Interview with the CEO
INTERVIEW WITH PAUL HÄLG AND THOMAS HASLER
Paul Hälg, Chair of the Board of Directors, and Thomas Hasler, CEO, explain why Sika can achieve strong growth even in a challenging environment, and why they are expecting the net zero target to generate additional growth stimuli.
COVID, war in Ukraine, unstable supply chains, and an energy crisis that is also threatening economic development – yet Sika is still growing. How have you continued to grow in such a hostile environment?
Thomas Hasler We have a very broad global set-up, with national subsidiaries in 101 countries and eight Target Markets. It’s almost never the case that all markets develop in complete parallel. What’s more, we’re also well diversified within these markets. In the construction sector, for example, we generate about 45% of our sales in the new build area, and 55% through renovation and maintenance projects.
But broad diversification does not necessarily offer protection against surprise global developments such as a coronavirus pandemic…
Hasler There's never any guaranteed protection, but Sika has acquired a great deal of expertise in coping with short-term changes, and always manages to identify and harness opportunities even in a difficult environment. For example, we expanded our distribution channel and e-commerce right at the start of the COVID-19 pandemic in 2020. This may have caused shifts between the different distribution channels, but there wasn’t any slump in sales. The pandemic boosted the digitalization trend, and this continues to have positive effects even now.
Has Sika perhaps even benefited from disruptions to global supply chains?
Hasler Yes, our strong regionalization is a successful business model. It has been useful for both us and our customers in difficult procurement and supply phases. We were able to use our own supply chains to bridge any global disruptions or interruptions.
How is Sika maintaining its EBIT margins against a backdrop of strong sales growth?
PAUL HÄLG Thanks to the local autonomy we grant on the P&L side, managers think and act as entrepreneurs, and take great care to ensure that they grow as profitably as possible. Therefore, they’re also responsible for formulating the local strategy. In consultation with Group Management, they make decisions on investment policy and the Target Markets they want to focus on.
How do you turn a manager into an entrepreneur?
HASLER We engage our General Manager in our "Best Demonstrated Practice". Typical themes here include the likes of pricing and sustainability. Managers receive a kind of “cookbook,” but precisely what and how they cook is something they decide for themselves. At the same time, we attach great importance to the fact that they can exchange their “recipes” and experiences with one another. With this in mind, we regularly invite them to management meetings where “peer-to-peer learnings” are presented.
What kind of fluctuation rate do you see among your 100 General Managers?
HASLER On average they remain in that position for just under five years. The majority move on within the Group, for example, the General Manager of a small market may take on responsibility for a larger market.
HÄLG If a manager leaves Sika, the reason is typically incompatibility with our performance framework. We provide managers with monthly updates which rank countries according to sales and EBIT growth. This ranking process allows for a certain degree of healthy competition.
How do you maintain or strengthen Sika’s impressive price-setting power?
Hasler Our prices correlate with the added value we provide to our customers above and beyond the individual product. This includes, for example, the rapid availability of goods, and the strong reliability and technical expertise of our organization. Our net zero commitment is another element of added value on the pricing side.
HÄLG A significant proportion of our products are system-critical. Take our concrete admixtures, for example, which make it possible for concrete to be pumped up to a height of 100 meters when building a high-rise structure. When you measure our products by their quality advantages and the time and cost savings that they provide, then price is not the most decisive factor. In the automotive industry – to give another example – manufacturers use a Sika adhesive that hardens much more rapidly than conventional products. This saves time in the production process, which tangibly increases productivity over the year. The additional price paid for this superior adhesive is negligible in this context.
How does the Sika brand impact pricing?
HASLER The impact of the brand on pricing is substantial. In our industry, Sika is the strongest local brand recognized worldwide. “Building trust” is a promise that we deliver on every day. On top of that, the importance of the brand has increased significantly in recent years and will continue to do so. This is something we have observed not just with organic growth, but also with acquisitions. Thanks to the strength of the Sika brand, our technology can be seamlessly transferred from one country to another.
“Thanks to the local autonomy we grant on the P&L side, managers think and act as entrepreneurs, and take great care to ensure that they grow as profitably as possible.”
Chair of the Board of Directors
After a stunning upward trajectory in previous years, Sika stock underperformed the SMI Index in 2022. How do you explain this development?
HÄLG We don’t comment on our stock price and can only assert that we have delivered in line with our strategy. So, there must be other factors influencing the valuation. Interest rates and interest rate expectations no doubt play an important role. Growth stocks such as Sika typically react to central bank rate hikes more sensitively than value stocks.
“In our industry, Sika is the strongest local brand recognized worldwide.”
Chief Executive Officer
Due to reviews by various competition authorities, closing of the MBCC Group acquisition has been pushed back and will now take place in the first half of 2023. What does this mean for the employees and customers of MBCC Group?
Hälg A 12-month phase of uncertainty finally ended for employees and customers in October 2022. Since then, we have gained clarity over which activities will be integrated, and which companies or company parts will be divested. Employees have been understanding and kept a positive attitude, but there is also some impatience – they ultimately just want to get started.
Hasler In the MBCC companies that overlap substantially with Sika, there was a fear among staff about redundant structures having to be cut. But with the sale of these companies or company parts, this fear will recede. Employees know that they will be needed by the new owner and that they have a future.
Hälg Looking back, I think it’s fair to say that our acquisitions have always created growth platforms. They offer employees new prospects and development opportunities. Sika is reliant on qualified employees and talented young staff for its growth strategy. Acquisitions help us to expand that pool of talent.
Will the expected synergies turn out lower because Sika must sell CHF 920 million worth of MBCC companies or parts of companies?
Hasler No, we’re still expecting synergies of CHF 160–180 million.
