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Edited Transcript of SIKN.S earnings conference call or presentation 21-Feb-20 9:00am GMT

Full Year 2019 Sika AG Earnings Presentation

Baar Mar 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Sika AG earnings conference call or presentation Friday, February 21, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Adrian Widmer

Sika AG - CFO & Member of Group Management

* Christoph Ganz

Sika Sarnafil, Inc. - President & CEO of Region Americas and Member of Group Executive Board

* Ivo Schädler

Sika AG - Regional Manager of EMEA & Member of Group Management

* Paul Schuler

Sika AG - CEO & Member of Group Management

* Thomas Hasler

Sika AG - Head of Global Business & Industry and Member of Group Management

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Conference Call Participants

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* Alessandro Foletti

Octavian AG, Research Division - Financial Analyst

* Bernd Pomrehn

Bank Vontobel AG, Research Division - Analyst

* Christian Arnold

MainFirst Bank AG, Research Division - Analyst

* Daniel Jelovcan

Mirabaud Securities Limited, Research Division - Analyst

* John Fraser-Andrews

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

* Martin Flueckiger

Kepler Cheuvreux, Research Division - Equity Analyst

* Remo Rosenau

Helvetische Bank AG, Research Division - Head of Research

* Xintong Ouyang

On Field Investment Research - Analyst

* John Revill

Reuters - Senior Correspondent

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Presentation

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Paul Schuler, Sika AG - CEO & Member of Group Management [1]

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Okay. Good morning, everyone. Thank you very much for coming. For us, an exciting day. And I'm always pleased that we see so many familiar faces, but there are also some new faces. So thanks, everyone, for joining our -- this morning.

Today, we will have a little bit highlights, then Adrian will inform about the results. Then I show a little bit more about what's the way forward. And then the outlook together with my colleagues from the area is Thomas Hasler is here; then also Christoph Ganz from Americas and Ivo Schädler and also Philippe is here, Jost. So when you have questions afterwards, very nice, and we are more than pleased to answer all your requirements.

I guess, if you look at the environment, and if you look around the world, I think we have a great set of numbers. The sales, CHF 1.8 billion. Remember, last year, we got CHF 7 billion and the year before, we got CHF 6 billion. So with CHF 8.1 billion, I think it's a strong number in sales, 14.4% sales growth in local currency.

EBITDA, 20% increase to CHF 1.3 billion, and the EBIT, first time ever to CHF 1,055,000,000. It's 11.5%, a little bit lower than our friends anticipated. But I guess, we had some reasons to be a bit lower. So we're still happy with the numbers. Very proud on the net profit. And with CHF 1.2 billion cash flow, it's really amazing that you can see, Sika is a cash machine, and we can run this machine even in stormy weather. So this is a number which pleased me very well.

Then we did a lot of investments. We have gotten 7 new factories, and we did 5 acquisitions. That's the numbers that again, Adrian will go closer to explain it.

This one is the growth rate, and we see it organic and acquisition growth. It's clear, our strategy is grow with acquisition, also organic. But here, also, you see a little bit of challenge, which brought 2019. If you look at our competitors, they are below these numbers, the most part; we have our peer groups. And that was the challenge really in several market, the market went down and also in Global Business, in automotive industry, in certain markets. So a little bit of challenging year for a lot of people and with 3.3 is results.

If you look around the world, we had a strong momentum in Americas, with 19.2% growth rate, up to CHF 2.1 billion now. So we have a strong position there. EMEA with CHF 11.6% to CHF 3.4 billion sales in EMEA, also quite a nice number. And 35% in Asia to CHF 1.5 billion now. This is a big impact from the Parex acquisition.

Global Business, 16.3%, 3 point in Global Business and 16.3% as a group.

The 7 plants where we produced in Senegal, Doha, in Douala, in Jakarta. So we really build the factories, and these factories are most mortar or mixture. So we want to be close to the customer, where it really makes sense to build this factory and that's just the way we want to explore the world.

Then we had the 5 acquisitions. Parex, we signed a year ago -- in January, a year ago, then we could close it in end of May. Then we have a Belineco, a smaller one. Then we have a very nice one King, in Canada, around CHF 100 million; and then we had the Crevo acquisition Sealing & Bonding in China. And then we closed the end of the year, Adeplast in Romania, also our CHF 100 million companies. So a very strong foot set and very good way there.

I think we worked hard the last year until we close it for the Parex integration, and Parex was, at that time, CHF 1.2 billion sales in 23 countries, 74 plants and around 4,600 employees and 13 R&D centers, mainly in Asia; Americas, 25%; and EMEA, 33%. And the sales was very nice on one side to waterproofing products, then the tile setting materials, and the facades.

On the first day of designing, we had combined organization already ready. And since then, in all countries, they work as one team together and one organization.

Interesting is the cross-selling integration and the first joint initiative. So for example, in Brazil, we just could get additional CHF 1 million sales because Parex had very nice contact with its builder, and we could sell our product additionally. So it's a great move, and we have many, many examples like that, where Parex or Sika brought the other company in. So this will leverage now, over the years, in a fantastic opportunity for cross-selling.

Then another really nice development we have in formulation, as Parex, really the major producer of mortars. We had also -- but having the cheapest formulation and then having this better technology in the house, so we find a lot of synergies on the cost side, exchanging the best formulation for the best product. That's a huge advantage we find here and it's really great. And we have more than 100 initiatives around the world to really get the best benefit out with the formulation.

Another nice one is in China. There, we could increase. They had 3,000 dealers -- I explained it last time, 3,000 dealers, they sell only the Davco range. It's called Davco in China. And now we started immediately with selling our range as well. If you see on the right side of the picture is the Sika box. So they start now to cross-sell in all their distribution, and we have the first real great success, and it's very nice, and we are very confident that in future, we will see a great improvement in this direction.

So for us, very, very nice integration. A lot of synergies, a lot of great products.

So the CHF 100 million synergies, we said CHF 80 to CHF 100 million. We are confident we get at least CHF 200 million, really good. Then the cost synergies are CHF 55 million, where we also feel that we are in really good way. The shop-in-shop concept is really beautiful and the cross-selling, the CHF 230 million, with over 100 projects, we are also confident we do.

In over 20 countries now, Parex is history. We integrated them in our teams, in our factories and, for example, in Chile, we had 4 warehouses: 2 at Sika, 2 at Parex. Now we have one new one, which build a lot of synergies. We had factories we convert. So a lot of good synergies. But the best is we have the organization under control. We work very close to getting the market. And we have one team. We have one HR team now. We have one finance team. It's fully integrated. And as Parex was more the name of the group, but the products had different names. We really could integrate them very fast. So we still have to bring now the synergies. We know we have to work another 6 to 12 months really to bring it in. But the first step is clearly the 20 countries are integrated and fully aligned with our organization.

So from that side, I think we are on the way to prove that we could do a big acquisition, that we can manage it, and you really have a strong organization in all the countries where we have strong General Managers, strong teams, and I think it's a excellent example how we can integrate companies and make one-one to three.

Then with the acquisition we started to have a new target market that our people start to focus also on a new customer segment, which Parex brought in. The new target market is building finishing; and in building finishing, now we start to roll it out. We have an own sales organization there. And to understand a little bit more, on one side, you see our technical mortars, where we repair the bridges, where we repair -- go to the job sites, direct sales and the other side where Parex was strong, was the tile adhesive, was the residential where Sika never really played the role. So if you look at this one, on one side, we have refurbishment and the other side, building finishing. We have now dedicated sales force, dedicated marketing teams, dedicated organization, looking on building finishing and on the other side, pushing refurbishment. And this runs very well, and it's just another great opportunity for Sika to win market share throughout the world in a new focused target market.

So the first 5, 6 months went very well, and we are convinced that we can continue with this success.

That's the building finishing. It's tile setting. Everybody in Switzerland probably has it in his bathroom. Nice tile setting, great opportunity for us. Sika was not really a strong player. Now we have access throughout the world. And imagine now we have the technology in 20 countries, but we are active in 100 countries. Now the target starts to roll it out, to make it everywhere happy, to build up a new organization. So a great, great opportunity to win market share, to get in another field, and we are well prepared.

Then also Sika was not -- never or very, very small in Facade Solution. They are very strong there in these 20 countries. So on one side, we try to build our market share in the 20 countries, stay active with facade. We have now the facade organization also integrated in our sales team. But then also here, the opportunity to roll it out in countries where Parex was not existent, and that's sell a lot in Europe. So another great opportunity and the same in interior walls, and this is then the building finishing organization

Excellent opportunities. And if you look at this one now from 2011, we were very small in the building finishing. Now we -- over years, we started to build it up, some with acquisitions, some with our own efforts. And now with that acquisition, which has got a real strong market position and really changing the mortar market, which is very profitable from us and gives us for the next years the great opportunity to continue our path forward.

Innovation, strong pipeline for new products. I think it's important that we have more than new product linked up around 100 major products launched in 2019. For example, SikaProof A, that's a membrane for waterproofing. In all the buildings, everywhere, you will see these membranes, to make sure you have a protected home that no water can come from outside. So it's the underground and great effort and a great success here around the world. We do in Qatar. We do everywhere around the world now this new membrane and it's excellent, because adhesion with concrete is so fast and so good that we don't have to use the old method. So it's excellent.

Then we have a new roofing membrane, AT, also very good outside there. Then we have new Sikaflex Arctics, where we can -- usually, you have to stop working when the temperature goes around 5 degrees. With this one, you can go down to below 10 degrees. So for the people, they can work longer, have more opportunities to work in cold condition or in -- where always it's cold, we can use this product. So just a few examples where we really can help the customer to build longer, faster and better.

