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Edited Transcript of SIKN.S earnings conference call or presentation 24-Oct-19 1:00pm GMT

Q3 2019 Sika AG Earnings Call

Baar Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Sika AG earnings conference call or presentation Thursday, October 24, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adrian Widmer

Sika AG - CFO & Member of Group Management

* Dominik Slappnig

Sika AG - Head of Corporate Communications & IR

* Paul Schuler

Sika AG - CEO & Member of Group Management

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Conference Call Participants

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* Alessandro Foletti

Octavian AG, Research Division - Financial Analyst

* Bernd Pomrehn

Bank Vontobel 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

* Manish Beria

Societe Generale Cross Asset Research - Equity Analyst

* Markus Mayer

Baader-Helvea Equity Research - Lead Analyst of Chemicals

* Martin Flueckiger

Kepler Cheuvreux, Research Division - Equity Analyst

* Martin Hüsler

Zürcher Kantonalbank, Research Division - Research Analyst

* Patrick Rafaisz

UBS Investment Bank, Research Division - Director and Chemical Research Analyst

* Remo Rosenau

Helvetische Bank AG, Research Division - Head of Research

* Thomas P. Wrigglesworth

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

* Tobias Weimann

Morgan Stanley, Research Division - Equity Analyst

* Xintong Ouyang

On Field Investment Research - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Sika Q3 Report 2019 Conference Call. I am Shai, the Chorus Call operator. (Operator Instructions)

At this time, it's my pleasure to hand over to Mr. Dominik Slappnig, Head of Communications and IR of Sika. Please go ahead.

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

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Yes. Good afternoon, and good morning, and welcome to the 9 months results conference call. We published our figures this morning at 5:00. Now our CEO, Paul Schuler; and our CFO, Adrian Widmer, will provide further details on the results and the outlook. Afterwards, we will be ready to take your questions.

With this, I hand over to our CEO, Paul, to start with the highlights of our first 9 months 2019.

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

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Good afternoon, and thank you for joining the call. I'm happy to inform you about our strong results for the first 9 months. We had an excellent sales growth of 15.1% in local currency, with a record sales of over CHF 6 billion. Organic grow reached a strong 4.1%. All our 4 regions were able to grow. EMEA, America and Asia Pacific all grew double digit, while sales in Global Business was impacted by the challenged automotive market. Especially strong sales development was achieved in Africa, Eastern Europe, North America and China. Grow in the major European market overall moderating.

In the automotive business, the number of new vehicles dropped by 5.8% or 4 million cars. Despite the significant decline in car production figures, Global Business recorded a grow of 3.6%. With high selling prices to our customers and action taken on the procurement side, we could increase our gross margin from 53.3% to 53.5%. Strict cost management led to a record high operational EBIT of CHF 805.9 million. Including one-off acquisition effect in 2019, like-for-like EBIT grew over proportionately. Even including this effect, EBIT developed strong double-digit grow.

I'm particularly pleased with the strong operational free cash flow of CHF 555 million that we were able to achieve in the first 9 months. This is already ahead of the full year 2018. Our excellent cash flow generation ensures the long-term success of our company and is a proof of the strength of our business model.

The integration of Parex is making excellent progress, and we see number of possibilities to create synergies and to cross-selling. In more than 20 countries, management structure are fully integrated and are working under one leadership. We also see the first benefit of our combined procurement activities.

In China, 1,500 shop-in-shops with Sika product is -- Parex point of sales have been introduced. Seeing this very positive development, we now expect the synergies to reach the upper end of the forecast of CHF 80 million to CHF 100 million. In the third quarter, we acquired Crevo in China. They produce silicon-based sealings and adhesives, which fit very well into our cross-selling activities in the distribution channels in China and give us a great opportunity for [first aid place in] business. The 2 other excellent acquisition we made this year, King Packaged Materials in Canada and Belineco in Belarus are both developing very well, and the integration is running as planned.

Going forward, our acquisition pipeline is full, and we continue to look for opportunities to acquire companies which will contribute to future growth. In the first 9 months, we have continued to invest in future grow in emerging markets by expanding our production in Senegal, Egypt, Qatar, Serbia and Cameroon. The expanded footprint will help us to continue to capture the potential in these growing markets.

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

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

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Thank you, Paul, and good afternoon or good morning, depending on where you're calling from. Following our CEO's business summary and highlight presentation, I will now give you further insights into the financials.

In the first 9 months of the year, the business showed continued strong growth of 15.1% in local currencies. Organic growth, which includes incremental sales growth by post-acquisition expansion of the acquired businesses, was 4.1%, while the acquisition effect added another 11 percentage points of growth.

Currency effects reduced local currency growth by 2.2 percentage points to 12.9% in Swiss francs. Negative currency development was primarily owed to a weaker euro, British pound and Australian dollar as well as to a number of emerging market currencies. Again, all regions contributed to our growth in the first 9 months of the year. Region EMEA grew sales at a rate of 10.8% at constant currencies. Organic growth was 3.1%, while acquisitions contributed 7.7%.

We recorded strong growth in Africa and Eastern Europe, while major European markets developed more moderately. Foreign exchange effects were most pronounced in this region, and this is mostly related to a weaker euro, and this had a negative impact of minus 3.6 percentage points.

