Sika AG (SIKA) Earnings Call Transcript

Good afternoon, everyone, and thank you for joining our Nine months call today will last 60 minutes. This is an opportunity for Q&A after the presentation. [Operator Instructions] With this said, Thomas, over to you.

Thank you, Dominik, and also from my side. Thanks for joining our 9 months call and I'm very happy to report on the progression of the business since the last time we have met. And here, just on the general overview, which you also have seen in the short video screen, we have been able to accelerate our local currency growth up to 4.8% over the first 9 months, which is a further enhancement and acceleration from the 6 months starting point. Also on the total revenue, we reached CHF 8.7 billion in sales. This -- Adrian will then further explain also the split with the currency and the evolution as we go forward. But here, very clearly also a very strong testimonial of our outperformance of still muted and challenged markets. Nothing changed since our midyear touch point, the markets are still very much driven by uncertainty, ongoing uncertainty as we speak. Then I think the material margin, when we look a bit deeper than sales has further still expanded 40 basis points above prior year, a clear indication also of our activities in regards to pricing and offsetting inflationary elements, but also here, I refer further to Adrian to give us details. The EBITDA margin, as also shown in the short clip, 19.2%, a further increase from the last year by 1.9%. Net profit, again, 1.9% improvement. And overall, when you look at this set of achievements, very clearly outperforming the market, outperforming through very selective, decisive initiatives looking where markets are giving us opportunities and capturing those opportunities, capturing based on our value contribution towards our customer activities demonstrating also in tough times that Sika is the best source for them to be more successful in their challenging environment. When you look how the sales contribution has built up over the 3 regions then, let me start with the largest region with EMEA that has 8 local currency growth contributing to the group. The strongest contribution in there as well, we have acquisitions, but a very strong organic growth as well. So in EMEA, we have seen the Middle East doing very strong despite a very challenging environment, strong double-digit growth continued also in Q3 and is also from a perspective what we expect in the near future. As we have demonstrated in the Middle East to all these ongoing large infrastructure projects, we are the most reliable source we bring not only the value through our systems and products, but also our supply chain doesn't disrupt any activities even if it comes at a higher cost with more complexity, Sika is the partner to stand by our customers in the Middle East that have a very challenging environment, but they keep moving on the big projects on the airports that we showed last time, activities are going there at high velocity, and we are the partner of choice for our customer in the Middle East. But also other parts of EMEA are doing well. Africa, a strong contributor, a regular strong contributor in high single-digit growth momentum. And also in Europe, we have a differentiation in Europe where the eastern part of Europe clearly demonstrate a growth momentum where other parts also a little bit weather-related, the hot summer months were is particularly more influential in the central and the Southern part of Europe. At the same time, in September, this has been recovered, and we also see challenged markets like Germany showing growth momentum. And here for the first time, we can also see that incremental funds are flowing into the infrastructure, renovation. It's still on a low level, but it's a good sign that finally, let's say, through the process of allocating funds that these funds now find a way into the market and we expect also that this is then going to further pick up over time as more and more funds than go into execution. So Europe, clearly still the most challenged market, but also here pockets of growth, green sprouts that we are working on and data centers as everywhere around the globe, very much an area where we are capturing more gains and where we are demonstrating also our ability to support large projects, large investment projects with more and more solutions that are contributing to the overall build of those data centers or large projects where customers but also specifiers and the engineering company can rely on more solutions from us. When we look into the Americas, the Americas has grown 4.1%. And I think the momentum in the Americas, as this is mainly organic growth Here, we have a very strong acceleration in Q3, above 6% in Q3. So very reconfirming direction as we also indicated at the midyear point. In the Americas and here, I have to start with the U.S., and I have to start with the data center, the momentum, which has further accelerated. It is going at a high velocity and we are capturing here also a lion's share of the opportunities that are given to us or ahead of us. At the same time, our business in Canada, but also in Latin America, has good momentum and giving us also the confidence that the Americas will further evolve on the path as we have indicated, again at the midyear point. Then