Then we are proud on the strong innovation award we got in Switzerland. I think that proves that we can also get recognition from other people. That's in adhesive. We call it SikaForce Powerflex, and this is one of the award, which our people are very helpful, and our manager happy, because we're going to sell. If you look a little bit at this one, everybody tried to bond something or to use an adhesive at home. So if you had applied adhesive, then it will get hard after -- whenever the adhesive will get hard and in the meantime, you have to apply the second one you want to bond. And then you have to wait until it's hard, it's cured.

So if you look at that line, this line is the open line where you apply it, then this line is usually the line, it gets hard, and from here, you can start to use it. That's very simple and our adhesive is here where we can define this, and we can define how fast this goes here.

So what does it mean for the customer? We had a customer, bus producer. They for -- probably 20 years or 15 years, they came to us and say, we want to have aluminum on the roof, how can we bond it. So we developed a system, which they could go away from welding and started to bond. With this adhesive, we could bond the first time a roof to this bus. For this, they had a time, an open time, for 15 minutes, and they had to have 4 people to stay around the roof to bond it because it was only 15 minutes. They applied it, put it on the roof and then they had to wait 24 hours until they can move the bus.

Okay -- we had the application then here and then they said, we have to improve it. Now the new adhesive gives them -- one worker can walk around, apply adhesive because we have a longer open time, 45 minutes. So he can apply instead of 4 people, only one guy is around. And then he applied the roof. And then, he can move the bus after 15, 20 minutes instead of waiting a day, so a big improvement for this bus producer, and therefore, we got that award, which we are proud. And this technology, we can use in other adhesive, we can also use it on the floor. So it's a breakthrough technology for us, where we really feel we can go on.

So that's a little bit last year. With this, I would like to hand over to Adrian and explain a little bit more our data set. Please.

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Adrian Widmer, Sika AG - CFO & Member of Group Management [2]

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Thank you, Paul. And good morning, ladies and gentlemen. After the presentation of the highlights 2019 by our CEO, Paul Schuler, I will continue now with the financials in a bit more detail. And I think it's fair to say that we have again delivered a strong set of numbers in 2019. Most notably, net sales of over CHF 8,109.2 million in sales, crossing this CHF 8 billion mark at the first time. This represents a double-digit growth in local currencies of 16.3% and 14.4% in Swiss francs.

EBITDA strongly increased by 20.7% to CHF 1,387,600,000, partially supported by a change in the accounting treatment of the leases under IFRS 16. But also on EBIT level, there is a double-digit increase of 11.5% to CHF 1,055,100,000. Again, here, crossing the CHF 1 billion mark for the first time. This is including CHF 44 million of acquisition and integration-related onetime costs, which are included in this EBIT figure.

An increase in interest cost was mitigated by a further reduction in the tax rate. The tax rate came down from 23% to 21.5% and has also resulted in a double-digit net profit increase of 10.4% to CHF 758.5 million. This also represents a double-digit EPS growth of 13% to CHF 5.3 per share on diluted basis.

ROCE, return on capital employed, at 19.2%, here impacted by the acquisition of Parex. But the cash generation measured by operating free cash flow was extremely strong, more than CHF 1 billion, CHF 1,026,000,000 in operating free cash flow, 12.7% of net sales, basically doubling the amount of last year here, primarily driven by a very strong working capital management.

Overall, this cash flow figure, I think, is a clear testament to a very strong deleveraging profile, which the Sika business has.

Let me now address the individual results in a bit more detail, starting at the top line, year sales growth of 16.3% was again very strong and across the board, as we have seen it across all the region. We achieved in terms of organic growth, particularly strong growth in the U.S., in Eastern Europe, the African continent, but also in a number of Latin American countries, Colombia, Peru, Brazil and also very strongly in the U.S. and Canada and in the -- in India, in Asia Pacific.

Acquisition growth contributed 13%, while organic growth was 3.3%. Currency translation effect had -- I'm almost inclined to say, as always, a certain negative effect, minus 1.9%. This was, in particular, owed to the relative weakness of the euro and also a number of emerging market currencies.

If we look at growth across a number of years, we can see here a very strong momentum with 2019 even higher than in previous years, of course strongly supported by acquisition with this 13 percentage point in contribution to total growth, primarily driven by the Parex acquisition, but also the acquisition of King Packaged Materials in Canada, Arcon in Romania, Belineco in Belarus and Crevo-Hengxin, an acquisition we did in the last quarter in China.

And moving further down the P&L. Also here, 2019 was characterized by double-digit growth across the board. Gross result increased over proportionally by 15.8%, with corresponding expansion of the material margin from 53% to 53.6% or 60 basis points, this in spite and including an acquisition dilution of around 20 basis points. And as we can see here, a clear upward development in 2019. Also, if we look across the year, we saw a clear expansion and positive progression of the material margin in Q2. We had a 20 bp improvement over the previous year period. This has gone up to 60 basis points for the full year driven by solid pricing, innovation, but also structural savings on the procurement side, and later in the year by flattening or decreasing material cost.

On the cost side, operating expenses, which do include personnel costs as well as other OpEx increased slightly on the proportionally by 13.6% vis-à-vis sales growth of CHF 14.4 million, but were impacted by a number of special effects.

On the one hand, we did recognize CHF 32 million of acquisition and integration related onetime costs for Parex. This compares to CHF 23.3 million of onetime costs related to the dispute resolution with Saint-Gobain in the previous year.

Secondly, also, this accounting change under IFRS 16 in terms of lease treatments had an impact both on operating expenses with a like-for-like reduction of CHF 64.5 million increasing, basically, depreciation and amortization and reducing other operating expenses by CHF 75 million.

Organically and excluding one-time effect, operating expenses grew in line with organic sales growth.

Slightly over-proportional personnel cost increase was driven by acquisitions, integration costs and also an unfavorable foreign exchange development. Personnel cost as a percentage of sales, however, remained basically at the same ratio at 19%, in line with the previous year level.

Other operating expenses as a percentage of sales decreased slightly by 20 basis points from 17.7% to 17.5%. Negative impact of acquisition and integration-related costs also here, but also pre-investments in our automotive business. And all this was countered by, overall, a very disciplined cost management and the shift of leasing-related expenses.

Correspondingly, EBITDA increased very strongly, 20.7% to CHF 1,387,600,000 as already indicated.

Now if you look at the depreciation and amortization line, here, we see 2 effects. On the one hand, this IFRS 16 effect, but also higher depreciation and particularly amortization expenses related to the acquisition activity, which over-proportionally increased that cost line by 63% from 2.9% of net sales to 4.1% of net sales in 2019.

Consequently, EBIT increase was lower than EBITDA growth, but also double digit, 11.5% as already mentioned, 13% of net sales compared to 13.4% in the last year. But again, here, if we exclude onetime effects and the acquisition impact, EBIT growth organically would have been over-proportional. If we look below the EBIT line, here, clearly, net debt, which is, on the one hand, related to the share buyback in connection with the resolution of the Saint-Gobain situation mid last year, as well as the financing of the Parex acquisition in early 2019, led to an increase in interest cost as well in other financial expenses. Net interest cost increase was CHF 30.8 million. This amount also includes an interest component on this lease obligation, which now according to IFRS 16 is below the EBIT line.

Net financial -- other financial expenses increased by CHF 4.7 million, largely driven by a CHF 4.6 million nonrecurring financing cost related to the Parex transaction. Here, this would have basically been the same amount without this effect.

On the income tax side, group tax rates. So another significant reduction as already indicated, from 23% to 21.5% of profit before tax, which is a continuation of the favorable trend of the last years.

Correspondingly, absolute tax expense only increased very modestly, and we can see here the development over the last few years. While in 2018 the reduction here from 24.7% to 23% was clearly related and structurally related to the lower income tax scheme in the U.S., following the U.S. tax reform -- this is also something which is or will be continuing -- while in 2019, the reduction was more sort of one-off in nature. Also here related to a tax reform here in Switzerland, which basically had a positive impact of CHF 12 million, increasing the deferred tax asset. If we look at it from a like-for-like perspective, tax rate development in terms of percent of net profit before tax would have been basically flat.

Overall, net profit also increased double-digit to CHF 758.5 million, which is a 10.4% increase. And in terms of percentage of net sales, 9.4% versus 9.7% in the previous year.

Now moving on to the balance sheet, our continued growth is, of course, also reflected here in the balance sheet with an expansion of the balance sheet total, primarily driven by acquisitions and related financing activities.

On the asset side of the balance sheet, purchase price allocation led to an increase of non-current assets, which basically doubled from 2018. On the one hand, an increase of goodwill of CHF 1.98 billion to CHF 3.14 billion as well as an increase in customer relationship trademark and IP intangibles of CHF 844 million. These intangibles are being amortized over their useful lives. Pro forma annual P&L impact from this intangible amortization -- and we have seen a larger part already in 2019 -- is CHF 60 million on an annualized basis.

In addition, and this a number of times, mentioned already, the new leasing standard also led to a recognition of additional assets, so-called right-of-use assets at year-end. This was CHF 321 million and the corresponding financial liability of CHF 330 million.

In addition, purchase price for Parex was refinanced through a eurobond issuance, a dual tranche Eurobond we did in April 2019, increasing here gross debt by EUR 1 billion with a maturity of 8 and 12 years. And earlier in the year, we issued a mandatory convertible note of CHF 1.3 billion with most of the effect being seen in equity. Equity increased by about CHF 1.14 billion due to this mandatory convertible bond.

