In a recent earnings call, Sika AG (SIX:SIKA.SW), a leading specialty chemicals company, reported a solid performance for the first nine months of 2024, with sales reaching CHF 8.9 billion, marking a 5.5% increase in Swiss francs and a 1% organic growth year-to-date. The growth accelerated to over 4% in the third quarter, particularly in the Americas. The company's EBITDA margin improved to 19.1%, up from 17.8% the previous year, largely due to synergies from the MBCC acquisition. Net profit rose by 25% year-over-year to CHF 922.6 million, and the company generated a free cash flow of CHF 850 million. Sika remains optimistic about its future, confirming a growth target of 6% to 9% in local currency and expecting to continue its growth trajectory in North America.
Key Takeaways
- Sales increased to CHF 8.9 billion, a 5.5% rise in Swiss francs, with 1% organic growth year-to-date.
- EBITDA margin expanded to 19.1%, driven by synergies from the MBCC acquisition.
- Net profit surged to CHF 922.6 million, reflecting a 25% year-over-year increase.
- Free cash flow reached CHF 850 million, with CHF 450 million generated in Q3 alone.
- The company confirmed a growth target of 6% to 9% in local currency.
- Strategic expansions in Latin America and the U.S., including the acquisition of Kwik Bond and Vinaldom.
- Positive outlook for Q4 with potential growth approaching 10%, supported by increased infrastructure spending.
Company Outlook
- Sika anticipates a 6% to 9% growth in local currency.
- Aiming for an EBITDA margin of 20% to 23% by 2026.
- North American business expected to drive growth, with infrastructure investments as a key factor.
- Asia Pacific growth contingent on Chinese government measures, with positive trends in India, Japan, and Southeast Asia.
- Integration costs from the MBCC acquisition in Q3 were CHF 7 million.
Bearish Highlights
- Asia Pacific segment experienced a constant currency decline of 0.2%, with a double-digit decline in China's direct construction business.
- The automotive sector in EMEA faced challenges, with production down by 1 million cars.
- Foreign exchange predicted to present a 3% to 4% headwind in 2025.
- EU Commission's investigation into price fixing in concrete admixtures ongoing.
Bullish Highlights
- Strong performance in the Americas with 4.3% organic growth in Q3.
- MBCC acquisition expected to yield CHF 100 million to CHF 120 million in synergies in 2024.
- Positive outlook for Q4 with growth potentially approaching 10%.
- Water segment identified as a growth driver despite market challenges.
Misses
- EBITDA margin in Q3 was down by 20 basis points year-over-year.
- Seasonality and logistics costs presented challenges for gross margin maintenance.
Q&A Highlights
- Executives expressed confidence in achieving mid- to high single-digit growth in North America.
- EBITDA margin of 20% to 23% targeted by 2026, with more details to be provided in February.
- Management is confident in organic growth momentum and is exploring additional acquisitions.
- The company is prepared to adapt pricing strategies to market volatility, aiming to maintain gross margins between 54% and 55%.
In summary, Sika AG's earnings call presented a company with strong financial health and strategic growth initiatives. The integration of the MBCC acquisition and expansions in the Americas have positioned Sika for continued success, despite some regional challenges and market volatility. With a focus on operational efficiency and a robust M&A pipeline, Sika AG is well-equipped to navigate the future and maintain its competitive edge in the specialty chemicals industry.
InvestingPro Insights
Sika AG's strong financial performance, as reported in the recent earnings call, is further supported by data from InvestingPro. The company's market capitalization stands at an impressive $45.68 billion, reflecting its significant presence in the specialty chemicals industry.
InvestingPro data shows that Sika AG has maintained a solid revenue growth of 10.78% over the last twelve months, aligning with the company's reported sales increase to CHF 8.9 billion. This growth trajectory is complemented by a robust gross profit margin of 54.79%, which falls within management's target range of 54% to 55% mentioned during the Q&A session.
The company's profitability is further underscored by an InvestingPro Tip indicating that Sika AG has been profitable over the last twelve months. This is consistent with the reported 25% year-over-year increase in net profit to CHF 922.6 million.
Another InvestingPro Tip highlights that Sika AG has raised its dividend for 5 consecutive years, demonstrating a commitment to shareholder returns. This aligns with the company's strong free cash flow generation, which reached CHF 850 million as reported in the earnings call.
For investors seeking more comprehensive insights, InvestingPro offers 7 additional tips that could provide valuable context to Sika AG's financial position and market performance.
It's worth noting that while Sika AG shows strong financial health, it is trading at a high P/E ratio of 32.02 and a high Price / Book multiple of 6.21. These valuation metrics suggest that investors are pricing in the company's growth potential and market leadership, as discussed in the earnings call.
The company's next earnings date is set for October 25, 2024, which will be a key event for investors to watch, especially given management's optimistic outlook for Q4 and the potential for growth approaching 10%.
Full transcript - Sika AG ADR (SXYAY) Q3 2024:
Operator: Ladies and gentlemen, welcome to the Sika Nine Months 2024 Results Conference Call and Live Webcast. I'm Sandra, the Chorus Call operator. I would like to remind you that all participants will be in a listen-only mode and that the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Dominik Slappnig, Head of Communication and Investor Relations of Sika. Please go ahead, sir.
Dominik Slappnig: Thank you, Sandra, and good afternoon, and welcome to our nine months results conference call. Present on the call with me today is Thomas Hasler, CEO; Adrian Widmer, CFO; and Christine Kukan, Head of IR; plus, Jami Lieberman, HR Manager. We published our nine months figures this morning at 5:00. The presentation to the nine-month results is as well published on our website. With this, Thomas Hasler and Adrian Widmer will provide further details on the results and the outlook. Afterwards, we will be ready to take your questions. I hand now over to Thomas to start with the highlights of the first nine months.