we move to Asia Pacific and Asia Pacific. And here, I would just start with the China contribution, which still is very visible in the overall contribution, it's a minus 2.3% as the rebasing of our business -- construction business in China and especially also the residential-oriented business has still a very significant impact. The market hasn't solidified yet. The residential market has not stopped to deteriorate and is still strong double-digit decline, but our measures are showing that we are countering that, especially on the bottom line, the profitability, the securing our profitability is our clear target for our Chinese business. Our Chinese business is healthy, it's profitable, double-digit profitable. But the market still gives us in 1 of the 3 sectors still strong declining base that we are proactive acting on as part of the Fast Forward but also with the given momentum. The other initiatives in the Fast Forward related to China are starting to show that we are here capturing with focus on renovation with the focus on large domestic commercial manufacturers especially manufacturing in food and beverage, but in other industries as well. With our solutions for those players that are gaming up towards the international competition. They also see clearly the value of us helping them to have their infrastructure, their assets at the international level, and we gain share there. We also see that the renovation requirements in China, in general, are increasing. So in line with our expectation, our business evolves on that direct China construction business. And then ultimately, also the automotive and industrial activities even so the market is challenged, we are outperforming the market quite substantially and increased content. But let me also now talk about Asia Pacific, excluding the China contribution. Here, we have a significant organic growth. And organic growth similar to what we have seen in the Americas and also in other parts of the world. So here, it is clearly a strong contributor to our business in overall. Our performance is the name of the game. It is clearly what drives us. We're going to be the prime partner to our customer, and we are the prime partner to our customer. This has then demonstrated also how we outperform our peers. You know this chart is the chart that we are putting together every then and now when we have reported numbers from our peers. And here, more significantly, when you look on the right-hand side, when we exclude the China influence, which is mainly an influence that is -- also, based on our activities in China, we are in China as China is a key market, but most of our competitors are not in there. The peers are not active in China. And then you see the outperformance has further built in momentum in the last 6 months. And we also expect that this outperformance is going to further be pronounced going forward. One topic, I think for those of you that have joined us. Also a few weeks back at the investor event in Dudingen, the acquisition pipeline, the bolt-on transaction that we have done at the beginning of the year in Sweden, a bolt-on motor manufacturer, giving us an exciting opportunity to expand not only in Sweden but also in the case countries in Denmark, in Norway in Finland. And it's only 6 months since Finja is part of our family, but we see very good momentum in accelerating the growth of both Finja and of our Sika business and also the reception from customers is reconfirming our assumptions that we put into this transaction. So a very interesting and very decisive for the Nordic acquisition. Akkim, we mentioned at the investor event in Dudingen, it's sizable. It's a CHF 220 million company that we closed 1 month ago. We have a very strong start into this integration, and it is an acquisition primarily focused on sealants, adhesives, forms that we can accelerate as a growth platform within Sika. And you will see later on, our aspiration is to double the sales of the CHF 220 million in the next 5 years with the integration of Akkim into the Sika family. Just recently, we have closed in the U.K. aspects. It's a smaller transaction than Akkim, but it is -- again, it's one of these bolt-ons that allows us to enter more significantly into an adjacent landscaping market, which is very much connected with our construction business. It is enabling us to take advantage of this very profitable, very fast-growing opportunity first in the U.K. and then also later on become available for scaling in other parts of Europe. And then also, I want to mention, even though it's not a 9-month relevant transaction, but we just announced it a few days back, the signing of the Resonac adhesives business that we buy out of the Resonac chemical group in Japan. It will still take some time until we close, we expect by mid of next year. But again, here, it's an adhesive company active, especially on the automotive and the tiers of the automotive industry in Japan, in China as well as in Taiwan. Akkim, as I mentioned, the top line, let's say, expectation, the opportunities we have with Akkim to double the business through their network, through our network. It is well on track to deliver according to this scale showing here. At the same time, I would just like to remind our bolt-on strategy to acquire companies at a lower multiple, bring it up to us our multiple