Sika AG

F:SIKA

Earnings Call Analysis

Sika's Strong H1 with MBCC Acquisition

Sika has had an impressive first half with the MBCC acquisition significantly contributing to a local currency growth of 7.9%. The material margin notably increased by 330 basis points due to the company's pricing discipline. Excluding one-time effects, EBIT grew by 6.9%, reaching a 14% margin level, while cash flow soared to CHF 316 million. The integration of MBCC after an 18-month wait is progressing swiftly, with promising synergy potential and positive stakeholder reception. Excitement is building around the growth opportunities and newly integrated 6,000 employees from MBCC. A sales increase forecast of approximately 15% for the full year reflects confidence bolstered by the material margin recovery.

Navigating through Challenging Markets with Solid Performance

In the first half of 2023, despite a complex market environment marked by inflationary pressures, there have been no significant disruptions. Positive trends have emerged, such as leading growth in distribution, sustained growth in North America driven by infrastructural developments, and a rebound in China with eased COVID-19 restrictions. These factors contributed to the company's robust local currency growth of 7.9% and a notable material margin increase of 330 basis points, reflecting effective pricing strategies. The company also accomplished a significant milestone with the closure of the MBCC acquisition, enhancing both its portfolio and future growth potential.

Financials Reflect Acquisition Impact and Currency Headwinds

Financial results reveal sales growth driven largely by the consolidation of MBCC, with organic growth of 0.7%. Acquisitions attributed to a substantial 7.2% additional growth, but the appreciation of the Swiss franc led to a substantial negative currency impact, reducing local currency growth by 6.1% overall. Specific regional insights showed varied growth patterns, with acquisition growth compensating organic declines in Europe, while the Americas achieved significant growth largely from MBCC and infrastructure projects. Asia Pacific saw an uptick in organic growth, especially from China, despite a significant negative currency impact. The fiscal period ended with an operating free cash flow improvement, and the EBIT margin, excluding one-time effects, marked an increase from the previous period to 14%.

Cost Management and Personnel Dynamics

The company exhibited careful cost management in the face of inflation and integration expenses from the recent acquisition. Personnel costs saw an increase due to wage inflation, partially offset by flat organic headcount growth. This, coupled with increased operating expenses and depreciation relating to MBCC, led to negative cost leverage. Nonetheless, efforts to temper these impacts have resulted in three out of four regions delivering strong EBIT growth, an impressive feat considering the economic backdrop.

Profitability Pressured by Financing and Macro Factors

Refinancing efforts for the MBCC acquisition, including bond issuances, have escalated net interest expenses substantially. Other financial costs burgeoned due to hedging and valuation effects amid forex volatility, as well as hyperinflation accounting in emerging markets. An increased group tax rate further pressured profitability, resulting in a decline in net profits to CHF 411.9 million. These factors underscore the financial resilience and strategic considerations required to navigate global economic challenges.

Outlook: Cautious Optimism with Sales and Margin Expectations

The company forecasts steady market conditions and maintains a positive outlook, expecting a sales increase of around 15%, including contributions from MBCC. The company also stands by its previous guidance for an overproportional EBIT increase, highlighting the significant role of material margin recovery in shaping the confidence for future performance. Caution remains regarding gross margin projections, acknowledging strong discipline will continue but suggesting a 54% exit rate might be ambitious within the immediate term.

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, welcome to the Sika Half Year Report 2023 Conference Call and Live Webcast. I'm Andre De Carlos, call operator. [Operator Instructions].

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

[Dominik Slappnig, Head, Corporate Communications & IR]

Thank you, Andre, and good afternoon, good morning, and welcome to our half year results conference call. Present on the call with me today is Thomas Hasler, CEO; Adrian Widmer, CFO; and Christine Kukan, Head of IR. We published our half year figures this morning at 5:00. The presentation to the half year 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 half year.

[Thomas Hasler, CEO]

Thank you, Dominik, and welcome, everybody, to our half year reflection. And let me start first with a view on the markets. The markets have been challenging. The environment has been, let's say, challenged by the interest in the inflationary tendency. But at the same time, no major disruption took place in the last 6 months. Therefore, the main trends have been reconfirmed and are positive. Markets have learned to adapt to this environment more and more.

If I look into Europe, which has certainly the biggest impact with negative volumes in the beginning of the year last year is we see here a steady move upwards. It's less and less impactful as it has been.

On our side, distribution is leading here exceptional growth patterns. North America, another steady growth element in our market, led by infrastructure, commercial, industrial, manufacturing giving a boost to the North American overall environment. China after a rather tough first quarter with the relaxation of the COVID measure started the Q2 rather softly, but now steady growing. Here, again, on our side, the distribution business is already back on a double-digit growth pattern.

And then finally, on our Global Business, business that is mainly the automotive manufacturing business here, we have a good base effect by the build rates that have a double-digit increase in the first 6 months. But on top of that, we have our additional content on the traditional, but especially also on the electric-driven vehicles, basically the battery business that is gaining traction.

This is the market, but now most excited about the first 6 months is our acquisition highlights. And here, of course, after 18 months of pregnancy, we were able to close and bring home the MBCC transaction on the second of May. And since then, we have been working on our first 100-day reviews with the specifications on the implementation and the synergies.

Amazing first 2 months included in our results, but also amazing in the potential that is visible through the first 2 months review. We have an accelerated integration effort here, which Adrian also will then refer to with the, let's say, front-loaded costs that have been accrued in these regards.