Thomas Hasler: Thank you, Dominik, and good afternoon for all joining at this call, since it's a pleasure to present insight into our nine months results. As highlighted also in our morning disclosure, we have reached, in many aspects, new record heights. As a company, we are proud of the results overall. They are in line with our expectation and with our guidance. The thing starting here on the top with CHF 8.9 billion in sales, 5.5% growth in Swiss francs. We have delivered according to our expectation and guidance. A lot of that coming from the MBCC transaction has also, I think, very transparently shared, but significantly also supported by the organic growth, 1% on a year-to-date rate, but with a very positive steady improvement quarter-after-quarter, which we regard as very significant as it demonstrates our ability in challenging times to take any movement up the chance to gain market share. And in particular, in the Americas, it's becoming very visible that if the underlying trend turns slightly positive we over proportionately take advantage of that in contributing significant organic growth. As you have seen in Q3, this is above 4% for the whole region Americas, in particular, the North American market has been driving and contributed to that top line evolution. But besides the top line, also, of course, on the margin side, a great expansion of our material margin base from 53.1% last year to now 54.7%, a significant improvement on this as well as, of course, then on the EBITDA margin where we moved from 17.8% to 19.1%. Also here, multiple key contributor, of course, to this improvement. And not least, of course, also the strong synergy collection from the MBCC transaction, which also led then early in the year to an upgrade of our targeted synergy expectation for 2024 in the range of CHF100 million to CHF120 million for the full year. Next to that, it's also to be mentioned that the expansion of our footprint, the organic footprint with plants opening in Latin America, in Peru for fiber, which is a strategic complementary offering on the concrete side, which has demonstrated a great potential also at the Capital Market Day we talked a lot about the fiber possibility. This expansion in Peru has to be seen as a concerted action with the implementation of footprint in the US, as well as in Germany, as well as in Australia and is a consequence of our belief into the fiber possibilities going forward, and it's demonstrated and also reconfirmed with the business evolution in LatAm in regards to this technology. And also China, I think here further investing into our distribution journey in China, but also in Indonesia, both are related to our distribution journey to penetrate further and reinforcing our activities in these key markets. These were the organic investments. Then on the acquisition side, Kwik Bond, the bridge tech renovation company we bought in the US, a fantastic enhancement to our infrastructure offering in North America and integration is very well on track and is contributing and is also benefiting from the overall increased spend on the infrastructure in North America. So right in time and a great combination with our business in North America. Then also in the Americas, Vinaldom is admixture company acquisition, it makes a difference in the Caribbean, and it is a hub for future expansion, like any other acquisition for Sika. It’s always a platform for acceleration of growth and penetrating markets at a higher rate of speed. Then ultimately, coming to the outlook. We confirm everything we have provided since the start of the year in February, the 6% to 9% growth in local currency. We are well on track with the overall proportional increase in EBITDA as well as the confirmation of our strategic targets that we have outlined in our 2028 strategy. And with that, I would then hand over to Adrian to give some more granularity.
Adrian Widmer: Well, thank you, Thomas, and good afternoon, good morning to all here listening in on our nine-month results conference call. Following our CEO's business summary and presentation of the highlights, I will now give you some further insights into the financial results. In an environment that remains quite volatile and challenging, Sika delivered sales growth of 9.1% in local currencies in the first nine months of the year, with acquisitions as the main contributor. But also, as mentioned, an increasing organic contribution throughout the quarters. Organic growth was 1% for the first nine months, gradually increasing from 0.2% in Q1 to 1.7% in Q3 in isolation. Acquisitions here being the residual MBCC impact as well as Kwik Bond and Vinaldom in the Americas added 8.1% of additional growth in the period under review. Currency effects continue to be significantly negative and picked up again in Q3, whereby reducing local currency growth by 3.6% to 5.5% in Swiss francs. The currency effect, particularly driving this or the weak U.S. dollar, the euro, but also continuing Japanese yen and RMB as many currencies in higher inflation emerging markets. Overall, we saw a further improvement in organic growth, as mentioned in Q3. If we look at the region EMEA, overall, growing 9%, were of 0.7% organic. Here also in Q3, organic growth was slightly higher at 1.0%. The positive trend towards more infrastructure and commercial construction projects also in Europe continued at local level, the Middle East, Africa and Eastern Europe showed further growth. While gradually improving growth in Germany is still in negative territory. And the automotive and industrial manufacturing sectors are facing decline in volumes due to the strong downturn in demand for new vehicles in Europe. Also here, foreign exchange effects, with minus 3.3% year-to-date negative. They were also, again, stronger in Q3 after reduced impact in Q2. Region Americas recorded growth of 12.2%. So, here double-digit growth with a clearly positive and improving trajectory on organic growth. As mentioned, organic growth here in the region amounted to 4.3% in Q3, particularly in the U.S., the positive trend is here supported by government-funded infrastructure projects as well as the reshoring of production activities. But also Latin America showed a solid growth that contributed to the positive trend in region. Acquisitions overall contributed 9.9% of growth, primarily MBCC as well as the recent acquisitions of Kwik Bond in the U.S. and Vinaldom in the Dominican Republic. Foreign exchange effects also here with a negative impact, minus 2.8% for the first nine months of the year. Sales in Asia Pacific increased by 4.7% in the first nine months with organic growth slightly negative at minus 0.5%. In China, we achieved moderate growth in the distribution business despite a sluggish residential market while the project business overall declined. Southeast Asia showed their strong momentum with high single-digit growth year-to-date. And in the automotive business, Sika expanded its content per vehicle further with local and international automotive manufacturers in China and India. MBCC contributed 5.2 percentage points of growth, while foreign exchange impact continues to be negative at minus 5.2%, but with a further relative improvement in Q3 quarter-over-quarter. Now moving down the P&L, where we, as Thomas highlighted, delivered a significant expansion of the material margin in the first nine months, with gross result expanding by 160 basis points to 54.7%, up from 53.1% in the previous year. And generally declining at and flattening material costs year-on-year, as well as structural procurement initiatives and MBCC synergies led to this significant material margin