and of course, use them as accelerator of our growth -- organic growth strategy. MBCC, as a reminder, moving from 15% EBITDA to 20% EBITDA within a very short period of time and then all the bolt-ons for various contributions, very much in line with this accretive deployment of capital to enhance and accelerate our organic growth momentum. I would like to come back to fast forward a year ago, pretty much a year ago, we initiated fast forward and gave you especially clarity on the structural side. We talked a lot about our fast forward structural saving initiative. It came with a one-off cost of CHF 108 million, but it also came with an expected savings of CHF 80 million to CHF 110 million over the years. And here, we are very well on track. And the initiatives taken and also the rebasing of our China business, the construction business is all well on track. And in Dudingen 4 weeks ago, we talked a bit more about the investment into growth. As the one thing is shaping the business towards the reality that the markets are representing, especially here in China, but at the same time, investing into growth at the same moment when there's a challenging time investing through the cycle is an investment into growth, into future growth. And here at that time, we talked about CHF 120 million to CHF 150 million of investments and also here a significant return to be expected. We shared that in -- during a couple of weeks back, but I would like to reiterate some of that here. Now again, what and where are the investments going? And how are we going then also to benefit of those investments? And then on one part is customer value. creating ease of operating with us through the B2B e-shop, but the PDs that are becoming even more relevant in doing business across the globe. The digital sales support, enabling our sales team to be more with the customer more in the field, having on the tip of their fingers, all the answers that they need to provide to the customer. And then as part of that, also building up AI-based customer journeys to enhance and bring tangible value to the customer by helping our customer to be more efficient in their value creation from project prospecting into tendering, into planning, into execution. So very tangible customer value on that side. In the middle, our own supply chain, the ease of doing business, we see closer investments here into having end-to-end supply chain capability, a digital factory to drive internal efficiency but also to be closer to the customer and put systems like TMS and end-to-end systems in place that, again, makes it easier for the customer, but also easier for us to bring the products at the right time in the right quantity to the right place. And then the third element, and that's the acceleration of the innovation journey by utilizing also here AI platforms together all the knowledge, all the learnings from every day's experiments and make that available to our 1,800 chemists with an AI-supported tool here. As you know, we call it [indiscernible]. And here, every day, we feed this machine more and more information, which means these data then become more and more valuable. And these are overall also elements that make us very confident that this, let's say, future digital data-driven competitive advantage requires that you have the data and us as the largest player in the industry with having access to all core markets, we can leverage this know-how like nobody else and we believe strongly that this digital leadership is going to be a key differentiator going forward as the world moves more digital, also in construction. A year ago, I -- or not a year ago. So last time I showed you stadium as it was the football season. This time, I would close my introduction by showing you another topic. We love data centers. We are on it data centers consume a lot of energy. We see the wave ahead of us of energy sources and not only renewable but also hydro, nuclear, all kinds of energy sources are going to be according to the different geographies being built in the coming years. And again, energy provider, energy projects are large-scale infrastructure projects perfectly fitted for Sika. We are deep into this infrastructure builds. We have all the elements that are vital for creating and bundling our solution. And here, I brought this the dam, the Diamer-Basha Dam in Pakistan, it's under construction. And here, you can also see that this dam consumes all our solution from the concrete admixtures anchoring routes, coatings, waterproofing, everything that Sika contributes is on such a project. And again, a fantastic example of sizable infrastructure projects that are going to become much more vital when you focus on the right-hand side of the picture, then you see that there is an expected 15% CAGR expected in the years ahead of us just in regards to hydropower energy contribution to the overall energy mix. And here, I think we are going to talk more about energy going forward as this is clearly also not only driven by the digitalization drive and the data centers, but also the consumption and the move towards more electrical power. And here, I think highlights that I just wanted to share you like the stadiums before. A prime example of Sika's strengths to benefit from global trends. But with that, I would then hand over to Adrian to talk a bit about the financials.

