slappnig, Sika AG - Head of Corporate Communications & IR [2]

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Good afternoon, and welcome to the Sika first half results conference call. We published our figures this morning at 5:00. Now our CEO, Paul Schuler; and our CFO, Adrian Widmer, will provide further details on the results. Afterwards, we will be ready to take your questions.

With this, I hand over to Paul to start with the highlights of the first half year.

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Paul Schuler, Sika AG - CEO & Member of Group Management [3]

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Good afternoon, and thank you for joining the call. I'm happy to inform you about a very motivating first half year result. We had an excellent sales growth of 9.6% in local currencies, with record sales of CHF 3.7 billion. All [our region] were able to grow. We posted excellent double-digit growth rates in Asia with 15.6%; North America with 11.5%; and 22.6% in Africa; high single-digit growth in Eastern Europe, with 9.2%; and Latin America with 7.7%. Growth in the major European markets developed moderately. However, we were pleased to see that in Austria, Switzerland and Germany, we are at around 4%. Difficult time in the U.K. with minus 3%; and Spain, Italy, also not so strong.

In the automotive business, the number of new vehicles dropped by 6.7% or 4 million cars. The Global Business recorded a growth rate of 4.9%. Despite the drop in automotive and the slow market in the part of Europe, organic growth is 3.1%.

With higher selling price to our customers, we could increase our gross margin from 53.6% to 53.8%. And strict cost control management led to a record high operating EBIT of CHF 481.7 million, an overproportional growth of 8.3%. And this despite the one-off effect from the Parex acquisition.

The Parex acquisition, closed end of May, is well on track, and integration is working outstandingly well. As I mentioned several times, this is not just a one big acquisition. This is an acquisition of 23 countries, and in 21 of the countries are already integrated in the Sika organization and working since day 1 under one leadership team. The synergies and the synergy teams from procurement, logistics and production are exploring all opportunities. I'm also pleased to see many successful cross-selling opportunities, as discussed in the last [year]. And the first 6 weeks, we're feeling the strength of our combined market and customer presence. So well-advanced 6 weeks.

On the other acquisition, we are pleased [that the] King with CHF 61 million, a leading manufacturer of concrete repair systems in Canada; and Belineco, a specialist in manufacturing foam systems in Belarus, we [could] close 2 other deals. The integration is well underway. Further, our acquisition pipeline is full, and we hope to close 1 or 2 additional acquisitions this year.

We continue to invest in future growth in emerging markets by expanding our production in Senegal, Egypt and Qatar.

And with this, I would like to hand over to our CFO, Adrian Widmer. He will guide you through the financial information. Adrian?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [4]

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Thank you, Paul, and good afternoon. And following our CEO's business summary and highlights presentation, I will now give you further insight into the financial results.

In the first 6 months of the year, the business showed a strong growth of 9.6% in local currencies. Organic growth was 3.1%, while acquisitions added another 6.5%.

Currency effects reduced local currency growth by 2 percentage points to 7.6% in Swiss francs. Negative currency development was primarily owed to the weaker euro, the Australian dollar as well as a number of emerging market currencies.

Again, all regions contributed to the growth in the first 6 months of the year. Region EMEA grew sales at a rate of 7.7% at constant currencies. Organic growth was 3.5%, while acquisitions contributed 4.2%. We recorded strong growth in Africa and Eastern Europe, while major European markets developed more moderately and were impacted by a lower number of working days in Q2. Foreign exchange effects, mostly related to a weaker euro, had a negative impact of 4 percentage points.

Region Americas continued to record strong growth at 11.4% in local currencies, supported by acquisitions, which contributed 7.1 percentage points, while organic growth accelerated in Q2 compared to Q1, particularly in North America. Business developed well in Brazil, Colombia and Peru, while the government change in Mexico and the impact on infrastructure projects continued to weigh negatively. Foreign exchange effects in the region were slightly positive at 0.5%.

Growth in Asia Pacific was a strong 15.6%. Organic growth was most dynamic in China and in India, and the acquisition of Parex contributed 12.9 percentage points of growth in the region, particularly in China. Foreign exchange impact at minus 0.8% was slightly negative.

The segment Global Business achieved a growth of 4.9% at the backdrop of a very weak market, with car build rates down almost 7% in the first 6 months. However, structural growth driven by megatrends such as lightweight construction and e-mobility and the residual growth impact of the Faist acquisition led to a continued increase in content per vehicle. Foreign exchange impacts were negative at minus 1.8%.