Region Americas continued to record strong growth of 18.1% in local currencies, supported by acquisitions, which contributed 12.1%, while organic growth gained further momentum in Q3, primarily in North America and amounted to 6 percentage points year-to-date. Business also developed well in Brazil, Colombia and Peru, while the government change in Mexico and the impact on infrastructure projects continued to weigh negatively. Foreign exchange effect for the region were slightly negative at minus 0.7%.

Growth in the Asia Pacific region amounted to 31.1%, strongly influenced by the acquisition of Parex. Organic growth was 6.7%, while the acquisition effect was 24.4%. China, India and the Philippines were most dynamic. Foreign exchange impact was moderate at minus 0.6%.

The acquisition of Crevo-Hengxin, which closed right at the beginning of October, will open up further cross-selling opportunities, as just highlighted. The segment Global Business achieved a growth of 3.6% at the backdrop of a very weak market, with car build rates down significantly in the first 9 months. However, Sika generated further growth supported by the residual impact of the Faist acquisition, and we were able to keep a flat organic growth in a difficult market environment. The foreign exchange impact was negative at minus 1.9%.

On gross result level, we have been able to increase our margin as a percentage of net sales by 20 basis points, driven by continued price increases, various initiatives on the procurement side as well as reducing negative impact on material cost inflation. On a net basis, material cost impact year-on-year was broadly flat, but continues to be relatively volatile.

Excluding acquisition-related one-time and dilution effects, organic material margin increase would have been 50 basis points for the first 9 months. Operating costs, which include both personnel costs as well as other operating expenses, increased on the -- proportionately by 11.1%, but were impacted by a number of special effects. On the one hand, we recognized CHF 26.5 million of acquisition and integration-related costs for Parex, which compares to CHF 23 million of one-time costs related to the resolution of the takeover dispute with Saint-Gobain in the same period last year.

Secondly, the application of the revised leasing standard, IFRS 16, led to changes in the recognition of lease-related expenses, increasing depreciation and amortization expenses by CHF 47 million while reducing other operating expenses by CHF 55 million. Organically and excluding onetime effects, nonmaterial costs grew slightly below organic sales growth.

In consequence, EBITDA increased by 18.2% to CHF 1.0398 billion. This is up from CHF 880 million in the same period of last year. Driven by the change in recognition of lease-related expenses as well as higher intangible amortization coming from acquisitions, particularly Parex, depreciation and amortization expenses increased by 54.8% versus the same period of last year. As a result, EBIT growth of 10.6% was double digit, driven by a higher material margin as well as disciplined cost management.

In absolute terms, EBIT increased from CHF 728.9 million to CHF 805.9 million in 2019. Higher debt, mostly to share buyback in connection with the resolution of the Saint-Gobain situation last year as well as the financing of the Parex transaction in early 2019, led to an increase in interest cost as well as other financial expenses. Net interest cost increased by CHF 23.3 million. This amount also includes an interest component related to the lease obligation according to IFRS 16. Also net other financial expenses increased by CHF 2.8 million. Of the combined CHF 26 million increase, CHF 6.7 million are nonrecurring in nature and related to the Parex transaction.

Group tax rate reduced slightly from 23.9% in the previous year to 23.8% in the first 9 months of 2019. As a result, net profit increased by 7.4% to CHF 566.8 million. This is up from CHF 527.7 million. Very positively, cash generation in the first 9 months of 2019 was very strong. Operating free cash flow is up by CHF 314 million to 551 -- to CHF 555.1 million. This compares to CHF 240 million in the same period of last year. This was driven by higher profitability, high depreciation and amortization expenses, lower capital expenditure as well as a significantly lower net working capital buildup and in spite of higher cash taxes. This strong cash generation in the third quarter led to a net debt reduction of close to CHF 400 million since the end of June.

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

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

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Okay. Thank you very much, Adrian. Our outlook 2019. The strong results support our full year targets, and we are expecting an increase in sales for the first time of more than CHF 8 billion, along with a double-digit EBIT growth. With the Parex acquisition and the full pipeline of exciting construction projects as well as many new product initiatives, we are confident to deliver even if there might be headwinds in some of the markets.

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

Okay. This is the outlook.

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Dominik Slappnig, Sika AG - Head of Corporate Communications & IR [6]

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Now -- thank you, Paul. Now we are ready to take your questions, and we can open the line, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Tobias Weimann, Morgan Stanley.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [2]

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Two, if I may. Firstly, the obvious one on the organic growth. You changed the definition a little bit. Could you maybe explain what the organic growth would be in Q3 based on the old definition, i.e., excluding the growth from M&A? That would be the first question.

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

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First to clarify why we had this change, you have to understand that we integrated all the 20 sales organization in 1 organization. Each country has now a combined sales organization. They work together in the market. We switch market, we switch customers approach, and we switch also and cross-sell. So it's impossible to manage and to clarify which one is now organic growth from Parex, ex-Parex, and which is growth from Sika.

As Parex is a huge acquisition for us overall with CHF 1.2 billion, it's impossible for us -- or we don't be willing to spend the time just to clarify this one. But in the first 9 months, it was very minor. It was just around 0.5%, which is organic growth from Parex. But in the future, we just have one organic growth, and we cannot really -- and we don't want to really manage now which one is the growth of which one because it's one sales organization in each country.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [4]

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Okay. So it was about 0.5%, is this correct?