Yes. Thank you. Thomas, for highlighting here our quite successful business execution. I will now like to focus and give a bit more insights on the financials of the first 9 months. In the 9 months to end of September, Sika delivered very solid revenue growth as we have heard. Let me now walk you through some of here the key elements in looking at the 9 months sales bridge. Driven by another solid quarter in Q3, organic growth was 3.5% in the first 9 months with acquisitions adding a further 1.3% of growth. This is slightly about above the first half year. taking Sika overall to 4.8% growth in local currencies. As Thomas had highlighted our growth in every region with the exception of China was strong. Here, you can clearly see this without the decline of the China construction business of around CHF 127 million in the first 9 months. We delivered actually 6.2% of local currency growth. This is up from 5.5% in the first half year, organic growth ex China was actually 4.9% for the period under review. Overall, a very strong performance in what still is subdued market and I think clearly showing that our strategies are delivering. In terms of Swiss francs turnover we delivered CHF 8.71 billion in sales in the first 9 months. This is up from CHF 8.58 billion in the same period of last year. The adverse foreign exchange trajectory reversed in Q3, reducing 9 months negative foreign exchange impact to minus 3.2%. As in the isolated Q3, the foreign exchange effect was actually positively contributing 1.5% in the quarter. So looking forward, of course, at today's foreign exchange rates, we expect a year or full year impact of foreign exchange to be between minus and minus 3% for the whole year from today's point of view. If we look at here the growth development or the sales development on a sequential basis, we have clearly shown here a reversal of the trend in the first half and have further improved in Q3. Organic sales, as mentioned, organic sales growth at 3.5% for the first 9 months. In isolation, 4.6% in the quarter, this being up from 2.9% in the first half year. Pricing has played a part in our growth after the start of the conflict in the Middle East, but we also delivered about 1% volume growth in the first 9 months, gaining further market share and in spite of a negative China. Contribution from acquisitions in the quarter, 1.5%, slightly above here of the first half year. This is due to 1 month of contribution of Akkim already, which we closed at the beginning of September. And given a chem, you should expect about 2.5% acquisition contribution in the fourth quarter. Let's now look at the full P&L and move down here from the sales line. In the first 9 months, we delivered a further expansion here of the material margin going up to 55.4%. This is base points compared to the same period of last year, which reflects procurement scale, efficiency as well as pricing and increasing input costs, and it also includes higher cost pass through or strongly increasing transportation costs that do sit in the OpEx line, but passing this on through pricing or surcharges. And dilution from acquisitions was relatively minor here on gross result level, about 10 basis points. Looking at personnel expenses, personnel expenses actually declined modestly as our Fast Forward initiatives compensated underlying wage inflation and also the addition of M&A-related headcount. Other operating expenses, on the other hand, with an increase of 5.5%, largely due to a significant higher transportation costs, reflecting both an increase in cost of diesel and the impact of driver shortages in parts of the world. But as mentioned, with this corresponding path through on the top or material margin line. As a result, EBITDA came in at CHF 1.676 billion, an increase of 1.9% and flat material flat EBITDA margin of 19.2%, including also here at 10 basis points foreign exchange drag. Our EBIT margin at 14.5% was up 10 basis points or 2.3% versus last year on marginally higher depreciation and amortization cost. Net profit came in at CHF 888 million, up 1.9% on last year and more than 10% of sales correspondingly diluted EPS also increased from CHF 5.42 to CHF 5.52 per share in the previous year. Now let's look a bit closer in terms of the individual buckets here driving EBITDA development in looking at the EBITDA bridge and the various elements delivering this 10 basis point increase in EBITDA margin on a constant currency basis. On a reported basis, as mentioned, a stable EBITDA margin of 19.2%. Clearly, on the one hand, continued improvement of our organic material margin by 50 basis points and cost savings and benefits through Fast Forward were the 2 elements here, offsetting some of the cost increases, as mentioned, largely related to a significant increase in transportation cost, also including in last year, some -- a couple of positive and one timers in the previous year. But as mentioned, this is being passed through on the top or the material margin line in terms of increased costs. So as you can see, Fast Forward is delivering at our recent Investor Day, I presented an update on Fast Forward. Also, Thomas mentioned it before. Here a brief recap. We are clearly on track here to deliver the CHF 80 million of productivity benefits in 2026. This will rise to about CHF 110 million of savings then through 2027. Now at this point at the end of the 9 months, we are run rating on a monthly basis, close to CHF 8 million of savings per month. Here, the last 2 buckets on M&A, also a solid continued revenue capture relating to MBCC, driving here 20 basis points of margin contribution in the first 9 months. This brings basically the trailing 12 months impact in terms of absolute synergies compared to the period before closing to above CHF 200 million. So here within the guided and targeted range for 2026. And acquisitions closed this year had a minor dilution impact on the one hand, integration costs, on the other hand, also PPA effects playing a role here. And lastly, excluding here the 10 basis points foreign exchange headwind, this 10 basis points improvement of EBITDA margin is underlying here a solid material margin management as well as execution here and delivery on Fast Forward and on M&A synergy capture. And with this, I'll hand back to you, Thomas for the outlook.