On gross result level, we have been able to increase margin as a percentage of net sales by 20 basis points and very pleased with the price increases. We were able to push through various initiatives on the procurement and R&D side as well as the reducing negative impact of material cost inflation. On a net basis, though, material cost impact was still negative year-on-year but less pronounced and still relatively volatile. If we exclude onetime and acquisition-related dilution effects, organic material margin increase would have been 40 basis points.

Operating costs, which include both personnel as well as other operating expenses, increased underproportionally by 5.2% versus a net sales growth of 7.6% but were influenced by a number of special effects. On the one hand, we recognized CHF 24 million of acquisition and integration-related costs, primarily for Parex, which compares to the CHF 23 million of onetime costs related to the dispute resolution with Saint-Gobain in the same period of last year. On the other hand, application of the new leasing standard, IFRS 16, led to changes in the recognition of lease-related expenses, increasing depreciation and amortization expenses by CHF 33.6 million while reducing other operating expenses. Organically and excluding one-time effects, nonmaterial costs grew underproportionally at the rate of about 75% of organic sales growth. In consequence, EBITDA increased by 14.5% to CHF 623.8 million, up from CHF 544.8 million in the same period last year.

Driven by the change in recognition of lease-related expenses as well as higher intangible amortization coming from acquisitions, particularly Parex, depreciation and amortization expenses increased by 42%, vis-a-vis the prior year period.

Results in EBIT growth of 8.3% was nevertheless overproportional driven by a higher material margin as well as disciplined cost management and efficiency improvements. In absolute terms, EBIT increased from CHF 444.6 million to CHF 481.7 million.

Higher debt, mostly due to the share buyback in connection with the resolution of Saint-Gobain last year as well as the financing of the Parex acquisition in early 2019, led to an increase in interest cost as well as in other financial expenses. Net interest cost increased by CHF 16.7 million. This amount also includes interest component related to lease obligations according to IFRS 16. Also net other financial expenses increased by CHF 5.1 million. Of the combined CHF 21.8 million increase, CHF 6.7 million are nonrecurring in nature and related to the Parex transaction. Group tax rate reduced slightly from 24.7% in the previous year to 24.5% in the first half 2019. As a result, net profit is up by 3.9% to CHF 330.7 million, up from CHF 318.2 million.

Cash generation in the first half year 2019 was very strong. Operating free cash flow is up by CHF 168 million from CHF 11.5 million to CHF 179.7 million in 2019 year-to-date. Cash from operating activities increased by CHF 104 million, driven by higher profitability, high depreciation and amortization expenses as well as a significantly lower working capital buildup and in spite of higher cash taxes.

CapEx at CHF 86 million compared to CHF 148.7 million in the same period last year was also lower. But the previous year included the buyout of 2 operating leases in the amount of CHF 70 million.

[June] 2019 balance sheet saw a significant expansion related to the acquisition of Parex as well as King Packaged Products, Belineco and Arcon. On the asset side of the balance sheet, purchase price allocation led to an increase in goodwill of CHF 1.98 billion as well as customer relationship, trademark and IP intangibles of CHF 875 million, which are being amortized over their useful lives. Pro forma annual P&L expense related to this amortization will amount to about 4 percentage points of Parex sales initially.

Replacing the initial bridge financing facility, the purchase price for Parex of CHF 2.5 billion was refinanced through an inaugural dual tranche Eurobond issue in April 2019 of EUR 1 billion, with a maturity of 8 and 12 years, respectively.

Earlier in the year, we issued a mandatory convertible note of CHF 1.3 billion due in January 2022, with a coupon of 3.75%. The mandatory note is split into an equity and the liability component for accounting purposes and has received a high equity credit by Standard & Poor's.

In addition to the new leasing standard, IFRS 16, led -- that the new leasing standard IFRS 16 led to the recognition of CHF 328 million right-of-use assets as well as a corresponding financial liability of CHF 335 million on the balance sheet.

ROCE on a reported basis is 17% for the end of June but is forecast to increase towards 20% by year-end 2019.

With this, I conclude my initial remarks and hand over to Paul Schuler for the outlook.