If we look at total financial liabilities at year-end 2019, CHF 4.41 billion and net debt of CHF 3.41 billion, with a cash of almost CHF 1 billion on the balance sheet. In terms of net debt, this is an increase compared to the CHF 2.1 billion in 2018, but already significantly down from mid-2019 by CHF 700 million. Here, we can really see the strong cash generation as well, where net debt was basically CHF 4.2 billion, and now we're down to CHF 3.4 billion at the end of 2019.

ROCE on a reported basis was 19.2% or is 19.2% at year-end compared to 26.2% in the previous year.

Now a cash flow statement and clearly, here, the reason for this net debt reduction in the second half, strong cash generation of the Sika business, which was particularly strong in 2019.

Operating free cash flow doubled to CHF 1,026,000,000. And together with cash from net financing activities, basically, the bonds we have issued, which I have just alluded to you, was more than sufficient to cover the net acquisition spend of CHF 1.74 billion and resulted in an increase in liquid funds of CHF 81 million compared to the end of 2018 to almost CHF 1 billion.

And here, the strong cash conversion we can see here with an operating free cash flow doubling the amounts of the previous year. This was driven on the one hand by higher profitability, by somewhat lower CapEx we had in 2018, a one-off CapEx spend due to the buyback of a number of operating leases of CHF 70 million, which compared positively, but also very, very strongly by -- driven by a very good working capital management. We reduced net working capital by CHF 88 million year-on-year, and this is versus an increase of 2018 of CHF 162 million. So a cash flow impact of CHF 250 million compared from 2019 to 2018.

But also here, the treatment of the leases had a somewhat positive impact, CHF 85 million, basically moved to the depreciation line contributing to operating free cash flow. And then last, we also saw a positive cash flow effect from the rollover of hedging transactions due to the strong Swiss franc. This is relatively similar to the previous year. The strong cash conversion, of course, has also an impact here on our deleveraging, corresponding to the net debt reduction in the second half of 2019.

Upon the initial consolidation of Parex midyear, we had a reported leverage of 3.6x net debt to EBITDA, of course, the full purchase price and no corresponding profitability against it, but particularly also due to the strong cash generation in the second half year, we're already down to 2.6x net debt to EBITDA and well on track towards the 2x targeted leverage by the end of 2020, of course, absent larger M&A.

This already brings me to the dividend proposal in line with the double-digit net profit increase and our strong cash generation. The Board of Directors of Sika proposes another double-digit dividend increase of 25 rappen per share to CHF 2.30 per share. This is up from CHF 2.05 and this represents another double-digit dividend increase of 12.2% per share.

With this, I would hand back to Paul for an update on Sika strategy execution as well as for the outlook.

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

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Okay. Thank you. The next, I would like to show a little bit in the future what we want to do and where we want to go. And I think we are excited to explain on the new strategy. But this one is rather for the long-term investors and to people they like more of the long-term view than just the short term view. So if we look back in our sales history, in 2015, we were CHF 5.5 billion; today, we are CHF 8.5 billion. So overall, the years, we had a great growth rate and over all the years, we had quite an improvement in EBIT. And we think we will do the same in the next few years.

So this is for the long-term investments. And then if we look 10 years back, we see in Americas, we had CHF 1 billion 10 years ago; today, we are by CHF 2.2 billion. EMEA, CHF 2.5 billion; today, CHF 3.4 billion. And Asia, we were CHF 500 million, one of the biggest Swiss companies active in China and everywhere, with CHF 500 million, now we went up to CHF 1.6 billion. So a great growth rate. In global automotive, we're around CHF 200 million at that time, now we are CHF 900 million going to close.

If you look at the EBIT growth, if you look at the net profit growth, if you look at the headcount and the countries, we have a good track record, and we're confident that we continue with the track record demanding a little bit movement in the top numbers.

And as you know, we are measured on beating the competitors. We always have to fight with our competitors, and we have a clear set of peers, which we measure and our bonus is on competing with the competitors. And if you look on our average sales of the peers in the last years, so in 2017, we beat them by 4%, we beat them in 2018. And then also this year where other peers who were minus, we beat them also by around 4%. So our aim is, as a management, our aim is as a team to beat our competitors and grow faster than this, and that is our daily motivation to go out in the market and get the next project every day, and therefore, Sika is so strong, and this is a little bit past. So we look in the future.

We developed an organization, a new strategy in '23 last October. We rolled it out. We had many workshops, and our teams are aligned. And we want to grow, again, 6% to 8% and increase our EBIT margin to 15% to 18%. And that's the major commitment from us that we go in this direction.

Besides the strong financial numbers, we adapted operational efficiency; I think we can improve there. And then we also want to continue with the acquisition, and we have our strong set of values.

Another important point is on sustainability. We want to increase our sustainability footprint as well as our new product focus much more on developing more sustainable products, and our aim is to reduce 12% our CO2 emission. I will come back to that a little bit more in details.

First, we want to say that Sika is on the forefront of the construction. For example, in the year 2000, we started the glazing -- the structure glazing of all these high towers. So this changed the world. And if we travel around the world to see all these high-rise building now with this glazing facade and glazing structure, new technology or we could develop that [nexus] for super tall skyscraper. We are one of the leading companies that do it around the world and not many can compete with us.

And now we start on the future. It's a small, but important future. We feel that more and more goes in 3D printing. I think we are on technology lead. And the main reason is, is labor work getting more and more difficult. It's getting more and more difficult to work and produce in big cities. So I think that's the new trend, and we are on the forefront, and we will see in the next 3 to 5 years very dense but very confident if it the rank goes in this direction and Sika is one of the major player.

Modular building is the new trend. A lot of new buildings will be produced in factories and ship it then to the job site. Also there, we are very, very on the forefront, main reason is increase process efficiency, automatization, bulk handling, main opportunity is less people on the job site, producing automatic in factories. And we are on the forefront, we also want to see where it goes.

And for example, we had the first breakthrough with modular bathroom, and they produced in factories, ship to job site and installed in big factories, hotels and this goes very fast.

Now recent, we are -- Europe or a lot of people were amazed how China built a hospital in how many, 2 weeks? All modular building, only possible with modular building. What's the plan? No way [others]. I think the Germans were impressed, they are still working under airport. That imagine it's only possible with modular buildings, and that will be the trend. That will be the new trend, and we are on the front line because we know automatization from the car manufacturer, and we know the construction side. So we will work on that. We'll support them. And that will be a part where we are on the forefront. So also here, Sika is in the game.

And also in innovation automotive, even automotive produced 5 million cars less last year. We could increase the number of per vehicle which we sold. So every year we increased, and we have a lot of nice technologies, main -- for example, in e-mobility, we have products for thermal management, we have product for protection. We can bond it. So it's a great opportunity for us. Even they produce less car, we could increase, and we will be there with new technologies, and we will be there with new adhesive and whatever car they build, I'm confident Sika will be a big supplier because we know the technology, and we have our sales organization close to the customer with our R&D to adapt.

So also here on the trend side, we feel quite confident. Even if they produce more or less cars, we will be a big player and profitable player there.

Committed to sustainability. Reduction of 12% in the '23. The Paris Agreement told that we have to go down to 15% in year 2030. And this 12% over 2030, we would achieve that. But our commitment is clear. We want to overachieve this goal. And therefore, 12% is the numbers. We also want to have more sustainable solutions; client performance, as I said, energy reduction by 15%. We want to have at least 50% renewable electricity rate. That's a challenge, especially in certain countries where they don't have that, but we will work, and we will motivate them to go there. We want to be careful with the waste. And we have a big community engagement now that we really want to have 10,000 working days volunteered per year. So we really motivate our people to go to certain support and it's 10,000 days where we motivate our people to participate on this engagement.

Overall safety, and that's the sustainability target. We want to bring it down. And today, we have around 27-kilo CO2 per tonne produced. If you look around the construction industry, cement as a comparison reduced 750 kilos per ton produced or even more, just to get the level, 750 to 1 tonne CO2 for 1 tonne produced compared to 27 kilo from Sika. So it's a completely different world. But we still have to work on it, and we still want to bring it down. And each year, we will work on reduction of this one.

The biggest challenge or the biggest opportunity Sika sells here is to help our people and our customers to bring better solution that they can reduce their CO2 footprint. We have 2 examples, I would like to explain a little bit in shorter, is the first one for the highways we developed the new admixtures, where we reduced 25% of the cement in one or -- so if they produce 750 kilo, we help them to reduce 25% cement by changing with our mixtures, ash and slag. So really a reduction where we can offer our customers. But there also if we build, you have to go to lead points and so. So this is a big one, then also possible [sintering], so less concrete, also a great advantage; and then 10 reduction of the 40% water reduction. So with this new technology, we really can make an impact. That's just one example.

And I think this is something where we really can help to go in a better future by developing more sustainable products to help all the people reducing their CO2 footprint.

And many years ago, we had the roofing. When you have to reroof a roof, you get -- have to take the membranes away. And usually, they landed on the landfill. Today, almost impossible and unbelievable, but they're really, today, a lot of landfill still around in this world. And probably 10 years ago, we started to recycle, got back to the customers, put their membranes and recycle it and then put 10% in our membranes. And instead of bringing 30,000 tonnes to a landfill, we could recycle it over the years. We also take products from our competitors. So we really try to make an impact. That's not even breakeven, really invest here. We don't make money with it, but we feel it's responsible for Sika to go in this direction, and we started this project probably 10 years ago or 15.

Strong innovation pipeline, nothing changed than our customers, nothing changed faster, how they have to adapt to the world, and therefore, they always need innovation and the good product. So we have a big pipeline. We have around 25% of our product. We really want to have younger than 5 years old, really pushed that, and all we want to sell is new products to the -- our customers. And this has to be always an advantage, as we explained before, or as we had with adhesives. So always, something which we help either environment or our customers to become better. That's an important number.