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

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Correct, that is correct.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [6]

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Okay. Okay. And that's for the 9 months. So for Q3, I assume it would be significantly higher.

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

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A little bit higher, but we didn't follow it really up.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [8]

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Okay. Okay. And then on your operating expenses, the personnel expenses clearly were down 50 bps in Q3, whereas I think in the first half, you were up 12 bps or something like that. So I wonder what was the key driver for improvement here.

And then also on the other operating expenses, if I just add back the impact from IFRS 16 and also the Parex integration costs, it looks like your other OpEx increased by, I think 130 basis points in Q3. So again what was the key driver here? Was it Parex-related margin dilution? Or where is it coming from?

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

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Yes. Overall, as I said, if you exclude all these one-time and the acquisition effects and operating expenses overall increased slightly below organic sales growth, that's point number one.

Secondly, as you've pointed out, I mean there's a somewhat different mix coming from acquisitions on the one hand, while the type of business, which is more, let's say, other OpEx heavy, more distribution focused. And secondly, there's also a geographical element in there, which has an impact on the split between personnel expenses and other operating expenses.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [10]

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Okay. And just a very quick follow-up on this. The margin difference just for this year for Parex on a stand-alone basis versus Sika on a stand-alone basis, how big is this in terms of percentage points?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [11]

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I mean we -- during the Capital Markets Day and the strategy presentation, we gave an indication what the impact are both on the dilution side but also on sort of the incoming profitability. And then of course, you have the one-time expenses. We are very well on track in terms of the performance of the business. Also one-time costs should be lower in the fourth quarter. So all in all, very good development, but too early to give sort of a very precise impact on the business.

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Operator [12]

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Next question comes from the line of Martin Flueckiger, Kepler Cheuvreux.

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

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I've got 2, and I'll go one at a time. Firstly, when I look at building permits in Europe, but also leading indicators for commercial construction in the U.S., looks like the numbers there are softening. And also judging from other indications on the U.S. construction market, it looks like we've seen the peak in terms of momentum.

Firstly, I was just wondering, what are your expectations? And that's not referring to the U.S. specifically, but rather to your global exposure in terms of construction chemicals. What are your expectations for stimulus measures on the infrastructure side? That would be the first part of my question.

And the second, how do you expect to counter any potential softening or weakness coming up in key markets in order to maintain your high organic growth in 2020? That's my first question.

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

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Okay. Thanks for the simple question, Martin. The crystal ball is not in Sika office. However, if you look at the U.S., yes, it's a little bit reduced, but if you look at our pipeline, if you look at our projects, if you look how we base there, we are quite confident that for the next few months, we see it's okay, but we will work on that one. We are quite confident we can remain in our target from the 6% to 8%, including acquisitions, and organic growth is just a part of it. So we have to adapt. We also are able to adapt organization.

As you know, for example, in Mexico, the market is down. And we have, for example, in Mexico, 10% less organic growth, as it's a difficult market. However, it could improve the operational EBIT because we can adapt our organization. So to maintain the organic growth, if everything goes up, that will be difficult for us as well as for other people. However, to get in a mixed bracket, we are quite confident for all the market, including China, including everything, that we be in our guidance from 6% to 8% also next year.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [15]

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Okay. And just on the infrastructure side, yes, I realize that infrastructure is probably the most likely sector in the construction industry to be benefiting from stimulus measures. We're already seeing some in China. Are you expecting or hearing anything else, say, in the U.S., Latin America or Europe with regards to infrastructure projects?

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Paul Schuler, Sika AG - CEO & Member of Group Management [16]

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I guess it's difficult and not so pushy in Latin America. They are not so pushy on the infrastructure. There are a lot of political turmoil. I think in Argentina, a little bit difficult; also Chile has started now; we just got the news on Bolivia. So I don't expect big pushes there. However, we hope that Mr. Trump moves in the U.S. We see a little bit going there, so not so bad time. We have nice infrastructure project. And also same as you analyze China, we see a good push on the infrastructure.

However, I guess also with the new outline of our distribution business, now as we go more and more to residential market and distribution, distribution also will pick up as soon as there is a little more recession because the people will still reform their houses. So we are much more balanced than before, so we can pick up on the infrastructure as well we can benefit then on the residential market.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [17]

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Okay. Perfect. And then just going back to one of the statements from Adrian a couple of minutes ago. I think Adrian was talking about the dilution from Parex on the gross margin for the 9-month period. Could you provide that number for Q3 as well, please?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [18]

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The material margin increase, let's say organically was 0.7% versus 0.4%. So that's the dilution effect there on the material margin, 30 basis points.

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Operator [19]

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Next question comes from the line of Martin Hüsler, ZKB.

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Martin Hüsler, Zürcher Kantonalbank, Research Division - Research Analyst [20]

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Also have a question to Parex maybe to make it completely clear. So you say that the impact of Parex on gross profit margin in Q3 was 30 basis points?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [21]

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Plus all the other acquisitions. So the acquisition dilution on material margin in Q3 was 30 basis points.

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Martin Hüsler, Zürcher Kantonalbank, Research Division - Research Analyst [22]

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Okay. And 50 basis points for 9 months?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [23]

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That's the organic and one for 9 months, just the organic development of the material margin, we have reported 20 basis points. Including all the acquisitions also there, there is a 30 basis points dilution.