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Paul Schuler, Sika AG - CEO & Member of Group Management [5]

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Okay. Thank you, Adrian. Our Sika outlook 2019, the strong result supports our full year targets, and we are expecting an increase in sales for the first time, more than CHF 8 billion, along with a double-digit EBIT growth.

With the Parex acquisition and the full pipeline of big, newly-won construction projects, many new products and a lot of initiatives, we are confident to deliver, even in headwinds from the different markets assumed.

Thanks for the commitment of our employees and the strengths of Sika growth model, we can look forward with high confidence to the end of 2019.

Any questions, remarks?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Tom Wrigglesworth with Citi Group.

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Thomas P. Wrigglesworth, Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst [2]

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Two questions, if I may. The first one is on the price/cost mix. Obviously, you started to see gross margins up in the first half. But looking forward into the second half of 2019, will we start to see raw material pressure abate? And do you think that could lead you to starting to hit your EBIT margin targets of 14% to 16%, maybe ahead of the 2020 targets? Is there 50 basis points of price/cost spread available?

The second question, if I may. Obviously, you've had 5 weeks of owning Parex. Could you share with us your first thoughts? And any areas of surprise, positive or negative, now that you're in full control of the business?

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Paul Schuler, Sika AG - CEO & Member of Group Management [3]

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Okay. Tom, I handle the second question first with the Parex integration. We closed it already in January. So we worked quite intensive with the whole management team, with all -- we have several meetings. We have [some] projects together. So we had a preparation time of around 4 months. The first day was, for us, very important. We had a great management in all the countries. We announced a new organization. We started to streamline pricing customers. So we are a very good way.

The positive is really that the people are construction people. They understand the business. And together, we really can move on. I think it's a great collaboration. Then also very positively, the mood of the sales force, they really like to work together. They started in the first 6 weeks [really.]

On the negative side, I think we had no surprise except a little bit in the U.S., the market is a little bit slower than anticipated for the Parex sales but set off by a really strong China market. So that's a little bit is bad. Disappointment, if I look at the U.S. market. However, overall, also good growth rate, and especially in China, very good. That's the point from the Parex.

Adrian, for...

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Adrian Widmer, Sika AG - CFO & Member of Group Management [4]

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So on the pricing we're targeting from today's perspective about a 2-percentage-point price increase for the full year. We're working towards that target. Have made a very, very good progress.

As I mentioned on the material cost side, the situation is still, I would say, not clear in terms of the direction we have seen, and certain raw materials in the first half year continue to go up. [Others] have come down. The situation generally is quite volatile but they are confident, and they are, of course, aiming to even increase the material margin and the positive comparison towards the last year in the second half year as the comparables should get a little bit easier.

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Thomas P. Wrigglesworth, Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst [5]

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Sorry, Adrian, just as a follow-up, could you disclose or remind me what the price effect was in the first half? You say 2%. Is that for the full year? What was pricing up in the first half in the bridge?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [6]

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Yes, around 1.5%.

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Operator [7]

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The next question is from the line of Martin Hüsler with ZKB.

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Martin Hüsler, Zürcher Kantonalbank, Research Division - Research Analyst [8]

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Two. Maybe first, about your sales guidance of CHF 8 billion, facing a tougher, let's say, Forex environment in the second half maybe. What's your implied assumption on the organic growth in order to achieve this CHF 8 billion?

And the second question is turning to the Global Business area. If I calculated correctly, you had an EBIT margin decrease by about 130-or-so basis points in the Global Business. I was just wondering whether this is like more pricing pressure, if it's a mix effect or is it only a volume effect.

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Paul Schuler, Sika AG - CEO & Member of Group Management [9]

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Okay. Thank you, Martin. I take the first question regarding our growth and our anticipation the organic growth. Think we still feel the U.S. is still going strong. It's a good situation there, really positive, also with it Americas. So we see the same -- similar growth rate that we had. Then if you go to EMEA, I believe that the rate we have, the 3% or 4% traditionally, we can help that, we can hold that, depends a little bit on several [sanctions] that are still positive for the next 6 months. If I look at the pipeline, if -- challenge is, of course, Brexit. The U.K. business is quite a business with us. But assuming it's not a disaster there, we still stay in our growth rate, this 3%, 4%. Asia, we are slightly more positive. China is still going strong. We see no weaken there. And Japan is stable. Also no big weaken. An improvement we see in Southeast Asia. So overall, I guess, we go with our growth rate of this 3% to 4% during the year.