We have excellent feedback from the stakeholders of MBCC. Customers, employees, we have clearly brought the message across that this is accretive for all the stakeholders. In particular, also our new 6,000 employees that are now part of the Sika family, the one big Sika family, and they are excited about the untapped potential that we can now dive in and bring to realization.

On the acquisition, also beginning of actually the second semester, early July, we brought home the Thiessen Team, a mining expert in shotcrete and grouts in the U.S., which we will be able to leverage into our Canadian as well as into our South American mine business very nicely.

Here, maybe just a brief comment on the M&A side. It has been a bit slow since we had this, let's say, antitrust ongoing in Europe and in North America, but we expect now to be back into the game and more to come in the near future.

All this altogether resulted in an outstanding first 6 months. We grew 7.9% in local currency. I think the material margin increased by 330 basis points is most remarkable and is a result of our pricing discipline and excellence. The EBIT, if we leave out the onetime effects, has increased by 6.9% and is now at 14% margin level. And the cash flow has increased strongly to CHF 316 million. Also here, a strong improvement compared to the prior year period. So all in all, a solid set of performance numbers, but most excited about the acquisition and the possibilities that the MBCC acquisition is offering for the now even bigger Sika.

With that, I hand over to Adrian to go a little bit further into the numbers and the details.

[Adrian Widmer, CFO]

Well, thank you, Thomas, and good afternoon, good morning to all of you. And as our CEO said, I will now go into a bit more detail on the financial results of the first half year 2023. In a challenging environment, we delivered sales growth of 7.9% in local currencies in the first 6 months of the year, which also marked the first time consolidation of MBCC and includes 2 months of results.

Organic growth was 0.7%, while acquisitions almost entirely related to MBCC added 7.2% of additional growth in the first half 2023. Negative currency effects were significant, reducing local currency growth by 6.1%.

Currency effects were particularly negative in Q2 with a 7.7% negative impact and was driven by the strong Swiss franc against all major currencies, particularly the euro, the U.S. dollar, but also the Japanese yen as well as vis-a-vis the high inflation environment in many emerging markets. Corresponding growth in Swiss francs was 1.8%.

All regions with the exception of Global Business benefited from the acquisition of MBCC. However, growth patterns by region were quite different. Region EMEA grew 3.2% at constant currencies. Organic growth was minus 4.2%, although volume development showed an improving trend in Q2. The Middle East and Africa posted solid growth and Europe South showed a significantly improved development in the second quarter, whilst Eastern Europe and the DACH area remained very subdued.

MBCC added 7.4% of growth and foreign exchange effects at minus 6.6% were also in region EMEA significantly negative. Region Americas recorded a growth of 11%, also heavily driven by MBCC. Parts of the business in North America was somewhat negatively influenced by rising inflation and increasing interest rates, but particularly by destocking in the roofing sector. Key growth supported were infrastructure projects and ongoing reshoring activities.

Most markets in Latin America showed solid growth, particularly in Mexico and Argentina. Acquisition growth contributed 11 percentage points of growth and foreign exchange effects also turned negative in the second quarter and reducing growth in Swiss francs by 3.6%.

Sales in Asia Pacific increased off a double digit by 10.1% in the first half and as organic growth in Q2 picked up significantly, particularly China, having emerged from COVID-related impacts at the end of Q1, recorded double-digit growth in Q2, primarily in the distribution business. Also, India was very strong, while Japan stagnated in Southeast Asia showed a mixed picture.

MBCC contributed 5.1 percentage points of growth on top of the 5% organic growth, while the foreign exchange impact was the highest in this region with a negative minus 9.2%, driven by a very weak Japanese yen but also a weak Chinese RMB.

Finally, in the Global Business segment, Sika achieved a very strong growth of 16.2% in the first half year. Underlying car build rate growth was positive on the back of solid demand, particularly for e-vehicles and supply chain normalization. Sika sales outgrew car build rate growth in spite of significantly negative production volumes in the market for white goods, which is also included in Global Business and accounts for about 10% of sales of that segment. And foreign exchange impact also here turned negative -- or more negative in the second quarter, reducing local currency growth by 4.3%.

If we move down the P&L, where we have heard, delivered a significant expansion of the material margin with the gross result expanding by 330 basis points to 52.7%. This is up from 49.4% in the same period of last year. Solid pricing, which includes pricing effects from '22 as well as smaller additional pricing elements this year in combination with declining input cost led to the significant material margin expansion. Material margin continued to expand in Q2 quarter-on-quarter.

As you can see in the EBIT bridge provided as part of the half year presentation deck, there was a small dilutionary effect coming from short-term purchase price allocation effects related to MBCC of 15 basis points. Without this effect, organic material margin would have expanded even a bit more at around 340 basis points.

Reported operating costs, which include both personnel costs as well as other operating expenses developed overproportionately, but include significant one-off costs related to M&A, all reported in the other operating expense line. These onetime costs are detailed in the EBIT bridge provided as part of the half year slide deck, and I will allude to them in a minute.

But first, a word to personnel costs -- to the personnel cost side, which increased by 8% versus top line growth of 1.8%. The acquisition of MBCC was the main contributor while organic head count development was flat, but wage inflation accounted for about 5% personnel cost increase on a like-for-like basis, leading to a negative cost leverage of about 100 basis points.

Other operating expenses increased significantly, but as mentioned, were impacted by an extraordinary onetime profit last year resulting from the divestment of the Corrosion Protection business, while last year's expenses in connection with the acquisition of MBCC Group were relatively moderate and in combination resulted in a positive net impact last year of CHF 140 million. This was reported in other operating expenses.