expansion. And dilution effect from acquisitions on material margin level was rather small at about 20 basis points. And in Q3, material margin was slightly above the previous year. Reported operating costs, which include both personnel costs, as well as other operating expenses, increased slightly over proportionate to sales growth in spite of a continued strong inflation environment, particularly related to wages, which was offset by strong MBCC cost synergies, operational efficiency initiatives and lower MBCC-related one-time costs compared to the same period in the previous year. In Q3, absolute operating cost development was largely flat with cost growth ratios further reduced. On the personnel cost side, which increased by 10.2%, an additional dilutive acquisition impact of MBCC was the main contributor. Secondly, underlying wage inflation continued to be close to 5% increase on a like-for-like basis. This was partially offset by cost synergies as well as operational efficiency initiatives overall. Q3 saw only a small over-proportional personnel cost increase as a result of higher efficiencies, synergies and slightly reducing wage inflation impact. Other operating expenses increased under proportionally by 2.8%, driven by lower acquisition-related onetime costs, synergy development and operational efficiency initiatives. Isolated Q3, other OpEx in absolute figures were slightly below the previous year. Overall, as we have heard, the integration of MBCC continues to progress very well. We've realized total synergies in the amount of CHF 89 million in the first nine months of 2024, well on track to push towards the upper end of the 2024 synergy target range of CHF 100 million to CHF 120 million. As a result, EBITDA increased strongly over proportionally by 13.2% to a record amount of CHF 1.7 billion and an EBITDA ratio of 19.1%.of net sales, up from 17.8% in the previous year. Depreciation and amortization expenses increased by CHF 53 million in absolute terms to about CHF 407 million or 4.6% of net sales, here primarily due to the residual impact of MBCC-related amortization on four months in the beginning of the year. Organically, depreciation and amortization expenses were virtually flat. Also here, EBIT increased over proportionally by 13.1% to CHF1.295 billion and an EBIT ratio of 14.5% of net sales. Below EBIT, net interest expense increased by CHF34 million compared to the same period of last year to CHF121.6 million. Here, the increase is largely related to the financing of the MBCC acquisition, primarily through the issuance of bonds. By contrast, other financial expenses decreased significantly by close to CHF83 million to result in a net income of CHF2.9 million in the first nine months of 2024, primarily due to a hedging gain on a currency swap, significantly lower foreign exchange valuation and also lower hyperinflation accounting impacts. The group tax rate also developed favorably with a decrease from 24.6% to 21.5%, largely due to higher tax deductibility on financing as well as a favorable one-time effect related to a deferred tax benefit in connection with the legal restructuring. As a result, net profit increased very strongly to CHF922.6 million or 10.3% of net sales, also here a double-digit ratio up here more than 25% compared to the same period in the previous year. Cash generation also continued to be very strong, with operating free cash flow for the first nine months at CHF850 million, generating close to CHF450 million of additional free cash flow in Q3, which is close to the record level of last year. Here, increased profitability, high depreciation, and amortization expenses overcompensated modestly higher cash taxes, CapEx, and the normalization of the seasonal net working capital patterns. Lastly, net debt-to-EBITDA leverage stood at 2.4 times, which is 0.2 turns lower compared to June this year. With this, I conclude my remarks and hand back to Dominik to kick off the Q&A.
Dominik Slappnig: Thank you, Adrian and we are now opening the line for your questions. Please?
Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Cedar Ekblom from Morgan Stanley. Please go ahead.
Cedar Ekblom: Thanks very much. Hi everyone. Just two questions. On the North American business, we understand that there might have been some weather impacts to construction activity in the third quarter. Would you have said that you saw some impact from a weather perspective? And if you did, is there any way to think about what a more underlying level type of growth was in the quarter because it was very impressive? And then if you can just talk about how we should think about that division into the fourth quarter? I think the comp is easier in the fourth quarter. Who knows if we get weather issues or not. But is it fair to assume, based on what you're currently seeing, that you could actually have another sequential pickup in growth in the fourth quarter and maybe even closer to 10% considering the comp? Thank you.
Thomas Hasler: Good. Thank you, Cedar. And let me become the weatherman for North America. I would -- we refrain from using that, only if it is really something extreme. And it rather applies to local condition and the US is a huge market. Of course, we had, let's say, the hurricanes in Florida, and there were some disruptions there, but nothing significant, nothing that really has, let's say, move the needle at all. And of course, also going into fourth quarter, unless we have huge blizzards that are, let's say, bringing down half of the US also there the weather is part of the seasonality, which is part of, let's say, a good predictability how the Q1 to Q4 are evolving. So I would really refrain from using weather as an influencer and certainly not this year so far, I would say, it is within the range. So the Q3 performance, and rightfully outlined by you, is a stronger performance. It shows that not only on the infrastructure side where we are benefiting from the increased spending on IRA bill, but also on the re-shoring activities, we are gaining there. Overall, when you include residential, probably the whole construction still not being positive. But for us, let's say, in certain segments already having a bit of a positive momentum accelerates immediately. And also rightfully that looking into the fourth quarter, yes, we are positive. This trend is not, let's say, a seasonal one. It has built up over the last three quarters, and we don't see a break in that trend also going in, in Q4. So we will to what level we will achieve that, but we are optimistic about the Q4 in North America. The only caveat, I would make and that's a bit given to the election in the US, we have seen in the past there can be wild times in the US, which has a possibility to steer up things. We don't expect this. This seems to be a more regular election than maybe the prior two. But other than that, the business is going in right direction, our ability to accelerate with our strong, let's say, resetting with the MBCC integrating everything is ready for future growth, and we capture that growth. Even if it is small, we double or triple it with the increased, let's say, competitive offering and the footprint that we have now in North America. So I'm very optimistic. But as I said, the election is something I wouldn't predict the outcome first and foremost and then, of course, also the aftermath. But that's -- it's -- it's not the weather, it's not yes, actually, nothing that really gives me concern about North America. It's one of the pleasant evolution where we see the investment into making organization future-ready is working very well, and the traction we have is delivering.