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Adrian Widmer, Sika AG - CFO & Member of Group Management [10]

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Your question on the segment profitability of Global Business, the -- and I would mention the sort of the volatile raw material situation, the area where we still have the biggest increases in raw material cost is Global Business, is automotive, particularly on the polyamide and bitumen side, which, of course, also in the automotive industry on existing platforms, it takes longer to increase prices. So that's one effect of the margin.

The other one is the lower leverage we have, a very disciplined cost management. But here, a bit missing leverage, but we have quite a number of improvement projects in the pipeline. And so we should also improve that margin going forward.

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Martin Hüsler, Zürcher Kantonalbank, Research Division - Research Analyst [11]

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Okay. But just maybe on the Global Business, what's your best guess for the second half organically, for Global Business?

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Paul Schuler, Sika AG - CEO & Member of Group Management [12]

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Thank you, Martin, for that. Very nice. I think if you look at the automotive market, they really have now the perfect storm out there. If you look to the car builders, the suppliers, they all expect a slowdown.

However, we are with our 7% to 10% area for the whole organization, is not really critical. However, we also feel if they cannot solve the issues, we will be also feeling the thunder in the difficult market. However, we would say, we will have a positive growth until end of the year. So we don't see a decline overall.

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Operator [13]

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The next question is from the line of Tobias Weimann with Morgan Stanley.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [14]

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If I could follow-up on the first question on the margins. Obviously, you have changed your guidance a little bit from the overproportioned growth to double-digit growth. Could you talk a little bit what was the intention behind that? And are you no longer confident with an improvement versus last year?

And then maybe as a follow-up on this one, and again, it was asked earlier, but back in February, you confirmed your 14% margin target for 2019? Are you still confident with that?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [15]

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Yes. So I mean, I think we have been very consistent in saying that we will overproportionally grow in EBIT pre-Parex. And this -- we very much hold on to this. Is very much unchanged. But it is very clear, given the magnitude, that there is a certain initial dilution coming from Parex as somewhat not in a major way but lower entry EBIT, but also a 4-percentage-point amortization, which gets added on top of it. We also have one-time costs, which -- we already had CHF 30 million in the first half year. There is more to come. We're working through integration. It's going very well.

But at this point, we cannot just, [I mean,] say that we will be able to basically -- with our organic and pre-Parex improvements to fully mitigate these effects because as well, material costs remain very volatile, I think we have made great progress on the material margin. We will continue this, but it's just too early to be very precise here.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [16]

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Okay. So that was the intention on the change in the outlook. And may I just quickly ask for Parex, the dilution effect, how big is it approximately?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [17]

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We will have this, as I said, the 4 percentage points of amortization, and you can also assume that the initial EBIT was a bit lower than our 14%. So you can make the calculation what it will be. And of course, the variant here is also the onetime, the onetime costs.

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Operator [18]

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The next question is from the line of Martin Flueckiger with Kepler Cheuvreux.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [19]

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Martin Flueckiger from Kepler Cheuvreux. I have 4 questions, and I'll take one at a time, please. Firstly, on your Parex acquisition effect, I think it was CHF 152 million in Q2. Could you talk a little bit about how much organic growth was for Parex in Q2 and H1? That would be my first question.

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Adrian Widmer, Sika AG - CFO & Member of Group Management [20]

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Yes, Martin. Parex is growing very well. The H1 growth has been around 8%.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [21]

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Organically?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [22]

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There is a bit of an acquisition effect in there, but it's less than 2%.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [23]

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Okay. And next one, coming back to the raw material price developments, could you elaborate a little bit whether the increase was overall on average in Q2, whether the increase versus Q1 was still positive? And also maybe provide an average increase year-over-year. And possibly also, what you think is your best guess for the outlook 2019?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [24]

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Yes. The best guess for the outlook is really very, very difficult. I mean, as I said, there is different movements region by region, raw material by raw material. And the negative for the net negative effect has been a lot lower than in last year. I mean we're talking here, 1%, 2%, not more. There is a chance that this will further recede. But as we have seen on some parts, there is an increase. It's always also dependent on force majeures. We have not seen really a very broad decline overall. That's why we remain cautious. We remain cautious of it.