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Martin Hüsler, Zürcher Kantonalbank, Research Division - Research Analyst [24]

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And so at this stage, you don't give a statement for the full impact of Parex, let's say, to overall EBIT. So not including integration costs, not including amortizations, what would be -- what would have been the results of Parex after 9 months?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [25]

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Yes, as I said, good underlying development. We clearly highlighted the one-time costs related to Parex. There is other impacts in terms of the dilution on the amortization side. There's other acquisitions, but yes, for now, we're not specifically highlighting and detailing the impact of Parex, also, as there is ongoing commercial integration, as Paul has highlighted.

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

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And Martin, it will be also more and more difficult -- we could [distract it], but the business has one sales organization in each country. They share, they work together. So Parex for us, we don't follow up Parex as a group as before. Parex is integrated into countries, and we follow country-by-country and then summarize in the region. So in the future, Parex, there's no numbers anymore where we fall, as a total.

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Martin Hüsler, Zürcher Kantonalbank, Research Division - Research Analyst [27]

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Okay. I can understand this. Then maybe 2 very short questions. What is the consolidation date of Crevo-Hengxin?

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

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Crevo-Hengxin, that's at the very beginning of October. So there is no impact in Q3 yet.

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Martin Hüsler, Zürcher Kantonalbank, Research Division - Research Analyst [29]

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Okay, so Q4. And you were mentioning that the CapEx was quite lower than last year. What's your current guidance for the full year?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [30]

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There was -- as you remember, there was also a special effect of CHF 70 million relating to a buyback of long-term operating leases last year in the amount of CHF 70 million. This is basically what we will not have. So I mean for the full year, we will be below the 3% of sales.

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Operator [31]

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Next question comes from the line of Bernd Pomrehn, Vontobel.

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Bernd Pomrehn, Bank Vontobel AG, Research Division - Analyst [32]

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My question is a little bit similar to the question of the -- of Martin Flueckiger. I still would like to get a little bit of better feeling of your view about the different submarkets, so really infrastructure, commercial construction and the residential construction. Where do you see some weakness? Where do you see opportunities? Could you maybe elaborate a little bit on these 3 markets on a high level?

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Paul Schuler, Sika AG - CEO & Member of Group Management [33]

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Thank you. They are -- it's more based on countries. If everybody comes, there's a little bit difference. But if you look over the countries and then in the market, in the U.S., we feel infrastructure as well as residential market still will be good for us. We still have a lot of opportunities. We just have a lot of good news on Home Depot, other things. So we believe U.S., Canada will still be strong in the next coming months.

Then as I said before, Latin America is a little bit back. It is a matter of its residential infrastructure. It's the political issue there in some countries until now. Colombia is strong. We have good business out in Brazil in infrastructure, as well in residential distribution market.

If you go to China, if I read the press, I would be scared. I just had a visit over there, and it's very good to see how they manage it. It's still a 6% GDP growth. And we cannot see big signs which go slow in China except automotive market. But all the other markets until now for us strong, strong pipeline in both markets and exciting growth rate possibilities for the next few months. So we will -- I expect exciting numbers out of China.

It is different in Japan. It's a lot of typhoons in the last 3 or 4 months. So it slowed down our business a little bit. But after a disaster, they have to rebuild. So we don't see there a real -- over months as a real downturn. And Southeast Asia turned a little bit around. It's also much better than before, infrastructure as well as distribution market.

Europe is also challenging, rather little bit slower. We don't expect there big grow rate in the major markets from Germany, Italy and Spain. All these major markets are rather slow. We see a little bit slowdown in this market. And the Brexit is also still open. We don't know where it goes. Also our numbers, it's now the first time after all the years of Brexit, we see a decline in our grow model. It's just down. But also there, we adapted the organization and improved our EBIT margin. So overall, it's -- all markets are a little bit different. So overall, we see still 6% to 8% for next year grow rate.

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Operator [34]

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Next question comes from the line of Patrick Rafaisz from UBS.

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Patrick Rafaisz, UBS Investment Bank, Research Division - Director and Chemical Research Analyst [35]

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Two questions, please. The first is -- and I'm sorry to circle back to Parex and growth in the third quarter. But at H1, you said Parex organics are around 6%, 8%, including some minor M&A for Parex stand-alone. Do you think that that accelerated in the third quarter, and is that a sustainable trend into Q4 as well? Or was there any special effects we have to keep in mind?

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

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Yes. The Parex -- if you want to call it the Parex business, we don't talk about the Parex business anymore. But if you want to call this a parameter like this, it was at least (inaudible), it was actually a bit stronger in the third quarter. There's very good momentum in many of the key markets they're in, and we are starting to realize the first synergies have combined the organization. So good -- very good traction there.

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Paul Schuler, Sika AG - CEO & Member of Group Management [37]

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And as we said, we are confident to reach the upper level of the CHF 80 million to CHF 100 million. So in many, many markets, we are very happy how this business works together.

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Patrick Rafaisz, UBS Investment Bank, Research Division - Director and Chemical Research Analyst [38]

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Okay. And the second question is around net working capital. Adrian, you talked a bit about the lower working capital buildup that also helped your cash flow performance in the 9 months. Is that an area where you see further improvement? Or is -- was there a timing effect? Should we expect a bit of a bounce back here for the working capital in Q4?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [39]

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Yes. I mean the working capital development was quite good. As I mentioned, there's 2 factors. On the one hand, in some markets, of course, less dynamic growth, which per se have an impact, but there is also a number of operational improvements. For example, on the inventory side, very focused on the receivables. So I continue to see a good progression, slowly but gradually, but that's certainly another area of focus also in this integration now.

