Sika AG

F:SIKA

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, welcome to the Sika Third Quarter Report 2018 Conference Call. I am Gay, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Dominik Slappnig, Head Communication and Investor Relations of Sika. Please go ahead, sir.

[Dominik Slappnig]

Thank you. Good morning, good afternoon, and welcome to the Sika 9 Months Results Conference Call. We published our figures at 5:00 this morning. And now, our CEO, Paul Schuler; and our CFO, Adrian Widmer, will provide further details on the results. Afterwards, they will be ready to take your questions. I will now hand over to the Paul Schuler, who will start with the highlights of the first 9 months.

[Paul Schuler, CEO & Member of Group Management]

Okay, good afternoon, and thanks -- thank you for joining the call. I'm happy to inform you about a very motivating third quarter closing. In the first 9 months, we had an excellent sales growth of 14.1% in local currency and 15% in Swiss francs with the new record to CHF 5,323,000,000. All our region were able to grow. EMEA, I mean, the Europe, Middle East and Africa, increased by 14.4% in local currency. We recorded double-digit growth in many countries and areas as Eastern Europe, Africa, the Middle East and a strong solid growth in Spain, U.K. and other companies (sic) [ countries ]. The newly established region America has an excellent run with also 13%. Double-digit growth in the U.S., Mexico, Argentina and Ecuador. Brazil posted a sales growth of 8.8% after some difficulties, and Colombia with 5.4%, we also had... In Asia Pacific, we grew by 4.8%. Double-digit growth in India and Indonesia. China's construction market picked up further, enabled us to grow with a strong 9.5%. Solid growth of 4.8% in Japan. In some market, we had some difficulties like Malaysia, Thailand and the Philippines, but overall, we're happy with the growth rate.The segment Global Business includes our automotive business with the new acquisition, Faist, and the Sika Axson Technologies, our market leader in tooling and wind industry, with 29.9% an excellent run mainly driven by the acquisition effect. Thanks to greater market penetration and structural growth, our automotive business grew clearly faster than the market. The pressure from high input cost, like raw material, were well managed through many price adjustment. However, we're still lagging a bit behind. Volume growth, together with disproportional low-cost development resulted in a strong EBIT improvement. The one-off cost effect in connection with the resolution of the dispute in Saint-Gobain of CHF 23 million negatively impact the EBIT. However, notice that improved by 9% to CHF 728 million. Net profit growth by 10.5% to CHF 527 million.In the first 9 months, we continued to invest in future growth in the market by opening 6 new factories and found a new subsidiary in Honduras. With the acquisition of Index in Italy, we should see secured market lead in the roofing, waterproofing business; and the closing of Faist in February extended our access and offering to the automotive industry. With Polypag, we acquired the market-leading polyurethane foam systems. The integration was excellent, and the synergies are even higher than expected. So overall, we had a great run. And I would like to hand over now to our CFO, Adrian Widmer. He will guide you through the financial information. Adrian?

[Adrian Widmer, CFO & Member of Group Management]