Cedar Ekblom: That’s great. Thank you so much.
Operator: The next question comes from Priyal Woolf from Jefferies. Please go ahead.
Priyal Woolf: Hello. So I've got three questions, please. The two are follow-up on North America. So the first question is I think you said previously selling into a lot of these onshoring projects. It's really the stuff that goes in later that benefit you more like roofing and flooring. Is that something that has shifted quite a lot going into Q3 as are we getting to the later stages of those projects? Is that what's contributed to this big step up or is it still just some of the earlier-stage products? The second question is just you've talked about wanting to be more flexible with pricing on big projects. I just wondered, again, did that help at all in that Americas division in Q3? And then the last question, you've talked a lot about gaining market share. I just wanted to check, is that broad-based across all divisions, or is it more an Americas theme? And what is that data based on? Is it the same sort of seven to nine players you discussed at the Capital Markets Day or something else? Thank you.
Thomas Hasler: Okay. Maybe on the reshoring activities. You have to see that this is not limited to the roofing and the flooring. We consider as a key player on the concrete side as well, which is very much the first part of the construction is, let's say, the underground and foundation, and that's a key element. This is also very important to be early on, on the projects in the planning phase, and it starts, let's say, with the concrete. And then it moves, of course, then with the installation with the roofs and the floor. And then later on, of course, also then being part of the manufacturing process. So this is also not to forget that later on, we have repeat business when it comes to batteries, when it comes to e-mobility, this is also -- but it is not, let's say, back-end loaded. It is actually from the very beginning of these projects that they are generating for us opportunity. And that's then also maybe linked to your second question. These big projects are for us, of course, also great opportunities for upselling. Once you have the foot in the door, then you can also -- then being close to the main contractor to the specify, you can then penetrate more solutions. So strategically speaking, when we talk big projects and we say, we want to apply also here strategic pricing, we always look at the total project potential. And then what is the lever to open this potential completely up to us and that may then also flexibilize some components that go in there to get the foot in early on and penetrate and upsell during the build phase of the construction. Not to forget on such a production side every day, there are needs for solutions, every day you have opportunities to continue to upsell and penetrate. And, therefore, to be early on is super crucial, being present on these large sites and then at the end, we can pretty much predict the full potential and make them the smart, let's say, entry door decision in case needed for smart pricing. That applies not only in North America. This is a universal approach that we take in looking at these big projects as holistically and not component by component. And then ultimately, on the market share side. And of course, we have not yet seen the reportings from others on the nine months or on the Q3, but our reading and our expectation is what we have shown at the Capital Market Day, the spread in the first six months is going to enlarge. We feel that we have more momentum there. But let's say, the verdict is out, we will gather. We use this, let's say, benchmark that we're also using to benchmark our company overall. That's also outlined in our annual report. This is a good thing to compare ourselves not only on the financials, on the growth and the profitability expansion, but then, of course, also on the market share. We use this also in the coming months, and we will compare. But our expectation is very clear when we then have the Q3 numbers in that here, our growth that moved now upwards will probably outperform the peers in Q3 again.
Priyal Woolf: Thank you.
Operator: Our next question comes from Martin Flueckiger from Kepler Cheuvreux. Please go ahead.
Martin Flueckiger: Good afternoon gentlemen. Thanks for taking my questions. Actually three, sorry. First one is if you could provide a trading update for October? And if you could also talk about your expectations with regards to the growth drivers, the organic growth drivers in Q4 by region? That would be my first question. The second question is, if I could calculate correctly, your EBITDA margin in Q3 was actually down year-over-year. It was up on the nine-month period, but based on my calculations, correct me if I'm wrong, they were down. So I was wondering whether you could explain that firstly, and secondly, how we should think about the EBITDA margin in Q4 versus Q3? And then my third question is on the automotive business. I understand the current market situation in the automotive sector. But I was just wondering how you experienced organic growth in your automotive business in Q3 and how that compares with your performance in the first half? That's it for me. Thanks.
Thomas Hasler: Okay. I take the liberty to answer the first and the third and then leave the middle question to Adrian. But when you look at the quarterly evolution of our regions and of course, here, the Americas stands out with 4.3% organic growth. But also please have a look at EMEA, which is moving from 0.4% to 1%. So the direction is also going in the right direction. And when you look back where Americas was in Q1 and Q2, our expectation here is also that it further accelerates really as much as Americas. I think here, let's say, the stimuli are not as strong, but the trend is positive. And also connected with your third question, it has to be noted when you look at EMEA, consider over this is now construction and industry combined. In the past, we had EMEA separate from global business. And this makes this year quite a difference as the automotive, let's say, reduction in build rate is mainly happening in Europe. We are facing here demand dilemma with the confusion about the electrification, the subsidies that are, let's say, running out. And so we have here, let’s say, a situation where actually demand would be there, but the incentives are not in place and the backlog is rising, but the build rates factually speaking, are moving rather to 1 million less cars produced. If we would incorporate that or exclude that the growth of EMEA of 1% would be quite a bit higher, as when you look at the total industrial change in organic, it has been minus 4.2% for the quarter three and construction is up 2.7%. So this gives you a bit a flavor that the combination in EMEA is a bit more impacted. The other two regions are less or not impacted there. You don't make a big difference, but it does really matter the 1 million cars less produced in EMEA are, let's say, on the organic growth traction in EMEA to be considered. So this 1% overall, we consider a good progression, and we also expect here the momentum to continue. We don't see any reversal. And when looking into Asia Pacific, here in Asia Pacific, even so, let's say, the quarter-by-quarter evolution is more flattish or slightly negative, clearly driven by the direct business in China. But also there, I think with the recent measures with the massive investment and the money flowing into the residential and into the stock market, I think here, that we don't see yet impact, but I think the Chinese government is also similar to the US, let's say, accelerating their programs to stabilize and to further utilize the business. And sooner or later, this will then also lead to underlying growth. And therefore, also for Asia Pacific, with China being most challenged. But I think also there, the look into Q4 and into the further evolution, my confidence is high that these measures will also stabilize and provide them again for us ground for further organic growth.