Okay. Thank you, Adrian. And here on the outlook. Most important or most relevant, we reiterate our outlook from end of July with the 3% to 6% growth in local currency as well as our EBITDA expectation to 19.5% and confirm our consensus at that time. We have reflected. And as you remember, in the midyear time, the Q3 is more visible than the Q4, and this is still the same. Q4 has a lot of uncertainty in there. And therefore, we also confirm what we have reiterated and guided you at the midyear point. With that, I would then say thank you and hand over back to you, Dominik, to then open the channel for questions.

Thank you, Thomas. Okay. Then we are now ready to take your questions. [Operator Instructions] The first question now, and we have already a list here goes to [ Vitush ] from Baader-Helvea.

So yes, just regarding the outlook. So if you take the midpoint of the guidance, it seems like the fourth quarter of 2026 should clearly slow down. So I think you will need something around there was 3.5%, 3.7% of growth in the last quarter of 2026 in terms of growth in local currency. So to meet the midpoint, and can you give us also a bit of color on what potentially would lead to such deceleration in organic growth for the last quarter of the year, please?

Here, I come back to our discussion we had already on that in July. Q4 Is a weaker quarter in general. It has influence, let's say, natural driven influences, weather condition can turn Q4 as well as Q1 quite a bit. But we also have the, let's say, man-made influences that we also highlighted in July, we have the midterms coming around. We have still instability in the Middle East. We have the oil price that just recently has reached another peak. So the instability is still very much prevalent. But in a quarter like Q4, those influences have higher impact than, let's say, in the strong Q2 and Q3 quarter where the industry is very, very active. Therefore, deviations from those elements can have a bigger impact than in the other quarters. And that we indicated that these are the things that we cannot control, we cannot predict. And already in July, it was a highlight that this may be a bit conservative. But I agree, it's a bit of conservative view that we have in our guidance, but it hasn't changed. And we don't see, let's say, elements in Q4 that are kind of drifting in the one or the other direction. Therefore, we have confirmed our midyear guidance.

And next question goes to Ben Rada from Goldman Sachs.

My question was just on pricing. It's been very good to see that you've been able to manage the inflationary pressure in the business year-to-date. Thomas, you made a comment just then that those pressures are getting a little bit more difficult into the end of the year. I know some of the other building materials, peers are starting to talk about 2027 pricing and additional actions you may have to take. Are you in a position to kind of share some of your views on additional pricing that you may take into 2027 to protect margins just to give us a working assumption on, I guess, how you're thinking about the contribution from price into the coming year next year?