On the other hand, onetime costs related to the acquisition and integration of MBCC in the first 6 months of 2023 were expedited and front-loaded and amounted to CHF 89.5 million in negative impact. Excluding these items, other operating costs increased by 10.8% driven by MBCC, but also due to modestly higher marketing and travel costs as we maintained high level of customer engagement and market-facing activities, leading to a negative cost leverage over here of 110 basis points.

Depreciation expense increased by CHF 26.9 million in absolute terms to CHF 220.7 million or 4.1% of net sales. And primarily due to MBCC, an additional intangible amortization of CHF 70 million in the 2 months since closing. This corresponds to an MBCC amortization expense on a 12-month basis of about CHF 100 million. As a result, EBIT decreased by 21.6% to CHF 660.4 million and an EBIT ratio of 12.4% of net sales.

However, excluding mentioned onetime costs related to the acquisition and integration of MBCC as well as the onetime gain last year, EBIT margin increased significantly by 60 basis points from 13.4% in the previous period to 14.0% or by CHF 48 million in absolute terms in the first 6 months of '23. And this, on a broad basis with 3 out of 4 regions with the exception of EMEA, delivering strongly overproportional EBIT growth.

On a pure like-for-like basis, also excluding initial dilution from MBCC, EBIT as a percent of net sales increased by 110 basis points to 14.5% compared to the same period of last year. Also here, reference is made to the EBIT bridge provided.

Below EBIT, net interest expense increased significantly by almost CHF 18 million compared to the same period of last year to CHF 42.7 million. Increase is largely related to the refinancing of the MBCC acquisition and the 3 bond issuances in November 22 as well as March and May of this year.

Other financial expenses increased by CHF 32.9 million to CHF 51.6 million in the first half year of '23, primarily due to higher hedging costs driven by significantly increased interest differentials as well as higher foreign exchange valuation effects, given the high volatility in MBCC. In addition, hyperinflation accounting impacts relating to the activities in Argentina as well as Turkey weighed negatively as well.

The group tax rate in the first half year of '23 increased from 25% to 27.5%, partially related to tax effects in connection with the MBCC acquisition and in that sense, were also partially temporary or one-off. And if so, then we were back to more sort of normal tax levels, but we also had a different country and profit mix in the first half year. As a result, net profit decreased to CHF 411.9 million or 7.7% of net sales, down from 11.4% in the same period of last year.

And lastly, operating free cash flow, as I mentioned, saw a significant increase compared to the same period of last year. In the first 6 months, we delivered CHF 316.5 million in operating free cash flow, which is up by more than CHF 270 million from CHF 39.7 million in the same period of last year.

Focused net working capital management, lower inventory valuation as well as the normalization of the supply chain were the main contributors as well as positive cash flow effects related to intercompany financing and hedging activities. Cash taxes, on the other hand, were higher.

With this, I conclude here my remarks on the results and hand back over to Thomas for the outlook.

[Thomas Hasler, CEO]

Thank you, Adrian, and I would just quickly summarize the outlook. Our expectation for the next 6 months are no massive changes in the market, which means the positive trends, the momentum that I explained initially in Europe, in China, but also the steady market in North America and in Latin America will give momentum in the second half. And therefore, we expect a sales increase of about 15%, including MBCC for the full year.

At the same time, we confirm our earlier guidance from February this year of overproportional EBIT increase here. This is excluding the MBCC effect as we have done previously as well. Here, of course, the material margin recovery is a significant contributor to our confidence in this outlook overall.

With that, I would now open up for the Q&A.

[Operator]

[Operator Instructions]. The first question comes from the line of Priyal Woolf with Jefferies.

[Priyal Woolf, Jefferies]

I'll just ask two for now. The first one is just a clarification on the local currency growth guidance in the presentation and the release that says now expected to be over 15%. So slightly pedantic, but should we interpret this to be around 15%? Or is that 15% to flow and you could come in a few percentage points above? And the context for that says that MBCC alone looks like it could be a substantial proportion of that 15%. But presumably, there's a couple of extra points from pricing and bolt-on M&A to come through as well.

And then the second question is just with regards to gross margin. Obviously, it went up substantially in H1. Is it fair to assume that pricing stays fairly flat in the second half, while raw materials continue to fall? And if so, should we assume the gross margin uplift year-on-year in the second half will be even higher than in the first half? And if so, could the gross margin exit rate actually get back within that 54% to 55% range?

[Adrian Widmer, CFO]

Priyal, let me maybe clarify your questions here. On the top line growth, I mean, it is clear that obviously, MBCC will have here a major impact as part of this guidance, given also here prevailing exchange rates that will come in probably rather at sort of around CHF 1.4 billion or a bit and below. So that's one element.

Pricing will continue to play a role. I think we have also seen here some, let's say, improving trends, while obviously, China a bit slower than anticipated, quite strong destocking activities in the U.S., which was also a bit higher than anticipated. But at the same time, we continue to be positive that there will be a clear improvement here also on the organic side overall, while maintaining quite some strong discipline here on the material margin side, but the 15% should not read 15.0%. Obviously, the exact amount we'll have to see, but it's clearly the 15% or more overall in terms of this guidance.

And on the material margin, I mentioned, obviously, there has been sort of a continuous increase here of the material margin throughout the first half of '23. And yes, pricing is rather going to be flat or there around and, as always, there is selected continued price increase in some of the raw materials, for example, cement also continue to increase. But overall, there will not be sort of a broad additional pricing element going forward. And I think there is a likelihood that obviously material margins will also increase in the second half year, although we have typically sort of a negative seasonality in this regard.

I think to look for sort of an exit rate of 54% is probably on the high side. But we're working towards that to that eventually, again, be in our sort of target range, but I don't necessarily see this for, let's say, the end of the year or early next year.