Adrian Widmer: Good. Then I'll take the second one. And here, Martin, yes, of course, your calculation is absolutely correct. Maybe a bit of color there. I mean, firstly, here, the difference is 20 basis points. And at the same time, Q3 was actually historically a very, very -- last year, a very, very strong quarter overall. Overall, I think we're managing quite well here on the cost base overall, given the continued inflationary pressure, particularly on the wages. This has come a little bit, but it's still sort of very close to, let's say, 5% underlying on a like-for-like. So we're managing here on the efficiency side, also here the synergies contributing overall. Also vis-à-vis top line growth still in an environment where we have a certain negative leverage, but clearly here improvement and the cost progression overall actually going in the right direction here in Q3.
Operator: The next question comes from Pierre de Fraguier from Goldman Sachs.
Pierre de Fraguier: Yes. Hi, everyone. Two questions, if I may. First one is I'd like to come back to potentially the September and October trends you've seen across your regions? I mean organic has improved nicely quarter-after-quarter, just to get a sense of that, how that's tracking into the fourth quarter? And maybe it's early days, but yes, early expectations relative to your 6% to 9% target into 2025. Second question would be related to the gross margin. We've seen a very nice expansion over the past two years. But 3Q, I think, marked the first sequential deceleration, so around 54% compared to 55% that pricing stable, are probably stable or down. So, I was wondering how much of that was related some of the large projects, maybe cross-selling strategy? And the rest, if you can provide color would be very appreciated. Thank you.
Thomas Hasler: Okay. Thank you from a going rate I wouldn't make a big difference between, let's say, Q3, September and now October, where there is nothing magic happening between September and October besides that we changed the clock. But I think it is -- I repeat myself, I think the momentum is predictable quite to a large degree, and we also see it now as we started the Q4, I think also Cedar commented it, we have here expectations. We have comps. So, we feel confident that the continuation in Q4 is absolutely in line with our expectation. Going into next year, 6% to 9%, that is the overall growth commitments that we stipulate in our strategy. I can't see any reason why this shouldn't apply in 2025. We are going to formulate, let's say, our guidance in February, when we then take, let's say, all elements in. But at this moment, I mean, it's, to me, one element that makes us strong -- that's our commitment overall. Of course, it will be calibrated, it will be reviewed. But at this point, I must say, there's no discussion to deviate from our long-term targets. But this will be then, let's say, refresh and then also shared in regards to our expectation concrete guidance for next year in the February full year call.
Adrian Widmer: Yes, I mean maybe on the material margin here. And I mean, broadly speaking, I would clearly say this has also been in line with the expectations also what we have guided for that from, let's say, a seasonality point of view here, the second half is typically lower than here the first. And I think that was the case. There is, of course, always several elements playing into this. We generally still also have on the input cost side here, it's particularly, let's say, the sea freight side, which is quite a bit higher. So, there is quite a few elements here playing into it, but nothing in terms of a major shift or deviation in terms of the overall material margin development. So this is quite in line with what we have also guided for previously.
Pierre de Fraguier: Great. Thank you very much.
Operator: The next question comes from Brijesh Siya from HSBC. Please go ahead.
Brijesh Siya: Good afternoon. I have two questions as well. So I think the first one is on North America. So Thomas, you talked about things moving nicely and picking up. If you say that that foundation to flooring and the roofing as well. So the opportunity is quite huge, and we see how the pipeline is building up across North America. So, when you think about in the medium term, what's the growth potential for North America business? Is it mid-single digit, high single digit? Anything you can just give a color on where you think that business has the potential to deliver in a sustainable basis in the medium term? Then the second is on the EBITDA margin and -- so kind of square the question about gross margin for this year or at least Q3 or into Q4 When you look into 2025, how should we think about EBITDA margin? Will it kind of at least go beyond the bottom end of that 20% to 20%, 23% EBITDA margin guidance to 2028?
Thomas Hasler: Okay. Let me start with the first question. I think North America is -- when you look at the underlying elements. And at the moment, it's, let's say, infrastructure, it is the reshoring, but we should not forget, North America is a growth continent. It is offering us market share opportunity gains. It is a market that will also on the residential side, sooner or later, gain traction. I expect also the interest rate to further come down. You know how soon, how quick. But underlying North America is a solid market with underlying growth potentials that I would say are above, let's say, the global average. And therefore, our ambition also, of course, to outperform is also built on leveraging our strength in North America and generating there substantial growth and substantial growth is a higher single-digit growth, not, let's say, like maybe emerging markets where we expect double-digit growth, but significant growth for a mature market, definitely outperforming underlying market. That's the mid- to long term. How much of that will realize in 2025, as mentioned here, interest play a role underlying the infrastructure spend. Just keep in mind that of this trillion of infrastructure build only one-third has been funded, which means one-third is now allocated. Some of that is actually flowing, but it's, let's say, a smaller part, but this will constantly generate business opportunity in the coming years. This is something that will probably fuel incremental volumes for the next three to five years, just by the sheer size and the relevance for us. And then what was the other the -- EBITDA. The EBITDA, we have a clear commitment to reach the 20% to 23% by 2026. And with our aspiration, again, we will then outline in our guidance call from February upcoming. But I guess, it's no surprise that the famous work for Sika is over proportional. So not making a commitment, but probably a suggestion in, which direction it goes, it will start with over something, and it will be more quantified than probably in February. But that's a clear aspiration overall that we have.
Brijesh Siya: Okay. Can I ask a supplement question to Adrian? On this other operating costs, how do you see Q4 evolving? Will that be similar to Q4 of last year or more like looking a sequential movement will be similar?
Adrian Widmer: Yeah. And here, in terms of, let's say, the underlying inflationary trend, which probably not see a major change there. There is probably a further slight relaxation, and we will continue to drive here our initiatives, particularly on the efficiency side, we will also see additional synergies. And here, I would expect that the direction will continue, which we have seen here in Q3.