Good. Thank you, Ben. And I think here, it's very important to say we have a very proactive pricing approach. It's not -- we're not looking into next year, make a guess. We are looking how the cost side is evolving and how this is going to impact eventually us in the near future. So our scouting and our global supply chain gives us the input material, let's say, evolution for the next 10 to 12 weeks, which immediately translates into then local, depending on the impact it has on the local lineup of products to mandate then that the local organization takes initiatives to offset those costs so that in line with the costs coming in that also our pricing is offsetting. And I think here, we have done a very good job in the last 8 months or 9 months or 8 months since we had the disruption in the Middle East. This is just about exactly how we are all going forward with these indications on the input cost. The transportation cost is also something which is very volatile. And here, again, there's a clear mandate for the local organization depending on the dependency of the transportation exposure, the diesel, the shortage of drivers here also to act proactively and included into the pricing. So our pricing modes is country-by-country different depending on the needs, and therefore, it can be -- on a monthly basis, price adjustment, it can be adjustments that are done on a 6 to 8 weeks on a 3 months, that's really very, very diverse, but the same principles are applied across the globe. And here, again, the power we have with data, the power from our supply chain also to provide this. And then also a very strong sales force that is close to the customer and bringing it to the customer knows that customers in general don't like so much, but also with clarity what is behind, how this is. And then, of course, also stressing, we bring value to you. We have also ideas how you can mitigate maybe the product price goes up, but let's then also invest into systems where you need less labor where you can take total cost out of the system is the overwhelming driver also to for our customer to accept but also engage into further enhancing our product offering, giving them relief. I call is the pain killer. The pain killer for our customers, you have to imagine it. Our customers, they have huge challenges as they can hardly offset all the cost increases, the labor and so on. They need smart solutions. And that's why in times like this, for us, it's a mandate to help to create value for our customer with a total cost view. At the same time, of course, also safeguard that we are not allowing here a lag in the cost transition.

Our next question goes to Ephrem Ravi from Citibank.

One for Adrian perhaps. Just on the transportation cost. I mean, it looks like for the 9 months, you had roughly a CHF 16 million increase in transportation cost. Can you give us a sense as to the total kind of cost base on a full year basis so that we can sort of get a percentage? And is there any way you can hedge or control that cost? Or is it all just down the pricing in terms of how you can kind of mitigate the impact?

Thanks, Ephrem. Here on the impact of the first 9 months, if this, let's say, had started the very beginning of the year, you would be right with the number you have stated. Obviously, this has started in here in March, but that's about sort of the monthly evolution you had highlighted. It's very difficult to hedge this. Obviously, this is a service we procure. I mean you have obviously elements of tendering and sort of optimizing, but that's in the end, at least here in the shorter term, which you have to accept and, let's say, find ways to mitigate it, obviously, as a part of the pricing package is one thing, but then also trying to optimize across here the supply chain. But that is the current situation, obviously, which were managing very closely also with, let's say, different effects and magnitude by country.

Our next question goes to Priyal Woolf from Jefferies.

I just had a follow-up on the outlook and the implied sort of Q4 slowdown you talked about. So I appreciate that Q4 can have an outsized sort of impact. But I guess I just wanted to check, is there anything tangible that you're seeing already, which would underpin that sort of slowdown going into Q4, whether that's October trading. You sort of talked about potential volatility around the midterm order book, general feedback from customers? Or should our interpretation be that you're just holistically looking at the world, things are still sort of going okay, but we need to bear in mind it could deteriorate suddenly.

Yes. Thank you, Priyal. And happy to go a little bit deeper. Our controllable momentum makes us very confident. The momentum that we have achieved over the first 9 months. This -- I have no doubt. This is delivering and this outperformance is delivering. To the other side, I don't have yet really, let's say, a growing concern in one or the other direction. But the midterms, which are ahead of us, I have seen my own experience quite some impacts that can be fall out of that and North America is an important market. But I don't have anything that concerns and troubles me more than maybe 3 or 4 months ago. I'm just cautious that I don't go fall into the trap that I read too much into the market, which we don't control and rather say, our momentum, I can absolutely reconfirm is robust, delivering our initiatives, these are delivering. But I don't want to take the crystal ball and read something that then at the end is maybe not materializing.