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Operator [40]

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Next question comes from the line of Thomas Wrigglesworth from Citi.

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Thomas P. Wrigglesworth, Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst [41]

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Couple of questions, if I may. The first is, sorry to go back to the growth from Parex in the organic growth. Can we assume the 0.5% growth for the 9 months, that that was largely -- that largely fell in Asia and thereby implying that the recovery in the U.S. market was to what I calculate about 9% organic growth -- sorry, U.S. market -- Americas market is kind of a good like-for-like number?

Secondly, on that Americas growth, I mean obviously, we heard about the first quarter being impacted by labor. But do you think -- what do you think is the rate of growth -- the underlying market rate of growth in the U.S. today? And can we infer from your earlier comments that you think that can be sustained into 2020?

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Paul Schuler, Sika AG - CEO & Member of Group Management [42]

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It's correct. It large comes from China, Parex China, Asia, very good performance, excellent. It's also correct that in U.S., the business is on track, but not as fast growing. But underlining grow rate -- our organic grow and is still around 6% in the U.S., and should be also in the next coming months.

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Operator [43]

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Next question comes from the line of Daniel Jelovcan, Mirabaud.

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Daniel Jelovcan, Mirabaud Securities Limited, Research Division - Analyst [44]

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Just also on Asia Pacific, after 3% in the first half, now in the third quarter 14%, significant growth, okay, maybe also because of products, but why the Philippines, for instance, there's such a big infrastructure demand and why also India you mentioned? Just a bit more information would be great.

And the second question is, in the Global Business, I mean just your other Swiss kind of competitor reported minus 8% in Q3 organic, and you had even slight growth. So very well done. But the question is, going forward, do you expect a stabilization here as well? Or as you mentioned, the production numbers are quite negative for cars, but that was probably also destocking in the channels. But in the end, customer demand is maybe okay. Would be nice to have your view here. I know you don't have the crystal ball, but you're certainly more -- know more than me.

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

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Yes, give a bit of flavor. Maybe your first question, yes, of course, the Parex business has developed -- the original Parex business has developed quite well in Asia Pacific, but also, as mentioned, we're seeing some pickup in Southeast Asia. Some of the markets have really been depressed also in relating to specific factors, to political factors. So there is in a number of countries and just from a growth rate point of view the Philippines was one of the examples, but of course, it's relatively small in the mix. But overall, a positive development in this part of the world. Also, India, quite solid. In Japan, we also had a bit of a positive effect from a tax change that is to come. So that's basically one of the organic -- or some of the organic drivers in Asia Pacific.

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Paul Schuler, Sika AG - CEO & Member of Group Management [46]

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Okay. I take the second one, Daniel. Yes, if I look at the grow rate of our peers, I'm quite pleased with our hanging in there and still have a grow rate and still able to maintain business. We don't expect that the automotive market turns fast around in the next 3, 4, 5 months. There will be still some headwinds there, some turbulences. As explained on the Investor Day that we are in a few new models where we expect some grow rate.

So we're confident to stay at that average grow rate -- or EBIT grow not expanding, but at least keeping the level of small growth, but not declining. That would be then really a turnaround in the whole automotive market. So quite positive that we can maintain the grow or at least stay on the same level. And not minus like our friends.

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Operator [47]

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Next question comes from the line of Manish Beria, Societe Generale.

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Manish Beria, Societe Generale Cross Asset Research - Equity Analyst [48]

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So yes, so I had 3 questions. The first one is on the operating leverage, I mean. So you talked about excluding acquisition and one-offs, I mean the operating expense, that is the nonmaterial cost just grew slightly below the revenue growth rate. So I mean this is a change because in the first half, I think you mentioned something like 75% growth rate of this operating expense, but now it's like 90%, 95% maybe.

So what is the reason for the picking up of the expense? Is this because maybe you are growing slower so maybe the operating leverage is less? How should we see it? Because you mentioned in the Mexico, you were able to cut costs despite lower growth and things like that. So should we assume, I mean even in a slower environment, probably you will be able to maintain the margins or the expense as a percentage of revenue, but not really getting operating leverage? So this is the first question. I will take another 2 after you answer this one.

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

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Yes. Good question here. Of course, let's say, organic growth rate or operating leverage does have a bit of an impact. I mean we're talking here somewhat smaller numbers. There is also some foreign exchange impact, which have not been helping. But all these differences also when I talk about, let's say, slightly below sales growth, I mean these are not big impact, given the numbers.

Secondly, we are -- of course, there is a number of markets where we are sort of rightsizing and addressing the issues. But also, I mean we're, of course, maintaining investments in some of the markets where we do see long-term strong growth. So it's a bit of a balance. And to look at it quarter-by-quarter, it's probably a bit not addressing it fully, I think, very strong and good cost control, also a number of efficiency projects, which we are ramping up. All in all, quite satisfied with the cost development.

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Manish Beria, Societe Generale Cross Asset Research - Equity Analyst [50]

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Okay. The second one is on your free cash flow that you say operating free cash flow of 560 -- CHF 555 million. So just wanted to understand, I mean is there some benefit coming from also the IFRS reporting because lease principal payment probably is included or excluded. Just wanted to know that.