[Operator]

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

[Martin Flueckiger, Kepler Cheuvreux]

Two as well from my side. Now thanks so much for your elaborations on your growth outlook, particularly with regards to the specific markets. But I was just wondering whether you could dissect that a little bit more because we know that residential markets are the most hit. And I was just curious how you see the various market segments, i.e., resi, nonresi and infrastructure or civil engineering as you may want to call it. So just wondering whether you have some more flesh on the bone with regards to your market outlook here, particularly for Europe and North America. That would be my first question.

And then the second one, I guess, is for Adrian. If I understand Adrian correctly, he's talking about pricing around flat in the second half on a sequential basis. Or is that a guidance in terms of year-over-year comparisons?

[Thomas Hasler, CEO]

Okay. Let me start with the first question on the markets and what we see and expect also for the next 6 months. You're absolutely correct. I mean the residential market is much more affected by the high interest rates, and we see this clearly in the segment reporting. But nevertheless, it is a lesser, let's say, relevance to us than the nonresidential.

And here, I would like to start in Europe where we have seen a huge impact by the inflation and the interest rates coming in. And on the commercial construction, here, we see a tendency that the pipeline is full, but projects are still, let's say, delayed or postponed for the insecurity that the geopolitical situation offers. So we see here a certain delay that especially, let's say, in the manufacturing countries like Germany or Central Europe, clearly visible that there this momentum is not kicking in, even so projects are lined up, but not executed.

On the other hand, in Europe, we have this positive trend on the distribution side, which is fueled by incentive programs that are still kicking in, in Southern part of Europe, in France, Italy and Spain, where we are back to a double-digit growth in distribution. These investments are going mainly into residential refurbishment, energy upgrades that are driven by subsidies from the Green Deal. So this is a bit offsetting, let's say, the general residential difficulties that also in Europe are very clearly visible.

When I look into the North American dynamics, the North American dynamics is very strong on the commercial infrastructure elements. Here, we see full fledged investments. Our concrete business, our waterproofing business, which is a precursor for the activities, is up double digit. And that's an indication that there the projects are starting to be executed and more to follow.

So here, we have a very positive momentum. It is also fueled by the reshoring of industries. It's the chip industry, the e-battery topic that is coming more and more back to the North American manufacturing. This is very positive. The infrastructure investment, the refurbishment of infrastructure, a very healthy element and very important for us since this is the majority of our business. The residential North America is, for us, a rather small portion. And yes, we do see they're tensed in the volumes because of hesitation to invest. This would be kind of the 2 main markets and the trends that we see.

[Martin Flueckiger, Kepler Cheuvreux]

But just a clarification on residential -- sorry, just to clarify, the residential assessment that you've just given on North America, housing starts have stabilized. You don't see stabilization on the residential side yet?

[Thomas Hasler, CEO]

The housing, as mentioned, it is, for us, a very small portion of our business. That's not the key business. So we see it indirectly through our big box business that goes mainly into the residential. And there, we don't see a huge difference from Q1 to Q2.

[Adrian Widmer, CFO]

Maybe then the clarification on the pricing. Yes, this is meant to be sequential from here, basically a flat development. On the other hand, we also have seen last year, sort of in terms of the impact of incremental pricing a flattening curve, but overall, yes, the comment was meant basically sequentially from here.

[Operator]

The next question comes from the line of Markus Mayer with Baader-Helvea.

[Markus Mayer, Baader-Helvea]

I have three questions, if I may. One is an add-on question to a question before and I would ask them. Firstly, the add-on question on Americas. You have said we have elevated a different kind of precent. But as have already seen as a positive impact from the U.S. IRA program specifically as many companies who are reporting that many projects related to previous IRA have been delayed. And then secondly, can you give us a little more flavor on the underlying MBCC margin for modeling purpose?

[Dominik Slappnig, Head, Corporate Communications & IR]

Markus, sorry, can you repeat quickly your first question? Your voice is not -- it was not so clear.

[Markus Mayer, Baader-Helvea]

Okay. So my first question was an add-on question on the Americas business, in particular in North America. You -- have you seen already a positive impact from the U.S. IRA program? As we have heard from many companies that they see a delay in related projects there. And just a clarification if this is also the case for you. And then I have 2 other questions, and maybe it's better to ask the questions one by one.

[Thomas Hasler, CEO]

Okay. I mean the first one, I don't -- I cannot refer to what others are seeing, but we have very strong feedback from our organization that they become real and that is driving our growth rates on the concrete and waterproof. The more concrete is poured and volumes goes into infrastructure, into main commercial construction and this is flowing. This is real and this is related to projects that are kicked off from the government side, the IRA as well as from private investors, reshoring takes place as we speak.

[Markus Mayer, Baader-Helvea]

Okay. And my second question would be on the underlying MBCC margin. If you could quantify it? Is this still a certain indication? Is it in line with the margin we have seen when we announced deal? Or has it changed? And if so, what has happened there that we also can get a feeling for modeling purposes for the next quarters are looking like?

[Adrian Widmer, CFO]

Yes, Markus, on the margins of MBCC maybe here 2 or 3 comments. If we look at material margin level, the slight dilution has basically all come from temporary effects. The material margins are at the very similar level as, let's say, the rest of Sika to start with. On, let's say, the profit margins here on EBITDA level, incoming EBITDA margin is about 15%. This has not changed compared to, let's say, the announcement progression, given some of the pressure was a little bit less, but very broadly comparable.