Overall, I would say, it's a little bit easier to get enough material. It's easier to negotiate, and we are able to move material around from one to other suppliers. So we are much [better] back in the game than just 12 months ago. So the market has certainly changed. We'll see how it remains that we have more bargaining power than 12 months ago.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [25]

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My third question is on the EBIT margin in Asia Pacific. I think it was also down by around 20 bps. Was that also raw material price-driven? Or what was that movement about?

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Paul Schuler, Sika AG - CEO & Member of Group Management [26]

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Yes. This was mostly raw material price-driven. That was one of the areas, which, at least in the first quarter, saw a very steep increase. It's now receding a bit. We have also caught up on the pricing side, but that's the main impact.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [27]

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Great. And my final question is, could you provide some -- with all these effects, IFRS 16 and Parex and PPA, could you provide an overall number of what you expect for group depreciation and amortization for 2019?

And related to that question, when does the PPA effect wash out of the P&L? How many years from now?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [28]

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Okay. In terms of the overall effect, I mean the first half year, we had an increase basically by about CHF 40 million year-on-year. I would expect the overall depreciation and amortization for the full year to be around, I would say, CHF 320 million, including about a CHF 70 million IFRS 16 effect for the full year.

The question on the PPA amortization, this depends on the, let's say, the intangible in the various areas. It's between 5 and 20 years. But of course, as we continue to grow, the percentage impact will also become smaller. But this is, of course, an effect that is not just short term, but the impact will be less material over time.

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Operator [29]

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(Operator Instructions) The next question is from Bernd Pomrehn with Vontobel.

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Bernd Pomrehn, Bank Vontobel AG, Research Division - Analyst [30]

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Two questions left. Firstly, thank you for providing the purchase price allocation for Parex in your H1 report. We can see that you paid CHF 1.7 billion in cash and additionally acquired CHF 1 billion in debt with Parex, which gives you an enterprise value of just below CHF 2.7 billion, which compares with your indication of an enterprise value of CHF 2.5 billion in January. Is my calculation correct? And if yes, why did you pay more than initially indicated?

And then secondly, you took over debt of a good CHF 1 billion with the acquisition of Parex. What kind of debt is this? And what is the average interest rate of this debt? And also do you see some kind of refinancing for this debt?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [31]

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Okay. Thank you Bernd. Well your calculation is not quite correct, the CHF 1.7 billion here in the equity in Swiss franc is correct. The debt number, you have to net out the cash there, and it also includes the newly assessed IFRS 16 leasing. So we are actually almost exactly at the CHF 2.5 billion as an enterprise value.

In terms of the debt, this is also more, I would say, technical because we're -- we have not paid this to the seller, but we have basically immediately retired the debt we have taken over and repaid it to the banks. It's basically coming now at the rate where we have issued our bonds. And if you look at our total gross debt, the interest percentage there is around 1.1 percentage points for the full debt we carry on our balance sheet.

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Operator [32]

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The next question is from the line of Daniel Jelovcan with Mirabaud.

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Daniel Jelovcan, Mirabaud Securities Limited, Research Division - Analyst [33]

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Yes. Only small questions left. Can you help me in Asia Pacific? You mentioned the acquisition effect was 12.9%, which is quite significant. So that's about CHF 70 million. And according to my memory, it's only Parex. And Parex has an annual -- sorry, a monthly sales of about CHF 40 million in APAC. So what exactly is the difference here? Is it -- was it -- or is June maybe a seasonally strong month for Parex? I don't know. That's the first question.

And the second question, you mentioned the CHF 31 million restructuring one-off costs in the first half. You guided for CHF 40 million for the full year and CHF 20 million for next year. What can we expect for the second half? Is it possible that you take more costs now and maybe less next year? That's the second question.

The third question. Organic growth in EMEA, according to my calculation, in the second quarter was about 1%. And it's very clear, it's less working days. Every company mentioned that. According to my calculation, the effect must have been maybe 2% or 3%, maybe 3%. So adjusted for working days, your organic growth must have been rather 3% or 4% in EMEA. Is that the correct calculation? I know it's only a quarter, but still to get an idea.

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Adrian Widmer, Sika AG - CFO & Member of Group Management [34]

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Yes. Okay. I'll try to do this one by one. In -- on the Parex growth in Asia Pacific, there is actually -- almost 50% of the sales are in Asia Pacific. So this contribution of around EUR 70 million for this 1 month and a few days in May is correct. The biggest part there is China.