Brijesh Siya: Okay. So it's basically a year-on-year basis, there will be a slight increase, but nothing major?
Adrian Widmer: On the cost side, yes…
Brijesh Siya: Yes, other operating cost.
Adrian Widmer: Yes.
Brijesh Siya: Okay. Fair enough. Thank you.
Operator: The next question comes from Ephrem Ravi from Citigroup. Please go ahead.
Ephrem Ravi: Thank you. Two questions. Firstly, could you break out the minus 0.2% constant currency decline in Asia Pacific? How much of that was China? And just to get a sense as to how strongly the rest of Asia, especially India and Japan and Southeast Asia are growing because if China is half the business, it has to be down at least 2% for the overall business to be down a little bit? And secondly, looking again into 2025, I mean, you got Kwik Bond and Vinaldom, which are probably, in aggregate, $100 million businesses at best. And so inorganic part of your 6% to 8% growth seems a little bit stretched from that point of view. So again, how confident are you about organic growth pick up into the next year to kind of meet that long-term target? Thank you.
Thomas Hasler: Okay. Let me start with the second one because just -- of course, I mean, the 6% to 9% is a combination. And it's correct, what we have disclosed so far are these two transactions. We’re working on other transactions as well. We can't, of course, share any of that, but this will also then play into our guidance for next year. On the organic growth side, I think it's pretty obvious that we are optimistic that the trend that we have generated in the past quarters is also to continue. I mentioned besides North America also the positive momentum in EMEA, very much challenged region in the past, but moving clearly in right direction, positive. To your question on China or, let's say, Asia Pacific, yes, the impact of China is significant. And here, the direct business, the direct construction business using a double-digit decline still in a double-digit decline and our distribution business that has been always, let's say, equalizing that in the past year is still growing, but lower single-digit, which then makes, let's say, the -- for the rest of region more difficult to provide a positive organic growth. The rest of the region, which is half of Asia Pacific, we have good momentum in Southeast Asia, we have a moderate growth in Japan, we have good growth in India. So it's, I would say, in line with where we come from. But I think the Chinese impact should not be underestimated especially on the direct side, it's still significant. And here, we also expect and with these measures taken that this may come then also slowly, but surely to a soft landing and then make creators next year new opportunities.
Ephrem Ravi: Thank you.
Operator: The next question comes from Jon Bell from Deutsche Bank. Please go ahead.
Jon Bell: Yes, afternoon, everyone. I think I've got three. Firstly, could you tell us about activity levels in the Water segment at present? The second one is probably for Adrian, and I'm not sure whether this is written down anywhere, but could you give us the one-time costs from MBCC in the third quarter, if there are any? And the third one, around about a year ago, you did a fairly major reshuffle of the management team. You talked about that quite a bit at the CMD. How do you feel about that a year later? Is that process now done? And have you seen some tangible benefits from that? Thank you.
Thomas Hasler: Okay. Let me take the first and the third one on the water management. I think we have highlighted that over several years to the outside, even much more to the inside, of course, as we walk the talk, and it is fantastic to see this is the, let's say, the potential even in challenged markets that investments in refurbishment of the water treatment facilities in mature markets, but also in emerging markets, the expansion of new facilities offers us a great leverage potential. Because here, the uniformity of the needs, the portfolio, we have everything for those markets, and this is a clear area where we can drive, let's say, even in challenged market growth. And for instance, in Europe, the initiatives, when residential are soft, shifting in this gives us an agile approach to offset some of the market declines. And that's what takes place. That's clearly not only since yesterday. This is now for several years, a clear call for action. It's a fantastic, let's say, area, just like the road infrastructure renovation tunnels, they are all contributing by themselves. They are significant. But if you take more activities in there, where good life exists and good growth potential is, this helps also to generate organic growth when markets are still soft. On the -- what was the third question? The management rotation, yes? A year is a long time. I think you have some introduction. All three are very senior managers, more than 20 years of experience. But again, we are not in a restructuring. We are changing a very successful company regions. And so a cautious approach with very competent teams in place. But once the leader is changed, you have some new angles to look at this. And it's fantastic to see, for instance, how Mike as an American going back, let's say, into the Americas with his eight or nine years experience in Asia is now also like bringing new elements in, and we see that also in Latin America with an increased focus, let's say, on the different segments of distributions. And we also see it in the US and in Canada, where he brings, let's say, his knowledge from Asia that drives the organization to excel. Similar, Christophe, with his very energetic management style has been well received. We see the organization likes his clarity and he's very demanding, but also very supportive to the organization in EMEA, really fully up to this agile and very growth-oriented mood. So that's well received. And then also Philip in his role in Asia Pacific, it's just a pleasure to see how well they have arrived and how well they are enhancing an already strong regional setup with their, let's say, knowledge gains across the organization. So I would say that move is one of the key moves also for Strategy 28, kind of going beyond the expected means also. We consider things that go beyond the ordinary, and this is very much the theme and the drive to each management -- or I would say the whole group management. I think I'm very proud of the group management and the senior managers to open up to new business models, to new business opportunities and always calibrating, of course, then to the most meaningful impact providing short to mid-term results. And then I think the...
Adrian Widmer: Yes, on the Q3 integration and M&A cost impact in Q3 isolated this was CHF 7 million.
Jon Bell: Many thanks. Thank you very much.
Operator: The next question comes from Yassine Touahri from On Field Investment Research. Please go ahead.
Yassine Touahri: Yes, thank you very much. Maybe a first question on foreign exchange. When I'm looking at the currency evolution, it looks like you could have, again, a headwind of maybe 3% to 4% or maybe a couple of percent -- sorry, a couple of percent next year, is that correct, based on the current spot rate? That would be my first question. Secondly, when we think about the pricing next year, so this year, pricing was relatively subdued. Do you see a more normal pricing environment of like low single-digit price increase next year? Or do you have any indication of what could be the discussion with your customer? And third question on leverage. Do you have a view of what could be approximately your leverage by the end of the year? And also could you be comfortable ramping up a little bit your bolt-on strategy in 2025 to drive more growth?