What we will see is obviously a higher element of amortization, which basically then translates into an incoming EBIT. If you consider that the purchase price allocation amortization of around 8% and overall obviously increasing with the synergy realization and the amortization expense, let's say, not increasing in absolute terms. They will actually go down over the years. And in relative terms, they will have a lesser impact going forward as there will be growth.

[Markus Mayer, Baader-Helvea]

On your guidance with the closing of the MBCC, do you reflect your ambition to achieve over CHF 12 billion in sales for 2023? But since '24 effect has significantly worsened and, therefore, I guess, we have not repeated this number or this ambition. Was it still -- is there still internally the target to achieve the CHF 12 billion revenue target for this year?

[Adrian Widmer, CFO]

It's also a bit a tricky thing with obviously absolute numbers given the strong Swiss francs overall. And we have all seen here the Swiss franc strengthening in the second quarter and continue to do so. Let's say, at this development, I think the CHF 12 billion will be challenging.

[Operator]

The next question comes from the line of Homani Ebrahim with CIC.

[Ebrahim Homani, CIC]

Two questions, if I may. The first question is about working capital. It has improved in H1 compared to H1 2022. What to expect in H1 -- in H2, sorry, compared to H1? And my second question is about personnel expenses, which increased by 17% in H1. How do you explain this, please?

[Adrian Widmer, CFO]

Yes. On the working capital, this -- I get an echo here. Yes, I think it's better now. On the working capital, here, you have seen that this has been one of the strong contributor to our strong operating free cash flow. And I clearly see here more, let's say, an upside coming from the working capital side as we continue to work through, let's say, the -- particularly on the inventory side, the normalization and going back to, let's say, the old efficiency given the supply chain disruption or the valuation side will have an impact.

And secondly, I think also on the receivable side, particularly now with MBCC having a similar type of seasonality, there will be more positive working capital effects in the second half year.

[Operator]

The next question comes from the line of Arnold Christian with Stifel Schweiz AG.

[Christian Arnold, Stifel, Nicolaus & Company]

I have a question on MBCC. If I look at the half year report, Page 16, here, we see that you have a net cash outflow of CHF 3.1 billion. And in addition, you took all the financial liabilities of CHF 1.9 billion, hence involved enterprise value is around CHF 5 billion for 2/3 of the MBCC you have now acquired. Back in November, you talked about CHF 5.5 billion enterprise value for the whole MBCC. So does it mean that you've actually got some CHF 500 million for the disposed MBCC activities? Or am I missing here something?

[Adrian Widmer, CFO]

Thanks here, Christian, for the question. This is not quite right, obviously, here the enterprise value of the business sold was higher than that. Obviously, there is a certain element of tax leakage also related to some of the transfers that need to be done, for example, on the IP side, which is usually a cash out that comes later and comes in future at an improved tax effect as it's already in the right place and as we have all the other, let's say, owner ship off, let's say, the brands and the intellectual properties overall. So that's one effect.

The other one is on the cash flow side, where similarly to ourselves, the cash flow buildup was a bit more significant compared to the original target given the strong increase of cost and pricing. Also, this is an opportunity going forward to reduce this as I was talking about this just relating to the question before. So overall, we also have a positive element in future coming from this carve-out, which initially led to a somewhat higher cash outlay and was part of the overall acquisition cost.

[Christian Arnold, Stifel, Nicolaus & Company]

Okay. And maybe also in relation to that, you gave on your EBIT bridge, this indication about the amortization -- intangible amortization on an annual basis of CHF 100 million. Is this linked to the intangible assets of CHF 1.3 billion you have acquired now? Or will also the generated goodwill of some CHF 3.4 billion being reduced over time?

[Adrian Widmer, CFO]

Yes. No, this is entirely related to amortizable intangibles, which is the CHF 1.3 billion we took on the balance sheet. The CHF 100 million of annual expense are for the next 12 months. There will be a step-down the year later of about CHF 8 million. Then again, CHF 7 million in the year later in '25, '26 and would then remain at around CHF 85 million per annum for the next few years.

[Christian Arnold, Stifel, Nicolaus & Company]

Next few years means next 10, 12 years?

[Adrian Widmer, CFO]

6 or 7, yes, and then there is a sort of a gradual decrease.

[Christian Arnold, Stifel, Nicolaus & Company]

Okay. And the last question would be on the net debt. By midyear, your net debt is around CHF 7.4 billion. And I'm fully aware that we have here some seasonality in terms of cash inflow and also that MBCC has generate cash only for 2 months. So the net debt level, of course, will be declined, yes, until year-end. Do you have here kind of a guidance where we should land at the end in terms of net debt? And maybe in relation to that, are you thinking of going for an early redemption for your convertible bonds, which actually is technically possible?

[Adrian Widmer, CFO]

Yes, here on the net debt level, I mean, this is, of course, very much related to, let's say, the pattern of cash flows. And yes, the second half will be a lot stronger. I would clearly expect here the net debt level to reduce substantially here in the second half year and the so-called soft call is clearly an option in this regard. We haven't taken a formal decision yet, but that's a possibility, as you say, as we're currently in that window where this is possible.

In terms of, let's say, the leverage, and it is -- I would see coming down and now without the soft call to around 3x on a full year basis. If you were then to exclude, let's say, the onetime cost and allow for 12 months EBITDA contribution which will only be 8 months of MBCC, this would even be more below 3x already at the end of the year. And the soft call will then reduce this by another half a turn or...

[Operator]

The next question comes from the line of Bernd Pomrehn with Vontobel.