And where we worked many, many years -- Sika is now 110 years old -- on performance embedded products we really want to extend now, increase the performance, but also sustainability benefits, so each product, which come out has to show that it's not just the better product performance, now it has to also have a sustainability impact that we really can support, as we explained before, with our admixtures.

Then we have another strong and new products. We have a new sealants technology, which is really better on health and safety, lower VOC emissions, so really going in this direction. Then we have new epoxy floors also reducing VOC, LEED-confirmed in this direction. And one of the nice one we have, we produce around 5,000 -- 5 million tonnes mortars now together with Parex, and we are very happy that we start now to launch our first mortar cement-free. It's really something which we have a big impact in the environment. And also same behavior, even better thermal insulation and reducing cement in our products.

It will be the future. We work there. We have to go. This is a little bit a challenge for us because every country has their own specification. So it will take a while to convince all the specifications to change. But this is one of the highlights we see will change health of construction industry towards more sustainable product. So we are on the pipeline, and we have a lot of new room here.

In operation improvement, we can grow bigger and better. And also here, we can have more operational efficiency. We have 4 levels where we do, looking at the people, very difficult to find in factories. So we go for high-level automatization. We really push that, because it's difficult to get people, else it sometimes is hard work. We try to educate our people, running machines instead of running their backs and things around. So this is good.

Then the next one, smart packaging, aligning, reducing materials, consumption combined. So also there, we see some impact, optimize our logistics. On one side, we will build new factories close to the customer, but they also make sure that we work along our countries and region to improve this one. Great opportunities and then, of course, the global expert teams, where we really try to optimize our product formulation, as explained before. This is a huge impact. So confident that we will achieve our goals of 0.5% reduction. That's the plan. Here, we work on and every year, it's our target to reduce our cost and our efficiency compared to the normal net sales.

That's then the other print now, that's for Sika one of the most important is values and principles. We saw it now by integration of these 4,600 people from Parex. We trained them. We had discussion. We explained it, how we treat our people, we always make sure customer first. We have the courage for innovation, sustainability, integrity, and most important empowerment and respect for people, to make sure we are everywhere, have the fastest decision close to the customers. That we really make sure in all countries, we make the smart decisions. And then, of course, we have to manage for results, and this is very strong and we can keep that.

I think we have a long culture in building that up and we convinced even with the 4,600 people, divided them in bigger organization, we can adapt them, we integrate them, and we're very pleased to see how fast they like the style we work and those that didn't like it, probably 1 or 2 left, but out of this one, the majority really liked it and really supported us. So this is one of our strong points.

Now to the outlook, I would like, first, we start the Global Business. Thomas, please?

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Thomas Hasler, Sika AG - Head of Global Business & Industry and Member of Group Management [4]

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Thank you and good morning, everybody, and welcome back to this nice setting here. It is a bit of a déjà vu, but it's also a bit of déjà vu when I talk about the outlook of Global Business. The market conditions are still very fragile. We expect a declining market in terms of production volume. And unfortunately, the issues which followed us a year ago, are still lingering around. We still have the tariffs open, the Brexit is still not resolved. And on top of that, we have a new situation with the China, outbreak of the coronavirus, which is also a big question mark, how it will impact 2020.

So we expect the declining market conditions and no, let's say, tailwind in this regards. We are, at the moment, watching carefully how China is impacting the car production. Short term, we will see, of course, that the supply chain, which is very well connected globally will have some downturn and shutdowns, and this is in our field, let's say, less critical because with an inventory level of 2 to 3 months on cars, this can be buffered quite easily by the OEMs. The more important and relevant question will be, how the consumer confidence will reestablish in China? Especially, after the crisis is over. This is much more vital, and it is also there. The expectations are varying, expecting a big boost like after the SARS virus, but who knows.

These are the circumstances in the market that are challenging us. Also the e-Mobility topic, which is a huge topic everywhere, has not yet found its roots in the real registration of e-cars anywhere in the world. So we expect also here, this year, to be a difficult year. Eventually, in the second half, we will see some high-volume car models reaching the showrooms, and this could then give a trend for the future in e-Mobility.

So the outside is quite difficult to predict. It is certainly not a boost for the business. On the inside, which is much more where we can measure ourselves against our peers and as Paul has shown we want to outperform our peers, we want to gain market share. And for this, we are building on the pipeline of projects in execution, nominations which we won in the last years, which are now in execution and will fuel also the growth -- the double-digit growth in content per vehicle, that we expect also for 2020 and beyond. And the reasons why we are so confident about outperforming the market is, we are on the mega trends that are fueling the car manufacturer.

It is, not to forget, a long-lasting trend that consumers expect better cars every year, which means a better ecological footprint, of course. But at the same time, we also expect more comfort, which means acoustics. We also expect more safety, which means more complex constructions and a safer car means more weight. So lightweight solutions are still very much in demand, and we have the solutions there, and we are committed also to further innovate that field.

The topic of e-Mobility is a hot topic -- everywhere, we started this 3 years ago. We have great progress there. We see that this is an expansion of our potential of more than 20% to the traditional produced cars, and we have made nice inroads in this field.

Here on the screen, you see an example, which is launching this year. It's BYD, bus and car. You see in the middle, you see the battery pack of that vehicle, this battery pack has our materials in it and around it. So it's the thermal management, it is the bonding, it's the ceiling and the fire protection of that battery. And the beauty of that is one of these battery packs is used on the car. So you see on the lower side, the cars that are going to be built by BYD and 6 to 8 of those battery packs are used, the same way in a bus. So BYD, as car producer as well as bus producer, is using this common platform. And for us, this is a field that we have not, let's say, touched 2, 3 years ago, and we have great inroads now on the e-Mobility side.

It is, of course, a topic for all our customers, all our OEMs today, the well-known brands as well as the new players like Tesla, but also here, we have seen an opportunity for us to expand and go to customers we were not even contacting 3 years ago. So we are talking here about Panasonic. We are talking here about (inaudible). We are talking here about battery producers that are now all of a sudden, pulled into this e-Mobility topic by the OEMs and we see here a nice leverage of our innovation power at OEM, which plays very well with this battery producers that are also looking for smarter better solutions to be fast in implementing more efficient battery solutions.

And then I would say, in these 5 years that you have seen on the screen where we have constantly build up our footprint and market penetration, we have expanded also our technical and production footprint and leverage that everywhere in the industrialized markets for automotive for industry. And we have, in the meantime, more than 20 mega factories that are producing multiple technologies like adhesives, sealants, acoustic products and they are producing not only for automotive, they produce for industry, they produce for the construction target markets, and they are powerful resources for us to expand in all the relevant markets where the industry automotive and the construction markets are present.

So we are positive about 2020 in terms of our organic growth that we can outperform, we are skeptical about the market itself. We don't expect it to be such a negative market like last year, where we had almost 6% decline but it's only February and too many variables are still unknown, but we think we continue our path to invest, commit ourselves on the mega trends built on market share growth and we let the market then take its course.

With that, I hand over to Christoph to talk about the region Americas.

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Christoph Ganz, Sika Sarnafil, Inc. - President & CEO of Region Americas and Member of Group Executive Board [5]

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Good morning. So I would like to start my outlook on region Americas with some remarks on our recent acquisitions from last year on the Parex and King. Both companies integrate really very well. I think we used to say that we use acquisitions as growth platforms, and this is really I think this is really also what we're doing. So you've seen some examples from Paul for that Brazilian example where Parex helped us to sell more on a particular project, where, usually, we probably would not have been able to participate. It also goes the other way around, like in North America, for example, we very much work on stadiums. So Sika is present in all big stadium projects in the U.S. and now you must imagine, so far, we were able to supply epoxy floors in these areas where the audiences are sitting and each of these stadiums, of course, they have a lot of bathrooms where tiles are being applied.

Now we can also offer tile adhesives from Parex into the same project. Then, of course, we use also Parex now in countries where they were not present so far, as we're rolling out the tile adhesive business in Mexico now, in Colombia, but also in Canada. And we're preparing this now, but we believe that towards the end of this year, we should already see some sales coming in there.

King, I would say, was a jewel, performed extremely well. I always say maybe just a coincidence since now they're part of Sika, but I don't think so. Family company, very similar culture like us, integrate very well, and they really brought the know-how in tunneling and mining. I'll come to this later. This is really one of the booming sectors in all of the Americas, and King teaches us now the right products, the contacts to get into this industry.

And Sika has also a lot of products for this industry. We were just never really able, in Americas to sell this ones.

Also nice synergies on the operation side. You must imagine Parex and King, they have more plants that are some of them 5x larger than us due to the nature of their business. They just have higher volumes going through these plants. Consequently, they have lower production costs.

And we have now started to move some of our models, not all, move them and produce them in their plants. And it's just fantastic to see, of course, lower production costs that we're facing now also for our own products. And we see this already, and we will continue seeing these lower material costs now in our material margin.

So all in all, really 2 beautiful acquisitions and integrations and just starting now to integrate and really harvest now also the fruit.

Talking about a bit numbers in markets. You heard it from Adrian and Paul, I think we're looking back to a pretty good year, 2019 and pretty satisfying, also in terms of organic performance, sales and EBIT. Of course, if you look a bit deeper, most of it came from North America really booming. Canada, I must say, it's fantastic. It was the strongest performance last year we had in Canada, but also U.S. doing very well. And then Latin America, challenging environment.

First half was very good. And then it started with all these turmoils, in Chile, in Bolivia, in Ecuador, it swapped over to Colombia, elections in Argentina. So was a bit challenging. We still finished the year more or less, okay. But it was a challenge.