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

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Yes. There is -- I gave a number of explanations here on the good development. I mean working capital is one, also lower CapEx. The other one is on the amortization and depreciation area. And there, you are right, there is an impact also from IFRS 16. Basically, the number I've mentioned in the cost context, about CHF 50 million, which is positively impacting like-for-like comparison.

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Manish Beria, Societe Generale Cross Asset Research - Equity Analyst [52]

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Okay. So understood. The last one is probably on the -- because I have seen your presentation, I mean you mentioned trade wars as one of your mega drivers because I've not seen that before. So just trying to understand how does trade war become a mega trend for Sika?

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

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Okay, now I get it. Okay. Thank you, Manish. A mega driver is we have to follow the shift, and we have to adapt our organization. We have to make sure that our supply chain is in the right position, in the right country. So that's a mega driver we have to do -- strategically to do. And usually, if someone really exports and is not able to produce in other countries, this supports always also our local growth. So we can be faster in local production like in China than everybody else. And we also have nice factories in U.S. So we don't have to move things around. So each one want to produce more local, fine with us. And our competitor are running behind.

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Operator [54]

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Next question comes from the line of Alessandro Foletti from Octavian.

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Alessandro Foletti, Octavian AG, Research Division - Financial Analyst [55]

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Yes. I just have a small follow-up here on the quarterly growth in the U.S. or in America. You've mentioned Mexico and the difficulties in Lat Am, but when I calculate the organic growth for the quarter, I come up to around 9%, which is again, quite an acceleration. Can you give a little bit more of information regarding this growth, how it came about? And what's the outlook?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [56]

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Yes. I mean your calculation is absolutely right. And as we said, I mean North America has been quite dynamic really across the board. In Canada, in the U.S., in all the businesses, a bit of a slow start, but as Paul has mentioned, I mean we're seeing a good pipeline and continued strong development. And this, of course, is not all the market, but we're gaining market share here also based on the more recent acquisitions really developing well, cross-selling and really being able to have a better and broader offering for our clients.

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Alessandro Foletti, Octavian AG, Research Division - Financial Analyst [57]

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Right. And my second question, more related to the growth contribution of the acquisition, but not what you have mentioned about Parex right now. We have understood that 0.5%. But in general, can you give an idea of what you think is the contribution of acquisition on your organic growth? I.e., if you didn't have done, let's say, the last 15 acquisitions, how would have been Sika organic growth? Do you know that?

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

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No. I mean to be honest, I don't have an exact figure. And of course, there is some more visible parts when you basically sell it through the existing organizations. But as we integrate relatively quickly, also as we have a very broad offering complement systems and so on, sometimes it's also about market access or getting access. For example, now in Canada, through the King acquisition, really having now a very strong position or inroads into the mining market. There is -- that's one of, let's say, the growth elements, but I could not spell it out how exactly -- what exactly the impact is.

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Alessandro Foletti, Octavian AG, Research Division - Financial Analyst [59]

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All right. Just for your information, the reason I ask is because you always mention one of your criterias when you make acquisition is that it has to provide a growth platform. So if that's the case, there should be incremental growth coming from these acquisitions.

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

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Yes, there is. But having -- concretely answering your question, what is the impact of the last 15 acquisitions, it is in different places, and there are different drivers. So there is definitely a positive impact. That's also what we always say. I mean we are looking for growth platforms, and this is part of the growth model. It goes beyond just adding businesses.

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

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Just an explanation from my side. We measure, for example, Canada on a total grow now, not just King and Sika, we merged the companies also there. So we measure the grow rate and then, as Adrian has explained several times, we do a back-testing of all the companies to see how they performed over the years. And therefore, we know exactly what benefit they have.

And the third element, we really always watch where the new product goes. We follow the products, not just the grow. So if we sell now King Package and King products out in the U.S., that's a growth platform because we have the formulation, but we will produce it, of course, in the U.S. So we see it's a growth platform because we could move the products and information and customers. That -- on other side, we follow that, but we don't really track it down. That's the grow platform, and we see that every month if it goes in the right direction or not.

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Operator [62]

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Next question comes from the line of John Fraser-Andrews, HSBC.

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John Fraser-Andrews, HSBC, Research Division - Global Equity Head of Building Materials & European Building Materials Analyst [63]

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Three for me, please. First one -- or the first 2 actually around the Parex synergies. So have we seen any cost synergies already in Q3? And can you update on how you see those in terms of the timescale?

Second one, again, Parex synergies, the sales enhancements we see, we can make some calculations there. But can you just say in Asia or in China, is the enhancement that's visible in the Q3 report, is that solely from the 1,500 points of sale? So where are you with the other best part of 15,000 others that you identified at the Capital Markets Day?

And then the final question. If I could ask you to get your crystal ball out again, please, Paul, and just tell us what your outlook is in raw materials, what you're seeing, and what the immediate and medium-term outlook is there, please.

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Paul Schuler, Sika AG - CEO & Member of Group Management [64]

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Okay. I'll take the first, the crystal ball, John. The outlook is a little bit of mixed bag as usual around the world in different countries, but at least it is a relief compared to 2017, and also better than 2018. In certain product mix, we go ahead; in certain, we still have to fight a little bit. But good indication is there is no more [pressure]. And I think it's a rather softer than the pressure we had 2 years ago. And also, I don't expect if the volume will drop in the future like our peers have shown negative sales grow or not really growing, I expect throughout a relief on the raw material margin.