Adrian Widmer: Good. Let me start here, probably is the most difficult question on the foreign exchange. I would love to give you a prediction. Obviously, if you do this from today's standpoint, yes, there could be a bit of a support. But of course, it is very, very difficult to break currencies and I would say, historically, the Swiss franc has always been strong. I don't necessarily see here a different picture. And what I think one can say is that probably volatility will remain. And obviously, we're acting according to this. But I think it's definitely a bit too early to give a prediction on 2025 and foreign exchange rates. Although we see particularly here where we had a big negative impact on, let's say, the Asian currencies, at least here an improving trend. And then maybe on leverage, I mentioned the 2.4 times, the expectation is that this will be going further down closer to 2, maybe 2.1 around there that is sort of the overall, let's say, expectation for year-end.
Yassine Touahri: On the revenue you would be comfortable with for next year would be something below 2 times, the level at which you would be ready to go back to midsized acquisition, how should we think about it?
Adrian Widmer: On the M&A and the bolt-on side, I mean, let's say, including sort of a normal sort of level of bolt-ons, which is resulting here in sort of 1.5% to 2% of top line impact here. I mean we would be looking at, let's say, a further deleveraging probably by about half a turn, which also indicates that, of course, there is here on the financial side, flexibility for more bolt-ons. And this is anyway not let's say, a number that is caused in stone. It's an element, how let's say, strategic growth is built up. But of course, we are having quite an active M&A pipeline. We're also driving a number of projects here. And yes, to the extent there is a midsized one that makes sense we will clearly have the ability to do this from, let's say, an organizational perspective as well from a leverage perspective.
Thomas Hasler: Okay. And then maybe on the pricing. Here, I would very clear, the times are over where we talk about annual pricing expectation. I think while 20s clearly demonstrates these days are over, this were the 2011 to 2019 where this was more regular and normal. Nothing is normal at this point. We have constantly changes. So adaptive pricing is here the key. It's correct at the moment, we have a relatively stable environment, but then all of a sudden, logistics costs are spiking, some commodities have for whatever reason. So I'm refraining here also to give guidance because here, the guidance is very clear is that we have we have to have adaptive pricing in place and do that. And so we review our situation constantly, and we have an excellent, let's say, also a tool in place, an internal tool in predicting the near future and also signal then to the organization, specifically the momentum by product group, by geography and then take early measures. So this really is misleading because this is no longer as predictable and it is actually harming organizations that are too, let's say, much into long-term prediction when actually short-term adoptions are much smarter and wiser to not be surprised by evolutions on the input cost side. So pricing is an everyday topic for every senior manager, but we have tools in place that give us quite good confidence visibility in the coming three, four months. That's more than enough. That's what we are utilizing for project pricing, for list pricing for -- that's a different mode of operations than, let's say, five years ago.
Yassine Touahri: Got it. Thank you.
Operator: Next question comes from Elodie Rall from JPMorgan. Please go ahead.
Elodie Rall: Hi. Thanks for taking my question. So the first one is, sorry to come back on gross margin and the weakness that we've seen in H2. I know you mentioned seasonality, sea freight rates increasing, but I was wondering if there is any negative impact may be coming from the automotive or industrial or China exposure on top of that of the seasonality? And what kind of gross margin expectation you plan for 2025 that's still between 54% and 55%? And my second question is on the M&A pipeline. I was wondering, what kind of multiples you're seeing at the moment, margins of the businesses out there? And how quickly you think you could improve these be a bit more aggressive on M&A? And then last question is on OpEx and early views into 2025 with regard to personnel and SG&A costs, please? Thank you very much.
Adrian Widmer: Okay. Good. Thanks, Elodie, for the question. I mean, going back here to the gross margin side. As mentioned, I mean, there is obviously always a number of here impacts. You have a certain volatility on many front. There's also different markets, but there is nothing which is, let's -- let's say, fundamentally changing or deviating from, let say, the view that typically here in the second half year. Yes, they are a bit lower than in the first due to seasonality and here, there is also, let's say, no deviation from, let's say, the overall view that we are here sort of well within that range. And this is also the target here for next year to be well within the 54% to 55% range. Overall, whilst, let's say, working on all the other buckets here driving here our profitability. And here, let's say, the OpEx side, particularly relating to operational efficiency projects remain in place, I think, in terms of, let's say, giving a guidance on underlying, let's say, inflationary element in OpEx or overall cost development, obviously, depending here on a number of factors. But at least according to -- or relation wage development, I would rather see a somewhat lower pressure compared to, let's say, the last two years, on wage inflation. But that also here still remains to be assessed in a bit more detail overall. And I think on the M&A pipeline or our activity. I can say, again, we have quite an active year pipeline. It's an overall very active process where we quite specifically look at several opportunities where it makes sense. It's then also consideration what the value and the related price we're here paying. I think, where we're not seeing issues to generate value at, let's say, the prices we offer. But this is a very project specific topic relating to the impact such specific acquisition will have. But here, we continue to be quite active on pursuing several potential transactions.
Elodie Rall: Thank you very much.
Operator: The next question comes from Christian Arnold from Stifel Schweiz. Please go ahead.
Christian Arnold: Thank you and good afternoon. Sorry to come back again on gross margin. But from today's point of view, I mean Q4, is it fair to assume that it will be similar to Q3, which then brings us to the more or less the midpoint of your target range of 54% to 55%? And going into next year would be also fair to assume that we have, again, this kind of normal seasonality that the best guess today would be to be again somewhere in the midpoint of that range? That would be my first question. The second one would be on the synergies. You commented that you had CHF89 million in the first nine months, well on track to reach actually the higher end of your CHF100 million to CHF120 million range. What does this imply for next year? Would it be fair to assume that you also will be at the higher end of the CHF140 million to 160 million you are aiming for next year? And the last question would be on the momentum. Thomas, you mentioned that, yes, you assume this positive momentum we have seen that will continue, is that also from a, let's say, relative regional point of view, meaning that the Americas would be the growth drivers, so to say, outperforming the other two regions followed by EMEA, followed by Asia Pacific? Thank you very much.