And looking into this year, I think it's pretty clear, we see a very similar situation. We see positive environments in North America, U.S. and Canada. We also had a good start. I must say, in Latin America, this is always a bit surprise box. So the situations have calm down now a bit, but the new strikes have been announced in some countries, a new government in Argentina is now in place. We will see.

The good thing is Sika knows how to handle crisis situations, and we also have proven that we can produce growth in very difficult environments. One secret of our success is the distribution channels. So we have a pretty strong position in retail, in small distribution shops in Latin America. And even if there is a large crisis, there's always money that is being spent. So you must imagine in Argentina, these -- they were faced with an inflation of 54% last year, and devaluation to the dollar of some 64% is unbelievable. I think for European conditions, so you have an interest to spend the money, right? Every month, you get some salary. You want to spend it because a few days later, it's already worth less. So where do you spend the money? You spend it in your apartment, you refurbish your house, et cetera.

And that's why the distribution business, also in several of the last crisis, is still going pretty well. And we have, I think, very good product offering for these kind of refurbishment jobs in Argentina but, of course, also in other high-inflation countries in Latin America. I mean Brazil is a good example. I mean inflation is okay but was also not the greatest environment, I must say. But Brazil grew close to 10% last year. So Brazil is definitely back on track last 15 months, each month with growth. So we're pretty positive there.

Of course, we have also regular business initiatives. This is very important. I mean I very much believe that initiatives are drivers of profitable organic growth. I mentioned tunneling and mining before. We really pushed this now throughout all of the Americas. And these are high double-digit growth rates that we see there now. Very good profitability also. And it's -- we're so small yet in this segment that for the next years, I think we have great opportunities, roofing initiative where we bring the PVC membrane technology from North America down to South America on all these big roofs of investors in Latin America.

Infrastructure, very important. I mean all these bridges in the U.S. that have to be repaired, we have perfected the product offering for this. Modular buildings we heard, we invest quite a bit there, but also online sales, very important. There's not just Amazon there. There is, for example, MercadoLibre in Latin America, a similar kind of a company, much bigger than Amazon in Latin America where we are selling -- or starting to sell our products through as well.

On the operations side, you also heard it from Paul, operational efficiency. So we've done already quite a lot. The last years, we invested a lot in automation. It's nice to see that the fruit coming back now from these initiatives. You heard about consolidations that we're doing in relation to Parex, the Chile examples of Santiago. The Chile has been mentioned that we are -- we're closing right now 4 warehouses and move them into one larger one and save a lot of money there from the leases.

And then also sustainability. It's -- yes, everybody talks about it. We've been doing already quite a lot regarding sustainability the last years. Now it becomes a specific focus. I think my guys are very excited. So one nice example we have, a good experience like in one of our high energy consuming factories where we produce these PVC membranes in Boston, Massachusetts. Most of the energy comes from solar panels that we have installed on our roofs, so pure renewable energy. And this is, for example, something we've been doing for a long time, also the recycling, and we're trying now to roll this out also in other factories, in other parts of the U.S. And I must maybe add, even if, let's say, U.S. politics is not really supporting -- or it's not the biggest topic for U.S. politics, sustainability, there are a lot of big customers, big investors, automotive industry, the Googles, the Apples, when they build their data centers, they very much care for this. They only want to have sustainable solutions yet. They don't care what politics say. And I think here, it's -- this is one reason or one additional reason why I think we have to invest really in this.

And the last point is people. And it's really not the least one, I think. I keep saying, I think the difference from Sika to most of our competitors is really the quality of our people. And here, of course, now with North and South America being united in one region, it gives us great opportunities to move our talent around. So we have several people, of course, now from Latin America filling open positions in North America where it's challenging to find people, but it gives me great pleasure to see also now that we have people from the U.S. moving also southwards, now helping our people there in a lot of challenges that we have.

So all in all, I would say 2020 should become a pretty good year. Again, we had a good start, and I'm quite positive that next year when we hopefully meet here again, we'll be able to report another good performance from region Americas. Thank you. And now Ivo on EMEA.

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Ivo Schädler, Sika AG - Regional Manager of EMEA & Member of Group Management [6]

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Thank you, Christoph. Also good morning from my side. And -- maybe I click here? Good. Okay.

Outlook on EMEA, also an exciting year ahead of us in Europe, Middle East and Africa. So first point here also, the opportunities, cross-selling and also all the synergies we have with Parex, a very important initiative and a very important objective for us this year. The largest operation in EMEA is in France. And there, now we see also a good development going further now and really using the synergies. I mean it -- also here, we have much better access to distribution channels, thanks to Parex. And those are a great completion of our total range with the building finishing, you saw it before on the slides.

I mean now Sika was always very much -- very strong in the more civil engineering part of the construction, but now really with Parex, we go into the finishing. We really complete our range, and that is great to see in all our operations, in all our teams we have, how we also work together and how we are -- our offer to the market in construction is really much larger.

I mean in most construction markets, in most markets, we see good development in Europe, mainly Eastern Europe, for example. I mean it's 60 countries, you can imagine, it's always a little bit different. We have different situations. But all in all, we see a positive development. And even further also, when we look also at our position, we have in many markets still under, let's say, proportional market share. So we have still great room for improvement in all parts of the construction sectors, in new buildings but also in the very important part, refurbishment. Especially if you'd look into the more mature markets, like here in Central Europe, the infrastructure is mostly built, but there is a strong demand for refurbishment, take infrastructure, take water industry, wastewater, for example. There is always, of course, the strong demand to refurbish such infrastructure. So there, we are really positive.

Also, the industry business in EMEA plays an important role. And here, I'm really glad to see that we have really great opportunities. We have many projects now secured. It's not just the pipeline, it's really new projects coming, like in the transportation industry, in the marine industry, in modular building as well, come to that as well. So we have really a good pipeline, good opportunities in the industry business as well.

And in all -- generally, in all project pipeline, it's really good in all sectors, as I said. So we are pleased there. Also in large markets, like here in Central Europe, like in Germany, for example, we see good projects where we're in. And the point here, you see also some examples here. Cross-selling plays an important role. We have substantial projects now such as, for example, data centers. This is an increasing trend. Of course, everybody has the data in the cloud. People ask themselves, where is the cloud. Cloud, for example, or data centers like this one you see here, huge ones.

Great opportunities for us. Specification selling. Also, we work very nicely together inter-regional, across the regions. So example, these data centers often are specified in the U.S., and then our systems are already in the specification. And this is a great opportunity and great advantage then to really come then -- when it comes to the realization of such projects to really have an advantage compared to our direct competitors here.

And cross-selling for us means, of course, you've seen the target markets, the 8 target markets, to sell as many Sika products as possible. And we've -- for example, in such a big project, we start maybe with the basement, with the waterproofing, and then we continue with flooring. Of course, the roof is always important here. It's sometimes 100,000, 200,000 square meters of roofs, which have to be waterproofed, and that's great opportunities here.

Here are some examples in the electronic industry, but also large tunnel projects are being built currently in Grand Paris in France. Then in Austria, Italy, great, big tunnel project there as well. And Paul has shown one example. The SikaProof A+ membrane, we just did the first -- or one of the first largest projects down in Qatar related to the Football World Cup. So more than 200,000 square meters of waterproofing with our innovative systems there. So you see everywhere, we have always opportunity to go on.

The modular building, I would also like to mention again now what Paul also showed, but now we see really in Europe, it started, the first projects we had in Scandinavia, mainly with this modular bathrooms. So just it's [wet] cells were just prefabricated in factories offsite, not on the job site, but now we see more and more full buildings being built. And we really see this year a strong pipeline here more and more -- in more and more countries, we see these manufacturers of -- who do the modular building style really picking up and growing very nicely.

The distribution, you see it on one of these -- or on the last picture here. Maybe I -- it was also reported earlier. We still have areas, for example, Eastern Europe, where our position in the market is still under-proportional when it comes to distribution channels. And we have seen some good improvement, good development in Eastern Europe, for example. For example, Russia, Russia is, as you know, of course, a huge market with huge potential. And now we see more and more that we can really enter into the distribution channels there. We do, of course, special marketing campaigns. We address our offer directly to the end user, of course, make it easier to get the Sika product, make it easier also to apply, and this is still a great opportunity for us. And we see really in 2020 here strong growth we expect here.

Also the online business in EMEA plays an important role, a more and more important role. If we see this as an additional channel, so we go. It was mentioned before, Amazon, but also other of these so-called pure Internet players. It's a great way to just do additional business for us. It's an additional channel. It's not conflicting with our existing channels. So for us, really an opportunity to just extend the market with more and more products, which can be bought just directly online.

Also, our Africa strategy, we continue. We further expand our footprint there. We saw it already also what we did in 2019. We opened new factories, and we will continue. It's very successful. We have now more than 18 companies in Africa growing nicely. We start the concrete admixtures, with mortars, in project business, but more and more also in distribution channels where we can really build up our position in this growing market also in Africa.

So with this, I would like to hand over then to Paul for Asia.

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Paul Schuler, Sika AG - CEO & Member of Group Management [7]

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Okay. Thank you. So our regional manager, Mike Campion, decided to stay in China or in Singapore. He didn't want to come and infect all of you. So I thank him. So I make Asia Pacific. We still feel we have a great market there. It's not something we have to say. Of course, the coronavirus makes everyone nervous now. We have to see how long this goes. But overall, I think integration with Parex in China goes well. We explained it. We have big potential in the target market. So we still feel we have a smaller market share. Also there, we feel quite positive that we will expand our market share and our growth.