[Bernd Pomrehn, Vontobel]

One question left, please, again, on these financial liabilities of CHF 1.9 billion, which you took over with the acquisition of MBCC. What kind of financial liabilities are these? Are these mainly bank loans? Because I think MBCC had no bonds outstanding. So obviously, I want to model your interest costs going forward and, consequently, would appreciate some information about the nature of these financial liabilities.

[Adrian Widmer, CFO]

Yes. Let me clarify this. I mean these financial liabilities, it says we repaid at day 1. So this is basically with the exception of about CHF 100 million, which are ongoing leases on the balance sheet. They are all repaid and refinanced through our takeouts we have done. So there is no other or additional debt that's all included here in our combined balance sheet and has been fully repaid.

[Operator]

The next question comes from the line of Yassine Touahri with On Field Investment Research.

[Yassine Touahri, On Field Investment Research]

Yes, I just would like -- could you speak a little bit more about the development of MBCC? I know that you are in all of the assets. What are your -- do you have any positive surprise, any negative surprise? Anything you're excited about? Any adding challenges that you see in the future?

And I'd like to also -- can you have a view -- do you have a view of the development versus last year? Are volume growing? Is the gross margin improving? What kind of outlook do you see for the concrete admixture, for the second part of the year? Would be very helpful to get some color about the assets and your plan and the perspective as well for the second part of the year and maybe midterm as well.

[Thomas Hasler, CEO]

Okay. Yassine, let's take this question. I have been traveling a lot and will, again, this weekend go to Saudi and Middle East. So it's clearly a key topic for me to follow up on MBCC. And what we can see, let's say, the underlying business is quite strong. We see that the business has not suffered.

It was a long period of uncertainty, but we see that on day 1 when it became Sika and since then, there is no disruptive element or there is no, let's say, confusion. The organization is fully up to the task, is fully let's say, excited and engaged. And on the, let's say, the price side, on a very positive side is that the -- when the first 2 months have passed and when I was in Japan or India, markets where we have, let's say, strong organizations on both sides.

The -- when the details came to the forefront, we could clearly see that the complementarity is even bigger and stronger than initially anticipated. Even in areas like the admixture business where you would assume that the 2 leading companies would have a much stronger overlap.

For instance, in Japan, we saw that only 5% of the customers are really sourcing from the #1 and #2 in the market and, therefore, leave a huge room for further synergies on the sales side in this important market for us, similarly in India and in other regions. And as I mentioned, I'll go to the Middle East, another exciting hotspots where the economy is booming and where the concrete and admixture market, especially, is super strong.

And also there, I expect to see a continuation of that very positive element where this addition of the number one and two is leading actually to more opportunities than even anticipated. Besides, of course, that now the product offering in the segment of concrete admixture is super strong and is almost unchallenged -- unchallengeable by others because we have now really the full innovation pipeline for the future ready and also very strong backup with the supply chain that is coming together. Maybe you asked specifically about...

[Yassine Touahri, On Field Investment Research]

Yes, I was asking specifically about like the development versus last year, if you've got a view on the margin side or the volume or the pricing.

[Thomas Hasler, CEO]

Yes. And there, I mean, you have seen that the material margin evolution from our side is also clearly visible on the MBCC side. The material margin recovery has been a key for MBCC as well, and this is in line with our expectation. Also profit line, I think Adrian mentioned it, the incoming EBITDA level is as expected and leaves further room for improvement.

The markets on the admixture side, I would say, are probably the most attractive at the moment, globally speaking, since, as I mentioned, North America, concrete is high in demand. Infrastructure is growing. But we see also the same in China. We see the same in Asia in general. And we also expect that this will become more pronounced in Europe even so with a certain delay because of the mentioned, let's say, hesitation to commit to big projects, especially on the private side. On the public spending, I think that's not a huge difference to before.

[Yassine Touahri, On Field Investment Research]

Maybe just a very last question on the -- you mentioned in your Slide 12 short-term PPA impact of minus 0.2%. And what does it mean? Is it something that is only visible in H1 that will disappear in H2? What is it related to exactly?

[Adrian Widmer, CFO]

Yes, it's a very specific element relating to the sort of the revaluation of assets-liabilities, which includes the inventory which you also have to basically revaluate market value as opposed to cost. So there is a margin impact, but there will only be a certain residual impact left for Q3 and then this impact will cease to exist and will also not exist next year.

[Operator]

The next question comes from the line of Pierre de Fraguier with Goldman Sachs.

[Pierre de Fraguier, Goldman Sachs Group]

I have questions regarding the operational efficiencies. So you've been targeting 50 basis points extracted on an annual basis. I was wondering how did that actually play out in the first half? How do you expect that to evolve in the second half? And maybe if we step back and look to the longer term, what's the potential to continue to extract this operational efficiencies, especially with the now combined entity, Sika plus MBCC?

[Adrian Widmer, CFO]

Yes. Thank you, Pierre. Yes, here on the operational efficiency initiatives, they are very important initiatives to sort of continuous improvement areas across the value chain. In the first half year, we're pretty much tracking the 50 basis points on the OpEx level. And I would clearly say that in the second half, we should be very well on track to deliver those efficiency on a continued basis.

Going forward and also here, we believe there is still lots of room, particularly, let's say, on the operations side, on the footprint side, on the alignment and in this regard. And you're absolutely right, the, let's say, alignment with the MBCC footprint and also on the logistics side in production, but also including some of the products that are relatively similar and can be combined and made more efficient. There is quite some room to come. So this will continue to play a role in our overall improvement of margins going forward.

[Pierre de Fraguier, Goldman Sachs Group]

Great. And how much of that has been factored in the guidance synergies for MBCC, i.e., would that be incremental due to the guidance synergies?