On the acquisition cost, yes, you recollect correctly. And also, I would assume that we will probably have rather a bit more of the one-off cost this year versus the next year as we continue to integrate fast, so probably rather from today's perspective, but this is a very rough number at around CHF 15 million for the second half.

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Daniel Jelovcan, Mirabaud Securities Limited, Research Division - Analyst [35]

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15. 1-5?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [36]

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1-5. Yes.

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Daniel Jelovcan, Mirabaud Securities Limited, Research Division - Analyst [37]

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Okay. And organic growth in EMEA?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [38]

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The organic growth, yes, there is about 1 or 2 days in EMEA which is around 2 percentage points for the quarter. If you basically align the working days and adjusted the growth for EMEA, we would basically have here -- be above 4%, 4.5%, which is, as Paul mentioned before, in line with the years before, maybe with the exception of last year, where we had a very, very strong growth in EMEA.

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Daniel Jelovcan, Mirabaud Securities Limited, Research Division - Analyst [39]

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And can you maybe shed some light on which more relevant European countries were a bit softer in Q2?

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Paul Schuler, Sika AG - CEO & Member of Group Management [40]

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As I mentioned a little bit before, U.K. was very soft. We had a negative growth there. I think they really feel now more pressure on the market. We have to see how this ends up. So crystal ball, I don't have. But it's clearly, last year, we grew by 9% to 10% in U.K. This year, we are rather below last year. So that's a real hit in overall growth. Then Spain was quite slow. Italy, we're quite slow. And with France, we are also on around 3% growth rate, including [today] we would also be about 4% or 5%.

So it's mainly U.K., then it's mainly Spain, Italy, which we are really fast, challenging. And then, of course, we have the GCC also in EMEA. And in GCC, we also have a negative growth rate, but that is because we stopped shipping to customers. We stopped a little bit just to make sure we collect the money. We wanted to make sure we have no future issues. In a moment they very tight on the money. The government don't pay the builders. The builders don't pay us. So it's a little conscious that we don't grow there. So that's the real weak, 2 weak points in EMEA.

The rest of the countries, as I said, Eastern Europe, double digit; Nordics, good. So we have a lot of strong, strong companies. And also pleased to see 20% growth rate in Africa. So overall, still confident that it's not falling apart.

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Operator [41]

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The next question is from Andrew Fraser with HSBC.

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John Fraser, HSBC, Research Division - Global Equity Head of Building Materials and European Building Materials Analyst [42]

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A couple of questions from me around Parex and then one on working days, please. So in Parex, the pro forma sales, just over CHF 500 million. I heard, Paul, you say the 8% organic growth or perhaps Adrian said that in the first half. So that clearly, there's quite a big half 2/half 1 split there if you also make the CHF 1.2 billion sales of the -- of last year in that business. So perhaps you could sort of flesh that out, please?

And then on the margins in Parex. I note the personnel expenses were up as a proportion of sales, and this was acquisitions. Imagine that's Parex as well. So perhaps, you could just give an indication of where Parex's margins are versus the group?

And then secondly, on working days. I imagine that it wasn't just EMEA that was held back by working days, perhaps. I would have thought Global Business had an impact. Was there any impact in any other region? And in the rest of the year, does working days become a positive perhaps in Q3?

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Paul Schuler, Sika AG - CEO & Member of Group Management [43]

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Okay. I'll take the third question with the working days. Yes, the Global Business was (inaudible) also in the same boat as EMEA. And the same in Latin America, we had the same effect. So overall, if -- [but is not] -- if we would account that, that will be another 2% growth rate on the overall. So yes, we had this day less, so the growth is lower. But if we would have it, then a 2% more.

Then on the Parex, if I understand it right, your question, they have the first half year growth rate of around 8%. They're growing very well, but it's the same as everywhere in our business. They had a little bit weaker U.S., which I explained before, so it's little bit disappointing. They lost a big customer last year, and we [days off] for now to recover that. On other side, very positive is the growth in China. They grow by 20%. So overall, we are quite pleased with that, that they achieved their results, what they had last year and rather on a same growth rate, and I think it fits to our strategy that they also should be by 6% to 8%, but we have to see.

Then we believe with the cross-selling, it takes us another few months to really set this up, to really [generate]. So positive in the future to keep this momentum on growth.