Okay. So we come to the final page before the questions. We still feel it's a difficult time, but we're confident. It depends how long the coronavirus and how big this impact is for us. If it's not the real, real, real [issue], we're still confident we deliver double-digit growth, more than 10%. Over-proportional EBIT increase expected for this year. We have a good setup. We have very buildup. So over-proportional EBIT grow and still right to have 7 to 9 new factories.

And I like my colleagues always very bullish. And I know they're going to deliver the results. We feel we have a strong position. We feel we have a strong organization, and therefore, the outlook is 10% growth rate and over-proportional EBIT growth for next year.

With this, sure, there is no question? Okay, please.

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Questions and Answers

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John Revill, Reuters - Senior Correspondent [1]

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John Revill, Reuters. I've got a couple of questions, if I may. I know you say it's early days yet with coronavirus, but could you give us a bit more color on how it's affected you so far and any kind of projections you've got for the rest of the year in China? That's my first question.

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Paul Schuler, Sika AG - CEO & Member of Group Management [2]

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Thank you, John. I didn't expect that questions, I have to admit. John, thank you. The good news is we have 2,500 people, and no one is infected, including the families. That's the good news. 75% of these customers are back at work or in home office, and 25% are restricted to traveling. So it's quite challenging. We do around CHF 900 million in China. And this means around CHF 15 million to CHF 20 million per week if they close.

We started to sell. We are out there, which is very, very slow. We know that operation-wise, we are there. We have no impact on the raw material. So we are good on raw materials. We also can export out of China. We export to our companies. So it's still going. So from that side, we have to see how it works out. We have everything as good as we can control to make sure our people get all the protection. We have enough material. So really, our main issue is protect the people, make sure nothing goes wrong. And then we see how this goes.

Probably the biggest impact will be transportation. If you imagine, when you work in Zug and you want to travel to Zurich, you have to go 2 weeks in the home office. Sometimes it's really difficult. So we have to see how this develops. So we restricted traveling for the whole region. We don't let traveling around the region, and then we go from there. But we have to see. It gives an impact probably in the first quarter for China, but for the whole group, in the moment, we are not getting nervous. We can manage it for the whole group. If it then goes longer, then you have the number somewhere. So we will see.

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John Revill, Reuters - Senior Correspondent [3]

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Can I ask a second one?

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Paul Schuler, Sika AG - CEO & Member of Group Management [4]

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Yes, sorry, yes.

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John Revill, Reuters - Senior Correspondent [5]

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And last year -- I mean you said you'd look at 7 to 9 new factories this year. And last year, you made 5 acquisitions. You seem to have kind of digested Parex now. Is there any kind of scale of M&A you might be doing this year? How many deals you might be looking at?

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Paul Schuler, Sika AG - CEO & Member of Group Management [6]

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Oh, I think it's a great time to beat a little bit our competitors. I mean their money is cheap, and we will have in our range, as we did always, this CHF 300 million, CHF 400 million, CHF 500 million in the bucket. So we will be very opportunistic. We will buy competitors or we will buy great opportunity, which we have. We continue our strategy like last years, and we go from there.

Another question? Okay. Patrick first, I think -- oh, sorry, sorry. That's for you. Thank you.

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Unidentified Analyst [7]

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Two questions, please. The first one is on your guidance. Usually, you guided to 6% to 8% in local currency, so that's a narrow 2% range. Now you left it open, right? So should we assume more than 10% means 10% to 12% as an indication? And related to that, what's your assumption here for the organic within that?

And then the second question is around cash flow in 2020. Obviously, '19 was very strong. You had working capital benefits, CapEx was lower. How should we think about CapEx in 2020 as a percentage of sales? And how much of the working capital benefit you expect to reverse this year?

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Paul Schuler, Sika AG - CEO & Member of Group Management [8]

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Adrian?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [9]

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Okay. I'll talk about our cash flow first. Yes. I mean, indeed, 2019 was very strong. I would say, of course, we're expecting for 2020 higher profitability, also higher depreciation. Clearly, on the working capital side, I would not expect with the growth in other, let's say, reduction or positive cash flow impact. So partially, there is a reversal there. But with the over-proportional profit growth also in terms of CapEx will continue to be between, well, 2.5% to 3% of net sales, so in line with growth, it take higher. You should certainly not add another few hundred million on top of that number. But we will continue to generate cash.

Maybe on the sales growth question. I mean, clearly, we're guiding within our strategy for 6% to 8% growth. We will have another particularly residual Parex impact, so the acquisition impact is higher. That's why we feel confident to say it's going to be 10% plus. How big that plus is going to be, I think, that's too early to tell.

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Paul Schuler, Sika AG - CEO & Member of Group Management [10]

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Okay. Now Martin, sorry.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [11]

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It's Martin Flueckiger form Kepler Cheuvreux. I've got 3, and I'll go one at a time. Let me just come back to the China question from earlier on. I realize that there's a lot of uncertainty still going around. But I was just wondering whether you could give us a trading update on Parex because I believe in Q3 and Q4, Parex contributed quite nicely to your organic growth in 2019. And regarding Q1, in that respect, if you could be a little bit more specific about the negative impact that you are expecting. I realize there's various scenarios, but if you could just show the sensitivity to your assumptions.

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

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Parex was very strong, very grow -- very strong growing the last quarters, yes, around 25% growth rate. So really good. The positive is they have 9, 10 factories around the country and they is a local business. They have local distribution, so they can travel in the region, so they don't have cross region. So from this side, I feel we are a little bit on the better position. And so if they can travel, they can sell. So as soon as they come back, in a little bit more, this business should be better than, for example, automotive business, which we expect a lot of longer time entries of. So as we said, I think the Hopkins -- the John Hopkins Hospital assumes now that late -- end of March, everything should be on the better side. And if that is true, then it's a little bit small pain in China for the first quarter, and then afterwards, we're confident we go there. But as I said, we don't know when it is finished.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [13]

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Okay. And my second question would be on the Parex integration. You're giving us a flavor here, but I was just wondering, what are the targeted key milestones for you in 2020? And what are the targeted incremental synergies for this year and integration costs? That would be useful.

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Paul Schuler, Sika AG - CEO & Member of Group Management [14]

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Integration costs, Adrian.

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

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In terms of integration costs, I mean, we had CHF 44 million in 2019. We're expecting another CHF 15 million to CHF 20 million in 2020. And in terms of the synergies in 2020, between CHF 25 million and CHF 30 million positive impact.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [16]

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Okay. And then my final question, just coming back to that automotive business remark that you made. Okay, I understand that the automotive industry is more impacted currently as a result of the coronavirus outbreak. But just coming to your business model there, how many new car models are you envisaging to supply to in 2020? And how does that compare with 2019? And also, in that respect, what kind of an increase in vehicle content do you expect for this year?

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Paul Schuler, Sika AG - CEO & Member of Group Management [17]

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Thomas?

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Thomas Hasler, Sika AG - Head of Global Business & Industry and Member of Group Management [18]

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[We're running] our activities in such a way that we kind of replace model year-over-year. So every model has continuation incumbency. And on top of that, we have a target of 20% by each account to conquer more platforms and content on those platforms. So it is, for us, a key driver of our growth is to expand and secure incumbency status and expand to the platforms left and right. VW is an excellent example. We have a high penetration in VW, which was fueling our growth in the last 5, 7 years. We are doing the same with other OEMs, with Toyota, with Ford, we have a very nice growth path there, but it's exactly fueling our growth by going from existing platforms to the next platform, penetrating plant by plant by plant, model by model.

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Remo Rosenau, Helvetische Bank AG, Research Division - Head of Research [19]

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Remo Rosenau, Helvetische Bank. So you're deleveraging quite nicely, very fast. By the end of '20, without -- if you wouldn't do any acquisition, you would probably go quite well below 2x net debt EBITDA. I mean does it mean that if you had another opportunity like Parex, I mean, if that -- you could well do it? I mean given your deleveraging capacity, you could well go again to 3.5x. You wouldn't -- not do a deal because it would go to 3.5x net debt to EBITDA for a short period of time. Is that a right assumption?

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Paul Schuler, Sika AG - CEO & Member of Group Management [20]

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I guess a good assumption. First of all, we have to finish the integration of Parex, as we always said. We have to deliver the results. We have to make sure, then we have to deleverage. If the great opportunity comes, then we have to discuss. It's not something that we say no, but it's not a target that we say we go for a bigger deal. It's clear, we go for the normal bolt-on and then we will see.

Okay, Bernd, and then afterwards, John.

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Bernd Pomrehn, Bank Vontobel AG, Research Division - Analyst [21]

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Bernd Pomrehn from Vontobel. You again achieved pretty impressive growth in many regions. One region where we are a little bit struggling is Europe and especially the largest market in Europe, Germany, where you had declining sales last year. What is your main challenge in Germany? Because some peers are growing in Germany, in general. The commercial -- the residential construction market is pretty healthy in Germany. The infrastructure market is pretty healthy in Germany. So what is your main challenge really in Germany to grow? And how are you tackling this challenge?

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Paul Schuler, Sika AG - CEO & Member of Group Management [22]

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We grew in Germany, but...

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Ivo Schädler, Sika AG - Regional Manager of EMEA & Member of Group Management [23]

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We had certain growth. We have still in many areas own -- I'm sorry, still under-proportional market share. I think we can still improve there. I just mentioned, we have now some -- our project pipeline looks really promising for this year. Also the distribution channels where we still have an under-proportional position in Germany, we are now improving there as well. So I see that's mainly what we're doing in Germany. So we see still our -- in our situation we have, there's still opportunities there.