Next question goes to [indiscernible] from JPMorgan.

Just one on the Americas. Obviously, like-for-like was pretty good in Q2 and Q3, and I appreciate the potential midterm impact in Q4. But given the data center growth, how sustainable do you think this could be into '27? Will this be a region where we see potentially the strongest growth next year?

Good. Thank you. And I have to also break here with the lens for Asia Pacific. Asia Pacific, excluding the China business has grown organically 7.7%. So a significant growth in parts of Asia, in India and Southeast Asia. So I don't want to take the limelight away from Asia just because we have the rebasing in China. But you're right. North America at an acceleration from Q1, Q2, Q3. And data centers are playing here an important role, but also our infrastructure business, our commercial -- of commercial business, especially those incremental construction related to batteries, semiconductors and so forth are, for us, growth engines. So the expectation going into next year is that we also see here a good momentum, data centers. We don't foresee that '27 is going to be a dip. We have no indications. We look at the order books, the order books are still very, very full and also looking further out, but we all understand also that can change. But so far, we don't see a change. And therefore, data centers remain a high priority, not only in North America, but the speed of data center acceleration also is more and more visible in Europe, in Asia, and we are on it, and we also want to build on those opportunities in the near future.

Next question goes to Cedar Ekblom from Morgan Stanley.

I wanted to go to the Asia Pac business. We're getting into a period where we're lapping much easier comps from an organic growth perspective. and yet the business is still delivering a negative organic growth. How do we think about the organic growth for Asia Pac in the fourth quarter and in the first quarter? Are we still going to be in negative territory? Or is there a potential that with those easy comps now in the base and the rightsizing of the China footprint having played out that we should actually see maybe not positive, but at least breakeven organic growth in Asia Pac in Q4 and Q1?

Thank you, Cedar. And I think in our guidance for Q4, which is a reconfirmation of our guidance of the midyear, we have, of course, also China in there, and we don't break out individual countries or segments. But it's also correct that the rebasing in China, which started in Q3 has still, let's say, some sell-off of products that we have deprioritized in the second half of this year. So it is not a cut over where with the decision everything has been, let's say, gone. It had to also to be depleted into the market. We didn't destroy materials that we did not prioritize going forward. So this is also an effect that needs to be considered and this also in our consideration integrated. And at the same time, the residential market being still with a 25% minus similar to last year, not coming to a normalization. This is speculative when there will be eventually a deceleration. We expect next year to still to be significantly negative. And what we are doing is adapting to this reality, not just waiting, not being in here in November and then say, "Oh, what are we doing?" We have constantly adapted our approach in China, seeing also that there is no slowdown in this deceleration of the activities. So therefore, more activities have been deployed into the renovation part in the residential as well as in the direct business and therefore, also then steering the organization and the structure more towards the areas where we see that there are signs that we can build on and renovation being one, but also on the residential side, China overall has a very negative momentum, but markets, big markets, like Shanghai, Shenzhen, they have a bit better momentum. And therefore, also for us, we are shifting as we see the market shift. And for us, the priority is also to safeguard our profitability in China, which is solid, which is double digit, which is for us a key not to fall into the trap of many others to go for volume. We go for quality. We go for the renovation. We go for the cities that have a better prospect. And this, altogether, we expect also then over time, to deliver and then also become more visible to you at the outside. And if Q2 -- Q4 or Q1, we will give you then more insights when we are at that point.

Okay. I'm not sure I understand the answer, Thomas, -- like I get the puts and takes, but are we negative in APAC still I don't really know what -- where that all shakes out, strength in some areas, weaknesses in others. I don't know when we think about Asia Pac as a whole turning neutral or even positive. Is it a case that you don't have the visibility I just don't know how to take puts takes, et cetera. I would have expected Asia Pac to be turning positive by now after the downsizing because we're sort of more than 12 months post the downsizing now at least I misunderstood the time frame.