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Adrian Widmer, Sika AG - CFO & Member of Group Management [44]

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Maybe lastly on sort of the cost elements or the margin contribution. Of course, it's still very early now with basically having 5 weeks consolidated there.

On the personnel cost side, they don't have sort of a higher personnel cost as a percentage. It's just the fact that, of course, there is no -- there is no leverage or no improvement on the acquisition side initially. And of course, there is a certain element of cost inflation on the overall wages we have, but it's actually quite contained, not more than in the years before. So this is managed very well. But there is no, let's say, additional or higher cost on the personnel side coming from Parex.

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Paul Schuler, Sika AG - CEO & Member of Group Management [45]

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On the personnel side, we had also, as we said before, all the management on [new lines,] so we will gain something on that level. And then also the corporate organization, we will save some. So we are positive to bring it to our level and quite fast.

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John Fraser, HSBC, Research Division - Global Equity Head of Building Materials and European Building Materials Analyst [46]

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So does that mean that excluding Parex, there was an improvement in personnel expenses? So note you saw an improvement in operating expenses, but did that apply to personnel as well on the core business?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [47]

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Yes.

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Paul Schuler, Sika AG - CEO & Member of Group Management [48]

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I think on the organic growth rate, then the -- would exclude all the other small acquisition, we're quite efficient in personnel and in other expenses. So I think we are really underproportional grow there.

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Operator [49]

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The next question is from the line of Simon Rowe with Janus Henderson.

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Simon David John Terrant Rowe, Henderson Global Investors Limited - Portfolio Manager [50]

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Just wanted to ask one further question about the EMEA growth rate. Did you actually answer the question about working days effect in the second half of the year? I'm not sure I heard that.

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Adrian Widmer, Sika AG - CFO & Member of Group Management [51]

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Yes. On the second half year, it's the very same number of working days as in the previous year. So there will be no effect in the second half year.

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Simon David John Terrant Rowe, Henderson Global Investors Limited - Portfolio Manager [52]

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Okay. And then just turning to the Americas. Could you just remind me again what exactly happened? Because I remember in the first quarter, North America was a bit disappointing. Now it seems a little bit better. What do you feel the outlook there is? And what's there going on?

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Paul Schuler, Sika AG - CEO & Member of Group Management [53]

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The first quarter was also a surprise for us and talking to a lot of customers and also what's the result of the customers -- the competitors. The first was weak. I hate to say it but it was really a bad weather and a bad condition there. And then when the weather turned better, they had not enough labor to really do then all the jobs. And the second quarter really then turned strong, and the pipeline for us is very full. So we are very positive for the next few months in U.S.

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Simon David John Terrant Rowe, Henderson Global Investors Limited - Portfolio Manager [54]

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Okay. And so what sort of -- can you say anything about what sort of growth rate you target in North America?

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Paul Schuler, Sika AG - CEO & Member of Group Management [55]

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Mid-single digits as organic growth and then a part of the Forex. So should be mid-single digit, high mid-single digit.

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Operator [56]

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We have a follow-up question from the line of Tobias Weimann with Morgan Stanley.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [57]

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Just a very quick follow-up on your cash conversion. I know you have the target of 10% or more cash conversion from revenue. And it has been bit below that for the last 2 years I believe. And now it was a bit weaker. So how can we think about this going forward?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [58]

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I think we had actually quite a strong cash conversion. You have to see -- I mean most of the cash we're actually converting and delivering in the second half year. Very pleased with the first half year and particularly also the containment of the working capital build-up, and that's really driving cash conversion first half versus second half year. Good initiatives there. Also on the CapEx side. In that sense, I think, very, very pleased. And of course, the major part of cash will be delivered in the second half year due to seasonality.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [59]

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Okay. So we can still go over to the 10% for this year?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [60]

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Yes.

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Operator [61]

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Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Dominik Slappnig for any closing remarks.

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Paul Schuler, Sika AG - CEO & Member of Group Management [62]

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Okay. First, I want to thank everyone who participated on the call. I wish you a very relaxing, hot summer. And I hope the construction moves, which we believe, and also the car manufacturers. So a nice summer for everyone.

And Dominik?

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Dominik Slappnig, Sika AG - Head of Corporate Communications & IR [63]

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Yes, and thank you for listening in. Have a nice summer absolutely, and bye-bye.

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Operator [64]

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Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.

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Dominik Slappnig, Sika AG - Head of Corporate Communications & IR [65]

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Good.