[Adrian Widmer, CFO]

Yes, we will certainly not be double counting. There are specific initiatives where there is, let's say, major moves, but in terms of which will be counted as synergies or what we will be reporting out as ongoing operational efficiency improvements will then obviously not be the same as on the synergy side. I mean, at some stage, obviously, there is a bigger pool to basically optimize. But the clearly identified moves will be shown on the synergies.

[Operator]

The next question comes from the line of Sebastian Bray with Berenberg.

[Sebastian Bray, Berenberg]

The first one is on the raw materials basket of the company. I appreciate that a raw material tailwind becomes more pronounced as the company works through inventories that have been bought in at lower prices. But if one were to compare the behavior of an aggregate basket of raw materials in August, let's say, versus July, would this be roughly flat?

My second question is on personnel costs. I didn't quite catch the answer. I think it was a line issue to the question that was asked on this earlier. But did personnel costs largely develop as the company had been anticipating at the start of the year or were they more inflationary?

And my third one is just a more theoretical question. Much of the acquisitions that Sika have made over the last 3, 5 years have been targeted at the infrastructure space, and I imagine it might start to run up against hard barriers when it comes to market share in certain areas. For future M&A, is it possible we see an increasing precedence of residential?

[Adrian Widmer, CFO]

Good. Well, Sebastian, thanks for these questions. Let's answer them one by one. On the raw material side, in terms of the overall basket, obviously, sort of -- we cant's -- it's sort of difficult to exactly answer and still even month-on-month, but we clearly have seen lately a continued decreasing trend which is continuing.

Now obviously, it also takes a certain while that this has filtered through in terms of the P&L. But yes, it is correct that the input cost trend on the raw material side continues to go down in that sense is having a positive effect.

On the personnel cost, there is not really a difference compared to expectation. I said in my initial remarks that there is about a wage inflation of around 5% across, let's say, the group as we operate and also traditionally quite high inflationary environment. This is clearly a bit higher than what we typically see, also higher than last year as already indicated. This is not a surprise. And obviously, here, we're working also on as part of the efficiency measures to here improve efficiency across the board, but this wage inflation will probably not be dissimilar in the second half as in the first half year.

And -- but the third one was on the acquisitions. I guess, I would slightly disagree here that the acquisitions in the past were particularly targeted on the infrastructure side and we had a lot of acquisitions. And then here, power exist is a clear and the biggest one here on the building finishing side, also sort of heavily going through the distribution channel, which will continue to be a mix going forward as we continue to see opportunities in many, many areas. And I don't think it will become prohibitive in any way to continue to make acquisitions also, let's say, in the infrastructure space.

[Sebastian Bray, Berenberg]

That's helpful. Just a small technical question. Tax rate post MBCC on an underlying basis, leaving aside one-offs in '23 is low 20s roughly on a going forward basis?

[Adrian Widmer, CFO]

Yes, we'll probably, for the full year, also leaving for the one-off side be slightly higher than in the previous year. But as we sort of continue to progress, basically, this will come down to sort of similar Sika levels overall. So you can assume that this will, let's say, come back to sort of the levels we have seen in the last 2, 3 years.

[Operator]

The next question comes from the line of John Fraser-Andrews with HSBC.

[John Fraser-Andrews, HSBC]

First question for me is on EMEA sales. Thanks for the comments on flagging what's going on there. But do you see that the strength in Southern Europe and Middle East, Africa and the lower base in the second half is enough to have a positive outcome in the second half on volumes in EMEA? That's the first one.

Secondly, synergies, the CHF 200 million, I believe the integration costs will be front loaded and perhaps, Adrian, you could just sort of flag out the timing of the integration cost of CHF 200 million. And then likewise, will the synergies also be more front loaded on the cost side than you originally anticipated? And perhaps you could sort of put some numbers on those in '23 and '24.

And then on -- the third question is on the MBCC margin. The EBITDA has come in at 15%. You've reported 16.5% within the overall business in half 1, which is down for reasons you've set out from sort of usual at 17%, 18%. So how quickly can that MBCC margin assimilate with the Sika margin and what needs to be done there?

[Adrian Widmer, CFO]

Yes. Thank you, John, for the questions. Let me sort of tackle some of them, and I'll leave the EMEA one to Thomas. On the acquisition of the onetime cost, the CHF 200 million, we have also indicated that we see about sort of CHF 120 million of onetime costs this year. So there will be another sort of CHF 32 million to come, which would then pretty much conclude the overall cost.

There may be some smaller elements in 2024, which means that sort of the CHF 200 million in total, may be slightly exceeded, but only slightly, given the carve-out activity and all the elements we have done. And we have very much advanced this and had to advance it, but also at the benefit that synergies in some areas are materializing earlier. We believe we can already achieve about CHF 25 million this year in '23.

And then although here that the phasing has not been fully concluded, so I can't give you a detailed figure. But the lion's share of, let's say, the remaining synergies will then materialize in '24 and '25 with the phasing then communicated a bit later. We need a few more weeks on that.

On the EBITDA margin and sort of the question when the MBCC 15% sort of live up or move up to, let's say, the normal Sika margins and clearly the 16.5% is impacted by one-offs, which is not representative. But going back to, let's say, normal levels, we see this by '26.

[Thomas Hasler, CEO]

Okay. And then, John, I'll try to answer your first question on Europe. And here, can the positive trend in Europe South, Middle East, Africa offset and bring, let's say, the organic growth, which is at minus 4% in the first 6 months to a breakeven. I think here, we clearly see that there's good momentum there. It is double-digit in growth. Now also in Europe South, on the distribution side, that's very reassuring. And we also see that the Middle East is further booming and growing. Also Africa has very solid double-digit growth, and Turkey is contributing.