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John Fraser-Andrews, HSBC, Research Division - Global Equity Head of Building Materials & European Building Materials Analyst [65]

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And to what extent does that include price increases on your part? How much more growth have you seen? And how much are you going for?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [66]

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On the price increases year-to-date, we're talking about 1.5% of price increases. Maybe I'll also take the first question you had on the realized synergies. I mean the realized synergies, they're still small. They're around 2 to 3 -- rather CHF 2 million in the first 2, 3 months, with the expectation in -- for 2019 between CHF 5 million and CHF 10 million.

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

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Okay. And I take -- yes, John?

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John Fraser-Andrews, HSBC, Research Division - Global Equity Head of Building Materials & European Building Materials Analyst [68]

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Sorry, is that on the cost side, Adrian?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [69]

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It's mostly on the cost side. Yes.

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Paul Schuler, Sika AG - CEO & Member of Group Management [70]

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And I take the China one. The 1,500 shops was just a fast reaction from our new colleagues in China. They really have equipped out the shops they have, the first 1,500, very fast in 1 month with our products, the positioning, pricing. It's not the big cross-selling now. It's excellent for us. But they also have a nice grow model and they grow tremendously well with the old system they have. So from that side, the majority of their own growth and cross-selling will kick in beginning of next year in a bigger line.

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Operator [71]

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Next question comes from the line of Xintong Ouyang, On Field Investment Research.

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Xintong Ouyang, On Field Investment Research - Analyst [72]

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I have a small question on the margin, EBIT margin. So if we exclude all the one-off effects, we see that normally speaking, in Asia Pacific, H2 will witness a several percentage higher margin than H1. So we are wondering for this year, will it still be the case or it will be diluted by the acquisition effect?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [73]

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Yes. The acquisition effects are, of course, I mean, larger. And so there will be a continued impact here also in the fourth quarter on, let's say the dilution side. And as we said, we're guiding for double-digit EBIT increase and more than CHF 8 billion in sales. But there will be a continued sort of dilution impact in the fourth quarter.

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Xintong Ouyang, On Field Investment Research - Analyst [74]

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Okay. Okay. Great. And another question is on the midterm development. We see that you mentioned in Strategy 2023 saying that there will be 25% of new products that you target at selling. I just want to know, could you please provide more colors on the markets that these new products are serving? Are they serving for any new sectors? Or are they serving for the current purpose, but just improvement in functions?

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

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No. I focus on all the 8 target markets. We expect that all the target market has new products. We expect that for all our 5 technology, we have new products in. So we expect it everywhere, and think we will go from there. So we have no clear breakdown. Every target market and every technology is expected to bring new products on the market, which we then can bring better solution to our customers.

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Operator [76]

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Next question comes from the line of Remo Rosenau, Helvetische Bank.

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Remo Rosenau, Helvetische Bank AG, Research Division - Head of Research [77]

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A more general question here. After the Parex acquisition, at some stage, you said that you expect the net debt-to-EBITDA to reach around 2.7 to 2.9x by the end of '19, then going down to around 2.0x by the end of 2020 and then being reduced by a factor of 0.4x each year, of course, all that without any additional acquisitions.

Now the question is, I mean of course, you will do additional acquisitions. So is it also imaginable that by the end of 2020, you will not be at 2.0, but for instance, let's say, at 2.4, 2.5, and you don't have a problem with it? And what kind of debt level measured with this net debt-to-EBITDA ratio would you feel comfortable, like, being -- remaining there?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [78]

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Yes, Remo. I mean what's included in this sort of deleveraging, if you will, is sort of a normal or smaller acquisition spend as we have had in the past. So there is some acquisition spend in there, but no, let's say, major acquisitions. There is also not that we say, I mean we have to be at a certain level, but as we have always said strong investment-grade rating, A minus, is important, and we will clearly maintain this. But certainly, there is some flexibility, particularly given the strong cash generation. Does that answer your question? Or...

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Remo Rosenau, Helvetische Bank AG, Research Division - Head of Research [79]

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Yes. Okay. I was (multiple speakers) that you...

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Adrian Widmer, Sika AG - CFO & Member of Group Management [80]

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Remo, without big acquisition, and big acquisition is above CHF 500 million, CHF 600 million, we will go to the target we have with this cash generation, which we'll continue.

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Operator [81]

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Next question comes from the line of Markus Mayer, Baader-Helvea.

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Markus Mayer, Baader-Helvea Equity Research - Lead Analyst of Chemicals [82]

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Two questions remaining. First off is on the -- on your order book visibility. Was there any change how you -- how far you could see in the order book, in particular if you compare the construction chemicals to the global businesses? That will be my first question.

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Paul Schuler, Sika AG - CEO & Member of Group Management [83]

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Okay. It's a little bit different business model we have comparing to other companies. They are mainly equipment builders. They have the orders in. We see our pipeline on the construction side, so we don't have orders in. But on the construction side, as I mentioned before, we still believe in many, many markets, we have a strong pipeline.

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Markus Mayer, Baader-Helvea Equity Research - Lead Analyst of Chemicals [84]

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So there was no change over the last months for (multiple speakers)?