How has Sika performed on ESG over the last year?
hälg Familiarity with ESG issues grew further in 2022, and implementation accelerated significantly. Sika has been firmly committed to ESG targets for over a decade. Our sustainability strategy and net zero commitment drive our innovation efforts. The high importance attached to ESG issues is supported by the entire organization. Sustainability is relevant not only to our customers and investors, but also our employees. We are confident that we will gain a competitive advantage if we are “first movers” regarding the sustainability of our products. For younger staff in particular, that commitment also increases our appeal as an employer.
Hasler The fusion of sustainability and innovation has proved to be an important step in the right direction. For Sika, sustainability and innovation are virtually synonymous. We are pursuing a path that is very Sika-like – which means with practical and measurable approaches. Our products that enable clinker reduction lower the CO2 footprint, as do the comprehensive measures taken in the area of production – for example expanding the use of renewable energy and reducing water consumption.
In September 2022, Sika committed to achieving the Science Based Target Initiative (SBTi) net zero target. What does this mean for the organization?
HaslerThis commitment underscores our determination to drive the transformation of the construction and manufacturing industries toward the net zero target. We now have until 2024 to develop a roadmap with defined measures how to reach the target and submit it for validation. We’re working intensively on that now.
hälg This development will be accompanied and supported at Board level by the newly established Sustainability Committee.
What are the most effective levers for influencing progress toward the SBTi targets?
Hälg 98% of our carbon footprint involves scope 3 emissions. About half of these arise upstream, i.e. in connection with raw materials. On the raw material side, purchased cement accounts for around 50% of CO2 emissions. And this is where we have the most effective lever because solutions that help reduce the use of cement is a core competence of ours. We, for example, develop additives and concrete admixtures to enable the use of cement substitutes in the production of cement, concrete, and mortars. Furthermore, Sika is the leading company for fiber-reinforced concrete solutions. Fiber concrete increases both the durability and strength of concrete. We purchase the polymers needed for this from the chemicals industry, an area in which we have entered a number of partnerships – such as “Together for Sustainability” (TfS). That said, it’s likely to be a while longer before CO2-neutral substitutes are available for the polymers used today.
HaslerLet’s not forget the significant enabling effects of Sika products in this context. The positive impacts resulting from their application are not yet considered by the SBTi.
How important is the circular economy?
Hasler We see enormous potential here. Admittedly we’re only at the start of these processes and are still gathering experience. For example, we take back membranes from old roofs and prepare them for use in the construction of new roofs.
hälg The circular economy is an important lever when it comes to making progress toward the SBTi targets. The higher the proportion of material that we can recycle, the more comprehensively we can reduce our footprint.
What kind of examples do you have in mind when you talk of reducing the footprint in the construction sector?
Hasler An obvious flagship project here is the Quay Quarter Tower in Sydney. This building was showing its age – unsurprisingly, as it dates to 1976 – and would normally have been demolished and replaced by a newbuild. But instead, 95% of the building core was left in place and subjected to a fundamental restructuring that expanded the available space. Sika gave a new lease of life to the concrete structure and helped more than 12,000 tons of CO2 emissions be avoided.
A significant part of the strong growth recorded in the Americas region is thanks to infrastructure projects in the United States. Where are the best growth opportunities for Sika?
hälg The most promising opportunities in the USA are in maintenance and renovation. Projects of this kind are very challenging, as they typically must be implemented without interrupting building operations – or at least with the minimum possible disruption.
Please give us an example.
Hasler Well, take a runway that can only be shut for renovation work during the night. Given that constraint, the newly cast concrete surface must harden within just a few hours, which can only be achieved with high-performance chemical products.
hälg Another example is the renovation of bridges. Whether a bridge must be closed for four weeks or four months makes an enormous difference when it comes to the economic cost. When this factor is considered, the benefits of our products clearly outweigh somewhat higher prices for our products.
The European Union is planning for a world of virtually 100% electric vehicles from 2035 onward. How ready is Sika for this development, and what targets is the company pursuing in this market segment?
Hasler The electrification of the motor vehicle industry is developing very dynamically, and the ongoing optimization of batteries is accelerating our growth. But something often overlooked here is the CO2 footprint of the other vehicle components. Several automotive manufacturers have defined a net zero target. This requires vehicles to be recyclable and reduce scope 3 emissions. With our solutions, we contribute to vehicles being 95% recyclable at the end of their lives. As a specialist for process materials and with our expertise in the areas of bonding, sealing, damping, and reinforcing, we are the logical partner to accompany and support the automotive industry in this process of transformation.
The great majority of the 1.5 billion vehicles in operation worldwide still rely on the combustion engine. What role does Sika play in this market?
HASLER Our focus is clearly on the production of new vehicles. As mentioned earlier, these must be 95% recyclable but without compromising on safety, comfort, or reliability. Challenges of this kind offer attractive growth opportunities to a specialized provider such as Sika. Incidentally, the potential for Sika solutions in electric vehicles is around 50% higher than in vehicles powered by conventional combustion.
Including the MBCC Group, what kind of sales development are you expecting over the next two to three years?
HASLER We have set a medium-term sales target of CHF 15 billion. This year we will be formulating and unveiling our strategy for 2024–2028. This will also contain guidance on profitability. We’ll also have to answer the question of whether the market potential defined for Sika – CHF 80–100 billion as things stand now – can be increased by developing new markets. Either way, with its market share of 10%, there is still significant untapped potential for Sika.
What are the greatest challenges you expect to face in the coming year?
Hälg The greatest challenge is the implementation of our strategy in a multipolar world where national conflicts of interest are becoming ever more apparent. The trend toward the formation of blocs is giving rise to very different sets of regulations and priorities when it comes to major global issues – such as globalization, climate protection, and security policy. In this context, a prudent independent strategy and “entrepreneurial fitness” will be particularly important.