On the brighter side, also, we see after a very harsh start that Eastern Europe is slowly moving upwards from a very negative trend into more neutral ground and that -- we expect also that probably in the next 6 months to contribute overall. And the, let's say, and the DACH region, Germany and the Central European may then also see that it is offset by those elements when we go into Q4. But this is a bit speculative. This is not yet, let's say, secured. But our optimism that this trend will further accelerate. We don't see any reasons why not. But at the same time, we haven't yet seen how the markets are then really evolving in the near future. But we expect, and that was always my expectation that given also the tough comparison, Q1 in EMEA is the toughest one. Q2 is probably the low point compared to last year. And now we see Q3 and Q4 further improving. And ultimately, yes, I'm quite optimistic that EMEA will be on the positive side contributing to the group towards the end of the year.

[John Fraser-Andrews, HSBC]

One more, actually. You set out the purchase price allocation time line of costs. Could you just rehearse that, please, that there's CHF 100 million in the next 12 months, and I didn't capture all the other numbers.

[Adrian Widmer, CFO]

Yes. The 12 months thereafter going down to CHF 92 million. And the next 12 months would then be CHF 85 million, and then we will see a plateau for about 6, 7 years at CHF 85 million.

[Operator]

The next question comes from the line of Stefanie Scholtysik with Mirabaud Securities.

[Stefanie Scholtysik, Mirabaud Securities]

I have an additional question on your sales guidance. I mean you're guiding 15% including MBCC. And at the full year, you were so kind and broke the 6% to 8% down on what was bolt-on, what was pricing and what was volume. Does this also include bolt-on acquisition to 15%? And how much would be coming from bolt-on? And speaking of that bolt-on, how much of your growth in the first half was coming from bolt-on?

[Adrian Widmer, CFO]

Yes. Stefanie, I'm happy to give you a bit of color. Yes, there will be bolt-ons, I mean, given, let's say, the phasing and given the almost 0 impact as we still had a bit of a divestment impact. The actual sales impact was a near 5 -- sorry, CHF 4 million in the first half year. So we are sort of assuming that, let's say, the bolt-on impact for the full year will this year not be more than 0.5 percentage point of growth. This is not to say that there will not be, let's say, more M&A transaction coming, but they will not have, let's say, given the timing, the significant impact this year.

[Stefanie Scholtysik, Mirabaud Securities]

Okay. So then, I mean, in fact, it is a lower sales guidance and this lower sales guidance is mainly coming from lower bolt-ons because you're busy with MBCC and had no time to go for bolt-on? Or were there no targets around? Or...

[Adrian Widmer, CFO]

Yes. No. I mean we continue to have quite an active pipeline that what Thomas was alluding to. Obviously, there was a number of antitrust processes running here in the background. It was, let's say, more difficult to navigate, obviously, additional acquisitions on top of this. But -- and this is certainly not, let's say, changing in strategy or slowing down our acquisition pipeline and remains quite robust and there will be more to come.

[Operator]

The next question comes from the line of Yves Bromehead with Societe Generale.

[Yves Bromehead, Societe Generale]

My first question is just on the comments that you've made on the OpEx, Adrian. I think you flagged that you had dilutive impact of 100 bps on personnel expense and on the other OpEx line. I'm just wondering for the second half of the year, do you expect a similar magnitude of dilution? Or should we anticipate some improvement with regards to the OpEx line?

My second question is on the automotive business. If I look at where you stand today in absolute revenues in H1, you're not too far off from 2018, 2019, albeit the volume may be still quite below that. But you've also taken quite significant cost savings in the time being. So I just wanted to understand the gap of margin that still is the case today between H1 '23 and the historical of 2017, 2019? And how should we think about that going forward, please? Is there any way where you could get back to sort of the 2019 levels by the end of H2 on an exit rate? Or is that too early?

[Adrian Widmer, CFO]

Thanks, Yves. Let me talk about here the cost on the personnel cost in the OpEx side and the development first. In terms of the personnel cost and, let's say, the inflationary element I was alluding to before, this is probably not going to change significantly in the second half year, neither to the worst nor to better. We will see a bit more efficiency elements also with, let's say, increasing volumes and lower dilution. On that line, it will be a bit less so. But I would clearly see on the other OpEx, an improving picture in terms of negative leverage in the second half year.

And then on the Global Business side, I think in terms of margin improvement, yes, we're making good progress and the cost side is one that we have also taken here at the time, obviously, where sort of volumes were impacted by various factors, particularly on the supply chain side of our customers to also here. Optimize pricing and reestablishment of the material margin is an important element as well on top of, obviously, here, the volume leverage.

So I would see here an improvement -- a further improvement in the second half, clearly with the ambition to go back to, let's say, the levels of '18, '19, but this will not yet be for this year as we're still sort of working through some of the elements, but there will be more upside next year.

[Yves Bromehead, Societe Generale]

Adrian, sorry, when you say an improving picture on negative leverage, just so my -- just so I understand correctly, you mean less of a dilutive impact in 2H '23 versus what you've seen in 1H. Yes. Okay. Very good.

[Operator]

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

[Dominik Slappnig, Head, Corporate Communications & IR]

Thank you. And this brings us to the end of our call. We take this opportunity to highlight the date of our next Capital Market Day. It will be in Zurich on October 3. And with this, we thank you for listening to our call and for your interest in Sika. We wish you all the best and a very great summer. Bye-bye.

[Thomas Hasler, CEO]

Thank you. 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. Goodbye.