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Paul Schuler, Sika AG - CEO & Member of Group Management [85]

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No. No.

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Markus Mayer, Baader-Helvea Equity Research - Lead Analyst of Chemicals [86]

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Okay. And my second question would be in particular on the global businesses. At least looks like that in the automotive-related businesses there was continuous destocking over this last month. Do you -- what is your feeling on your customers in this business? Is the inventory level already low? Or is there further destocking potential?

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Paul Schuler, Sika AG - CEO & Member of Group Management [87]

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I guess they really destocked a lot in the last 5 months, mainly the Germans. And I guess we will see some light in the tunnel, not sure when, but I feel individual transportation, the cars will remain in the next future, even if the big cities model change a little bit. So we are confident that in the next few months, the seas will turn.

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Operator [88]

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We have a follow-up question from the line of Martin Flueckiger.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [89]

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Actually most of them have already been answered. I just have one more follow-up, and sorry for being a bit meticulous on this one. Adrian, you were talking about the gross margin dilution in Q3 of 30 bps by Parex and all the other acquisitions. Can you just remind me how much it was at the EBIT margin level?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [90]

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And the dilution, again, at the -- we don't spell out Parex right now what the impact is. I have given an indication at the Capital Markets Day what the effects are. On a full year basis, there is about 400 basis points amortization effect, and there is -- the one-time costs we have spelled out. So of course, the really incremental impact so far has been relatively small.

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Operator [91]

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The next follow-up question comes from the line of Thomas Wrigglesworth.

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Thomas P. Wrigglesworth, Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst [92]

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So I just wanted to -- on the organic growth, could you help us understand how much of that organic growth is kind of volumes, absolute tons versus price and mix effect? That would be helpful color.

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Adrian Widmer, Sika AG - CFO & Member of Group Management [93]

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Yes. I mean mix effect overall is very small to nonmaterial, and the price effect is 1.5%. So the rest is volume, basically, to the 4.1%.

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Thomas P. Wrigglesworth, Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst [94]

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Okay. And can I -- just to go back on the raw mats comments. I think one of your peers in the U.S. talked about falling raw materials into year-end, but you're saying that's not part of what you're seeing in the market today.

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Paul Schuler, Sika AG - CEO & Member of Group Management [95]

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No. Probably you give me the names, I can call him to see the supplier. From our side, we don't see that too much. It could be possible, but I don't see it yet.

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Operator [96]

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The next follow-up comes from the line of Tobias Weimann.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [97]

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Just a quick final one on the prices again and also on the raw materials. So you mentioned earlier, in Q3, gross margins organically were up 70 bps. Now you said raw materials are probably not improving much further from here. And if I look at consensus estimates, I think they imply 170 basis points uplift in the fourth quarter. I wonder if this is feasible, maybe it comes from pricing because your initial guidance was calling for 2% pricing for the full year, but now you're saying we had 1.5% in the first 9 months. So are you expecting an acceleration in pricing in the fourth quarter? And do you think 170 basis points margin uplift is feasible for the fourth quarter?

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Adrian Widmer, Sika AG - CFO & Member of Group Management [98]

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I mean of course, on the pricing side, I mean we continue to increase prices, but we also do this in a measured way. Also when we look at raw material input cost, still very volatile, as Paul was indicating, I mean we're not seeing sort of a broad decline. So there is, hopefully, going to be some impact, but we also have other measures on the procurement side, on the new product and so on and so forth. But again, we have to see how the input costs develop, and there is just no point or clear trend to give a guidance in this regard.

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Paul Schuler, Sika AG - CEO & Member of Group Management [99]

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And for the overall EBIT, and we have a lot of initiatives and efficiencies. So we're confident to keep our guidance.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [100]

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And for pricing, you want to still keep the guidance of 2% for the full year because, clearly, that would imply quite an acceleration in the fourth quarter if you have 1.5% year-to-date. And I think the comparison base is actually higher in the fourth quarter because last year in Q4, you had, I think more significant price increases as well.

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Paul Schuler, Sika AG - CEO & Member of Group Management [101]

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I mean given the comparison, it will probably be a little bit shy of 2%. Yes.

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Tobias Weimann, Morgan Stanley, Research Division - Equity Analyst [102]

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Okay. And then just -- sorry, just a clarification on the raw materials. What exactly is going up because, clearly, 70% of your raw materials are oil derivatives and oil prices really have come down quite a long way. But also if I look at acrylic acids, they have come down. If I look at epoxy, they have come down. So what is really the headwind here?

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Paul Schuler, Sika AG - CEO & Member of Group Management [103]

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Yes. The -- of course, oil price typically is one element. It's more sort of a long-term one. I mean that's not sort of the big driver typically. Short term, it's more supply and demand. And there is areas, for example, special bitumen, but also polyamide particularly also affecting. The Global Business is still significantly higher year-on-year. It's just very volatile, still also region-by-region. So again, no sort of clear guidance we can really give on the input cost development.

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Operator [104]

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The last follow-up question -- sorry, we don't have any questions at this time.

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Dominik Slappnig, Sika AG - Head of Corporate Communications & IR [105]

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Okay. So basically, this brings us to the end of our call. Thank you very much for listening in and for your interest in Sika. We wish you all the best.

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Paul Schuler, Sika AG - CEO & Member of Group Management [106]

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Okay. Thank you very much and see you soon. Thank you.

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Operator [107]

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