Adrian Widmer: Well, I'll start here with the synergies. And yes, we're well on track. We also said here that this is particularly here an element of timing that we're making very good progress, but we will also specifically then address the synergy guidance for guidance for next year when we give broader the year in February. But overall, we remain very well on track. And then maybe again on the material margin. Here, I think we're sort of well within that range of 54 to 55, which I think as we have always said, this is for us a guidance, it's not a religion and it is where we see here the broader business playing. There is bit of volatility due to seasonality and other factors, but I mean, we're clearly here driving the overall bottom line in terms of over-proportional growth. And this is an element, which is important also internally to steer, but less of a target, which is really very much to the point and have some fluctuation.
Thomas Hasler: Good. And Christian to the growth drivers and the regional differences, I think building trust means Sika is predictable. We talk the walk. We guided at the beginning of the year, and we have repeated and repeated and we deliver according to our commitment and our guidance. What is underlying there are the trends that we are that we are communicating and reconfirming, and so when I'm positive about the outlook and the future, reading the signs reading the signs and you're are absolutely correct. The growth driver or the trends in the Americas expected to continue. The positive momentum mostly in EMEA will continue. That's an expectation. Then Asia Pacific, also there, we have seen Asia Pacific has in past years, been a growth engine by itself, and it will come back as a growth engine. How fast, how quick? We will see. But we are very much into trend reading and then bringing that in a consolidated view to you and share this, but it is all based on underlying, let's say, momentum in the business which clearly indicates that Q4 and also going into next year, Americas will be certainly on the upper side, EMEA probably in the middle and Asia Pacific, a bit on the lower side. But ultimately, all three of them, especially Americas, EMEA on a very good traction. And as I mentioned before, Asia Pacific, no concern because underlying, this is the future market. Asia Pacific has a huge construction output. It is the leading automotive region, more than 40% of the cars are produced in that region. So Asia Pacific is relevant and Asia Pacific will also find back to its as an economy into -- in a growth traction. It's a growing population, every megatrend is hit in Asia Pacific. So absolutely no concern. But we are reading the signs and we translate, and yes, we communicate, and that's why, yes, we are confident that the near future will continue as Q1, Q2 and Q3 has evolved. We don't see a disruptive element in there. And so it's giving us the confidence for the close of the year and then also into 2025.
Christian Arnold: Thank you very much.
Operator: The next question comes from Arnaud Lehmann from Bank of America. Please go ahead.
Arnaud Lehmann: Thank you very much. Good afternoon. I have three questions left, if that's okay. Firstly, on the Americas region, the 4%-plus organic growth in Q3. Would you mind giving us the standalone for North America for the US? Has the US done better or worse than the 4%, I guess, is my question? The second question is the overall 1% organic growth you've delivered year-to-date. Could you give us a bit of color by products? I appreciate your report by region. But could you give us some color also about the admixtures, the coatings, et cetera, which products are better than one and which products are below one? And lastly, I think, Adrian, in the introduction, you mentioned some gains on currency swap and accounting for it inflation. Would you mind giving us some numbers, some quantification of these FX? Thank you.
Thomas Hasler: Okay. I start with the Americas question, the 4.3% in Q3 and here no secret, the US has over-proportional contributed to that. I would say, significantly has contributed. Even so Latin America is also solid in growing. But here, the US momentum is clearly above this 4.3% going rate, very clear, yes.
Adrian Widmer: Then here on my comment on the financial expenses. As you know, let's say, our financing is a combination of Swiss franc bonds and Eurobonds. On the one hand, Eurobonds, due to market capacity but also initially in relation to the underlying currencies of the MBCC acquisition, we have now obviously progressed well on the integration, which also includes legal integration and the funds flow. So we're swapping a larger part of the euro financing into Swiss franc, which still shows me with the Eurobond interest on the interest line and then a hedging gain on the swap. Here, the impact on a year-to-date basis in terms of effectively lowering interest cost is about CHF 30 million, 3-0.
Arnaud Lehmann: And any comment by product, please?
Thomas Hasler: Okay. We don't go down to that granularity level. As you know, it's a mix target markets regions, and we do not -- I mean, we have the industrial and the construction outlined, and that's as far as we go down as we feel it's misleading and not helping really.
Arnaud Lehmann: Understood. Thank you very much.
Operator: The last question for today comes from Martin Flueckiger from Kepler Cheuvreux. Please go ahead.
Martin Flueckiger: Thanks. Thanks for taking my follow-up question. Just on the EU Commission's investigation that, if I remember correctly, started a year ago roughly on price fixing in concrete, admixtures, if I remember correctly. Can you provide us with an update what's happening there? What you've been seeing whether -- how the whole case is moving on? Thanks.
Thomas Hasler: That's a great question to close the call. This is a matter that we take very serious. It's an ongoing matter. There's nothing new to report. The investigation hasn't yet even reached, let's say, an advanced preliminary stage. So, this is very time-consuming. And we support these activities with all the means. We support fair competition in the market, but we have nothing new to disclose. It's just this may take years until we have here something to share, but fair competition is a key criteria for free markets and we contribute and we collaborate with the authorities. But I can't share anything else than that. It's an ongoing procedure.
Martin Flueckiger: Thanks.
Dominik Slappnig: Okay. Thank you very much. This brings us to the end of our call. We take this opportunity as well to highlight the date of our sales results communication. This will be at January 9th, 2025, when we have this. And this is, thank you very much for listening into our call and for your interest in Sika. We wish you all the best for the rest of the year. Bye, bye.
Operator: 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. Good bye.
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