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Paul Schuler, Sika AG - CEO & Member of Group Management [24]

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And if you look at our peers, look at Denko or look at Sto, look at MC-Bauchemie, look at our competitive peers, they are real behind us. So we didn't really outperform in the growth rate in Germany. We have 2.6 something, still grow, but our competitors, our peers are far behind.

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John Fraser-Andrews, HSBC, Research Division - Global Equity Head of Building Materials & European Building Materials Analyst [25]

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It's John Fraser-Andrews, HSBC. My question -- first question was also on EMEA, just to follow up because after that turned slightly negative in Q4, I think Spain and Italy were new countries that were negative. U.K. was still negative. So I wondered -- I mean I can say the good news from the U.K. is the property market has picked up after the election, see Brexit that much closer now being solved. So I just wondered if you could say how the year started in EMEA, whether you do see, you can see some growth this year. That's the first question.

The second is around the Parex sales synergies. So clearly, China is a difficult market. That was your first emphasis in terms of the sales synergies. Could you say a little bit on sort of what you're doing there in China in terms of rolling out those points of sale? Or are you shifting the emphasis now into the other countries?

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

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EMEA?

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Ivo Schädler, Sika AG - Regional Manager of EMEA & Member of Group Management [27]

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On EMEA, you mentioned the U.K. Of course, there, Brexit, 2019, we saw a certain impact, yet a little bit slower. Now what is happening, of course, like many, we don't have the full picture. There is certain investment now announced of the new government. We will see that. But as I say, I mean, we always work on our strategy. We work on the projects. Some projects come a little bit later. But all in all, I'm positive for this year for EMEA.

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Paul Schuler, Sika AG - CEO & Member of Group Management [28]

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Okay. Also the question in Spain, rather slow also the first month. It's very early, but it's also quite -- January is a difficult month anyhow in construction. Brexit, we have to see. Overall, we have countries that run well. We have countries that go slow. So no one makes really a big impact here. So it's something we have to deal with. But Brexit, we'll see, but it's -- overall, it's 1/3, that's overall in percentage.

Good, John. You look skeptical.

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John Fraser-Andrews, HSBC, Research Division - Global Equity Head of Building Materials & European Building Materials Analyst [29]

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Question on the...

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Paul Schuler, Sika AG - CEO & Member of Group Management [30]

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Parex? No we don't get nervous now because the coronavirus. We push, we go and we wait as soon as we can go, then we go full steam ahead again. So no change in strategy just because it's a little bit nasty weather out there. We go and stay behind. We roll it out in the region. We motivate our sales organization. We roll it out to the other countries. And in China, we'll do exactly the same. And yes, we will go through that.

I think this side now.

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Christian Arnold, MainFirst Bank AG, Research Division - Analyst [31]

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Christian Arnold, MainFirst. A follow-up question on the net working capital. Did I understand you correct that it's a fair assumption that net working capital as a percentage of sales is probably -- can be kept stable around 18%?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [32]

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Yes. I mean if you look at the net working capital ratio, it did come down year-on-year. That's one thing. There is also a positive effect from Parex. If you look across the board, there's a number of markets which have lower working capital ratios overall. So I would say, for the future, we continue to, of course, work, be very disciplined on particularly the receivables side, but there is still also opportunities on the inventory side as we more strongly integrate and align the network. So you should assume that from a ratio point of view, we are targeting a further slight reduction year-on-year. Of course, end of the year is always a point in time. So this is a continuous process improvement. With the expected and targeted growth, of course, the cash flow impact will not be again that positive.

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Christian Arnold, MainFirst Bank AG, Research Division - Analyst [33]

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And the second question I have is on the raw material costs. You said that you had some tailwind in the second half. We have also seen the gross margin development in Q4, nice rebound from Q3. So can we expect further tailwind going into 2020?

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

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I mean raw material cost, of course, prediction, and we deliberately don't do this because that's very difficult to predict. It is clear that the trend throughout the year has been positive. And particularly in the last few months, we have seen, let's say, bigger impact from that side. I mean, year-on-year, it was still only a sort of a marginal impact. We have very much also focused on pricing with a good trajectory there, and all the initiatives basically improving our material margin. But in terms of the situation from today's perspective, and here, again, sort of the nasty weather out there excluded what impact that could have is difficult to say but certainly not as challenging as it used to be at the beginning of '19.

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Unidentified Analyst [35]

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Philip (inaudible). You have launched the first shop-in-shop concept in China. Do you see other possibilities on other markets with such concept? Or it's typically for China?

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Paul Schuler, Sika AG - CEO & Member of Group Management [36]

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We see a lot of potential. Now it's -- we have to prove it. We have to make it happen. We have to see how much we resale. Onetime feeling is okay, but how often they resale. As soon as we have the right product mix, as soon as we have the right strategy, then we want to go to Indonesia. That's a similar market. We want to go to India. There are huge other similar markets where we have the same trend. But first, we want to make sure we have the right product mix, the right thing to sell, the right story and then, yes, big opportunities. Yes.

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Unidentified Analyst [37]

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Two questions. One for currency-wise, I mean, Swiss franc strengthened even more than last year. What's your best assumption at actual current rates impact on maybe sales but also on margin as you might have a bit of a Swiss cost overhang? That's the first question.

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

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Okay. Well, that's even more challenging than raw materials, I guess, currencies. Clearly, and this is something we do and have to live with and I think we can live quite well with in terms of, let's say, our cost base. We have a very good natural hedge in terms of basically the cost base in the selling country. There is a certain overhang of the Swiss cost base. But that's, I would say, relatively small in comparison. What is more difficult, of course, to deal with is then the translation effect, and here, I'm not volunteering any prediction. The euro, for example, which is one of our key foreign currencies, is currently, if you compare it to beginning of 2019, quite weak. So I would expect another negative translation effect for 2020, but how big and how it develops, really difficult to tell. But on the cost base, relatively insignificant, unless it's a huge swing.

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Unidentified Analyst [39]

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Good. And the second question I have is to France. You showed the numbers, absolute numbers in sales, 2019. What actually was the organic growth? I think it was quite impacted by Parex. And what's your assumptions for this year? How is France doing?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [40]

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Organic growth in France was relatively similar to Germany. In terms of the expectation, it's not a bad market in France, I'm not sure, Ivo, if you want to comment on it. And this, of course, is always without the sales synergies we're expecting from Parex.

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Ivo Schädler, Sika AG - Regional Manager of EMEA & Member of Group Management [41]

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So we see this part of the same range. It was about 3%, so it will be the expectation.

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Xintong Ouyang, On Field Investment Research - Analyst [42]

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Xintong from On Field Investment Research. So I have a couple of questions. The first one is on price and cost. So I'm just wondering, in Q4, do you still see around 2% price increase, as you've mentioned before? And then you mentioned that there is a cost deflation in H2, but then I'm wondering, could you please provide a little bit more quantified color on the cost deflation? And also, I'm wondering, looking into 2020, do you see a margin improvement when you have a lower one-off cost and where that improvement can come from? That's my first question.

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Adrian Widmer, Sika AG - CFO & Member of Group Management [43]

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On the pricing side, we had for 2019 about 1.5% pricing impact. Talking about cost inflation, there is -- I mean we always have to deal with sort of 2% or 3% across the board. Of course, that varies. That's why all these efficiency initiatives are important. So there has not been a meaningful change in 2019. It's also not something I'm expecting to materially change in 2020. But again, it shows improvement and efficiencies are important, which we can typically deal with quite well.

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Xintong Ouyang, On Field Investment Research - Analyst [44]

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And margin-wise, when you look into 2020?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [45]

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I mean, clearly, with the target to overproportionately improve or increase, EBIT is -- goes along with an increased margin on EBIT level. And also on the material side, I mean, we have clearly said that we are moving back into this sort of 54% to 55% material margin bracket. To what extent and how quickly that goes, again, is dependent on various factors, last but not least, on the raw material situation, as alluded to before. But yes, we are targeting an improved margin for 2020.

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Xintong Ouyang, On Field Investment Research - Analyst [46]

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Okay. And then my second question is also on China. I understand that it's a very challenging situation and it's also very uncertain. But I'm wondering, so for example, now you don't have a specific time line on when will the distribution points in China will resume working. And then also with -- what's different from 2003 is that you have -- the Chinese economy is less, say -- they're growing at a slower pace. And also, the government is -- also, let's say, the real estate market is not as strong as it was in 2003. So I'm just wondering, given all the factors and the underlying markets, do you think this coronavirus will delay your synergy realization progress in China? And if that is the case, how do you want to solve it?

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Paul Schuler, Sika AG - CEO & Member of Group Management [47]

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I think it's a question how fast they come back to speed. If China is still a strong market, we still feel on China. They do a lot of good things. So China, even if they stay is lower, it's still the most growing economy in the world, still. And we have a weak position. We can get more market share, and we have a great organization there, so we are there. And time on the car owners, I think, is not probably my biggest comment. So I don't know.

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Alessandro Foletti, Octavian AG, Research Division - Financial Analyst [48]

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Alessandro Foletti, Octavian. I have 2 questions, probably one each. One on the free cash flow, which was at 12% of sales. Obviously, you had mentioned this sort of tailwind from IFRS 16, CHF 85 million. I imagine this is sort of a number that we can continue to add on the depreciation, okay? Is there any counter-position in the cash flow? Because before IFRS 16, it was pure expense, right? So it was above the line. Where does the counter-position go? Do we expect CapEx at some point in the future? Or is it purely financial?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [49]

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Yes. I mean the leasing payments are recognized in the financial part of the cash flow section. So it was a clear shift driven by the standard. And you're right, I mean, this is the level or the approach that will continue going forward. So in that sense, it's not a one-off, but of course, it's sort of structurally improving operating free cash flow. And then in 2019, the effect was CHF 85 million of -- out of this, even if you exclude this very strong underlying development.

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Alessandro Foletti, Octavian AG, Research Division - Financial Analyst [50]

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All right. And on the CapEx side, how -- can you explain why it was 4% of sales and now you're guiding at 2.5% to 3%? I would have expected to stay a little bit higher now.

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

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When was it 4%...

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Alessandro Foletti, Octavian AG, Research Division - Financial Analyst [52]

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This year, I think, right? You mentioned in 2019 or this year.

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Adrian Widmer, Sika AG - CFO & Member of Group Management [53]

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No. In 2018, we had a somewhat higher ratio, above 3%, because we bought 3 basically factories and building out of an operating lease. But if you look this year, we were actually slightly below 2.5% of sales. And so we continue to look at a CapEx ratio of around 2.5% to 3% going forward, more, let's say, geared towards, let's say, efficiency investment automation as opposed to capacity as we have a very strong network, also integrating our Parex footprint, aligning it, that's a bit the nuance. But in terms of actual spend, you should expect a similar ratio going forward.

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Alessandro Foletti, Octavian AG, Research Division - Financial Analyst [54]

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All right. My second question, probably for you, Mr. Schuler. A topic we never talk about in these reunions and those in the Capital Markets Day, the industry business, so -- but not the global one. If I'm not mistaken, it's around CHF 1 billion as well. Can you give a little bit an indication of how that is doing and how that is growing? And what's the outlook of that part of the business?

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

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Thomas?

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Thomas Hasler, Sika AG - Head of Global Business & Industry and Member of Group Management [56]

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I mean that was mentioned in the EMEA update, the industry business is a core business. It is slightly smaller than the automotive business. But altogether, they have a lot of synergies across. So what we implement in automotive can be leveraged into industry. And for us, in the industry, the key markets are Germany, the U.S. and China. And all 3 key markets are developing very nicely. We have a lot of momentum there. Ivo mentioned in Germany. In China, it's going to be wind. Wind is going to boost our sales this year quite a lot in China. In the U.S., it is the transportation business. The modular building business, which is also a topic globally. But for us, in the industry, it's the big markets in China, in Germany and in the U.S. which are indicative. Of course, there are other markets in Europe which we are also capturing, France, U.K. and so on, but Germany is kind of the lead industry market for us.

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Paul Schuler, Sika AG - CEO & Member of Group Management [57]

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Compared to our peers, we have a really good run in the industry, and the industry is one of the good profitability of our market segments.

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Unidentified Analyst [58]

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Okay. Could you just break out by how much percent of Parex sales came from China last year and by how much it did increase your exposure to the country?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [59]

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Total sales on an annual basis coming from the upside in China is about CHF 400 million. So as indicated before, our total sales, including automotive and the construction side, is about CHF 900 million. So CHF 400 million has come through the Parex acquisition.

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Unidentified Analyst [60]

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Okay. And a second one, I think you mentioned cheap money earlier, you wanted to take advantage of that. Why is financing so cheap at the moment? And why are you looking into M&A and not investments in new technology or...

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Paul Schuler, Sika AG - CEO & Member of Group Management [61]

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I think we have some smart investor banker here. Probably they can answer the question why money is so cheap in the [way], probably not the right one. And to invest, I think we build factories, we build our own infrastructure, but we also want to benefit from the market consolidation. Market consolidation, construction, we will go on, we will continue, and we would not be -- just to wait and see. It's a time where Sika is strong, and this is a time where we can change, build a strong, strong Sika for the future. So therefore, we participate whenever we see it's a good fit for our company.

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Unidentified Analyst [62]

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And you think it's more important to buy than to invest?

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Paul Schuler, Sika AG - CEO & Member of Group Management [63]

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No, no, no. If you talk to our people, organic growth is our driver. It's no discussion. It's not that we'll lay back and say -- no, no, all our management, all our people are paid to make organic growth. That's the message. Nothing else. Additional, we benefit and we appreciate the tailwind from acquisition. But for the management, for the salespeople, for everyone, it's organic growth.

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Unidentified Analyst [64]

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And R&D is also a priority?

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Paul Schuler, Sika AG - CEO & Member of Group Management [65]

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Of course. Without innovation, we have nothing to sell. If we have nothing to sell, the customer will pick us on the pricing if we cannot bring a better solution. Therefore, innovation, R&D, but then also operation are -- they are really important to support our growth.

Dani?

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Daniel Jelovcan, Mirabaud Securities Limited, Research Division - Analyst [66]

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Yes. Jelovcan, Mirabaud. Just on Japan, maybe I've overheard it, but there was a hiccup in the fourth quarter with the VAT, increased destocking, stocking and hurricane. How is Japan behaving -- doing at the moment, the first starting to this year? And the second question also to Thomas, to the Global Business. I mean the margin was down 2 percentage points and your friendly competitor in Graubunden had a margin increase. I know it's not comparable, but is the possibility for the margin decrease may be because you invest more in the EV topic? Or just curious on that one.

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Paul Schuler, Sika AG - CEO & Member of Group Management [67]

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I give him some time to think about. So I answer the Japanese one. Japanese, Japan is, for us, a good market, a stable market, but it's not something really changing. So the hiccup with the VAT, yes, they slow this down a little bit. Now we are in a normal stream of the growth rate, and the first month is difficult to tell in Japan. But I rather expect a stable growth, some growth, but not double digit. It's stable growth in Japan.

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Adrian Widmer, Sika AG - CFO & Member of Group Management [68]

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Maybe just to add to this, Daniel. I mean the shift was really from the third to the fourth quarter. Because of this pre-announcement of the VAT increase, there was actually quite a bit of pre-buying in the third quarter. That was also the effect of the different growth rates in the quarters in this country and partially in Asia. But that's not, let's say, structurally something that has changed now.

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Daniel Jelovcan, Mirabaud Securities Limited, Research Division - Analyst [69]

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Yes. No, that is clear that Q4 was weaker.

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Adrian Widmer, Sika AG - CFO & Member of Group Management [70]

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Yes.

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Daniel Jelovcan, Mirabaud Securities Limited, Research Division - Analyst [71]

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But just curious if it has recovered in Q1.

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Adrian Widmer, Sika AG - CFO & Member of Group Management [72]

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I think it's -- well, Q3 was really at the expense of Q4.

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Paul Schuler, Sika AG - CEO & Member of Group Management [73]

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But stable. We expect stable.

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Thomas Hasler, Sika AG - Head of Global Business & Industry and Member of Group Management [74]

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Okay. On the margin side, if you compare the company in Graubunden with us, it's a bit different business. They are much more upstream. They have a niche on the polyamide, which is a key raw material for the automotive business and not so easy to replace. So the pricing pressure is a different one when it comes to the specialty chemicals, which we sell. We have seen that the car manufacturers are, of course, high pressure and price concessions are expected and we fight those. So we have a demanding pricing situation. At the same time, we were also, let's say, challenged by raw material price is still going up. One of them which help us is the polyamide, which is (inaudible) an uplift, for us, it is rather a significant raw material which we use for our acoustic products. So we were hit there. So we were hit in this sandwich situation in 2019, but I think we hold off quite well compared to others. When you look and compare us more to the chemical supplier and automotive, and Henkel would be a good reference point to look at the evolution, but also DuPont is in there, PPG is in there, we think, outperformed those quite well.

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Paul Schuler, Sika AG - CEO & Member of Group Management [75]

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And we have to see -- we want to invest in future growth. So we don't cut costs -- we cut costs but not people. We want to stay there. We need them. And if it's a little bit harder out there, we want to continue. Then we build it up a new factory in Mexico and the one in -- improvement in credit. So we invest in the future. We really believe it's a challenging market out there. And now we had a little bit hit due to raw materials. And if you go to -- it will -- yes, I think we invest. And on the other side, we had a little bit of downturn, but it will turn around.

So no more...

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Unidentified Analyst [76]

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If I may, (inaudible). I have a follow-up question on acquisitions. The money is cheap, as you said, you're deleveraging quickly. If we look -- if you look at your portfolio today, at your portfolio of activities, what would be a strategic sense? If you were to buy anything, what would you like to add or strengthen in your portfolio?

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Paul Schuler, Sika AG - CEO & Member of Group Management [77]

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If you look at Sika, it's very simple organization. We look everywhere, but we have 5 core technology. So one of these acquisitions has to be in 5 -- this core technology. Outside of this core technology, I don't think we're going to acquire anything. So it has to stay in our backbone. And then in the backbone, we have to see, is it really additional for us to get access to another application field, or the customer field where we are not being already, gaining a country where we are not so strong. That's a little bit the main, but we will stay with our 5 core technologies. And then we look at the landscape, and then we pick what we feel fits us well, but inside these 5 core technology.

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Unidentified Analyst [78]

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And specifically, you increased in mortar. A few years ago, you increased your exposure to acoustic products. In practice, these 5 pillars, where would that lead you to?

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Paul Schuler, Sika AG - CEO & Member of Group Management [79]

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Yes. Oh, yes, if I would have a wish list, I always like adhesives. I think that's a peak of our EUR 2.5 billion, very profitable business. Now we have double [adhesive] with mortars, but we are now strong there. But it's not -- we are -- we take the best thing what we have, and it has to fit to our organization. And there, we leave it open.

Okay. So I guess all my colleagues are here around for our lunch. It's more than happy to share our view and our ideas. And in this moment, I really like to thank you for coming. It was always nice to discuss with you, and have a safe return and enjoy the weekend. Okay. Thank you.