Thank you, Paul, and good afternoon, everybody. Following our CEO's business summary and the presentation of the highlights, I will now give you some further insights into the financial results of the first 9 months of 2018. Q3 saw a continuation of the dynamic sales growth of the first half year with 9-month sales 2018 increasing by 14.1% in local currencies. Organic growth in the third quarter even ticked up slightly from the 6.8% increase in the first half year to 7.4% in Q3, resulting in a strong organic growth year-to-date of 7.0%. Acquisition contributed another 7.1% year-to-date. Translation impact was negative in the third quarter, negating part of the positive foreign exchange impact in the first half year, resulting in a modest year-to-date positive impact of plus 0.9%. Total sales in the first 9 months were CHF 5.323 billion, which represents a growth of 15% in Swiss francs. And as we have heard, all regions as well as mature and emerging markets contributed to our growth in the first 9 months. In the region EMEA, sales grew at the rate of 14.4% in local currencies, with Q3 growth accelerating to 16%. Organic growth of 7.2% was driven by solid volume growth in core markets such as the U.K., Spain and double-digit growth in Eastern Europe, Africa and the Middle East. Organic growth was matched by acquisition growth of 7.2 percentage points, mainly coming from this year's acquisition of Index in Italy as well as KVK in the Czech Republic and ABC of Turkey, which both closed last year. Foreign exchange impact in EMEA in the first 9 months was at positive 3.6%, while in Q3, we saw a slight negative impact of minus 0.9%. 4 new plants and production lines in Senegal, Saudi Arabia, Dubai as well as the acquisition of Polypag closed at the end of September will support continued growth in EMEA. Region Americas continued its double-digit growth with year-to-date increases of 13% in local currencies. Targeted investments into the supply chain and sales organizations primarily in the fast-growing metropolitan areas, solid demand as well as acquisitions in the U.S. contributed significantly to this continuous strong business performance. Sales growth in Mexico, Argentina and Brazil were also strong. Total organic growth in the Americas came in at 8%, while acquisitions added another 5 percentage points. Foreign exchange impact, however, was strongly negative at minus 3.4%, driven by weak currencies in a number of markets. Growth in Asia Pacific increased by 4.8%, in line with previous year growth. Growth was all organic and foreign exchange impact was neutral. Highest growth was achieved in India and China, while growth in Pacific and in Southeast Asia slowed. In Vietnam, a new state-of-the-art mortar plant was commissioned next to an existing production of scrap mixtures, which will further enhance the supply chain and market access in Vietnam. The newly formed segment Global Business achieved a strong growth of 29.9% in local currencies compared to 9.2% in the previous year period. Organic growth in this segment was 7.2%, which is only slightly lower than in the first half year, while the acquisition of Faist ChemTec contributed almost 23 percentage points of growth. Targeted foreign exchange effects contributed another 2%, leading to an overall growth of 32.1% in Swiss francs. Moving down to P&L. Growth result as a percentage of net sales decreased by 140 basis points from 54.7% to 53.3%, a slight improvement versus half year impact of minus 150 basis points. Ongoing price increases as well as various initiatives on the procurement in R&D side limited the impact of significantly higher raw material costs. Dilution effects from acquisitions accounted for about 30 basis points of this material margin contraction.On the other hand, and driven by solid volume growth as well as further efficiency improvements, we showed a strong operating leverage with both personnel costs as well as other operating expenses growing significantly below sales growth in spite of a certain dilution effect from acquisitions. Organically, cost growth continues to be around 50% of organic sales growth only. The successful resolution of the long-standing dispute led to a onetime cost of CHF 23.3 million year-to-date, which are included in other operating expenses. A positive impact in Q3 of the previous year of CHF 8 million related to the reduction of the pension conversion rate in Switzerland impacted cost growth in Q3 2018 negatively. EBITDA increased double-digit by 10.3% to CHF 880 million compared to CHF 797.9 million in the same period of last year. If onetime cost related to the dispute resolution were excluded, EBITDA growth would have been 13.2%.Driven by increased intangible amortization coming from acquisitions, depreciation and amortization expenses increased by 17% versus the previous year period. This resulted in an EBIT increase of 9% year-on-year. Excluding onetime costs, EBIT growth would have been 12.4%. In absolute terms, EBIT is up CHF 59.9 million to CHF 728.9 million on a reported basis.Net interest costs were higher by roughly CHF 5 million in the first 9 months, largely related to higher debt in connection with the purchase of the 6.97% of outstanding Sika shares from Saint-Gobain. Net other financial expenses also increased due to higher hedging costs primarily related to high level of intercompany financing and increasing interest differentials, particularly to the U.S. dollar.Group tax rate, however, reduced markedly from 25.8% in the previous year to 23.9% in the first 9 months, primarily related to the lower tax rates in the U.S. As a result, net profit after tax increased double-digit by 10.5% from CHF 477.4 million to CHF 527.7 million.With this, I conclude my remarks and hand back over to Paul for the outlook.

[Paul Schuler, CEO & Member of Group Management]

Okay, thank you, Adrian. Our outlook 2018 based on the results with the 9 months, we confirm our full year targets. We have an outstanding pipeline of big, newly won construction projects, many new products and initiatives as well as several acquisition candidates throughout the world. We are well on track to increase sales by more than 10% to reach sales of above CHF 7 billion for the first time. The volatile raw material price will now present the challenge in the next month. However, with efficiency improvement and continued price adoption, we expect double-digit growth for EBIT and net profit. Thanks to the commitment of our employees and the strength of Sika growth model, we can look forward with high confidence to the last quarter of 2018. Okay, thank you for your time. Any questions?

[Operator]

[Operator Instructions] The first question is from the line of Roseberg, Phil with Bernstein.

[Philip Anthony Roseberg, Senior Analyst]

Just a couple, please. The first one is how should I -- how should we -- can you help us understand the sort of the big drop in operating leverage in the third quarter? I believe EBIT grew at only about 6.5% on revenues of about 13.5% compared to the sort of 10% growth that you got in the first half or even 16% in EBIT that you got if you compare -- if you take out the CHF 23 million related to Saint-Gobain? So my understanding was that the raw materials, the worst of the raw materials inflation was felt in H1, not in Q3. So perhaps you could sort of break down the elements behind why Q3 was substantially less. My second question then related to that is, can you also help us to sort of get comfortable given that Q3 number that you can get to your full year guidance, which I think requires, at least in my calculation, you to get to about 13% growth in EBIT in Q4? So coming from 6.5% to 13%. It would just be nice to know how we should think about that.

[Adrian Widmer, CFO & Member of Group Management]

That's -- thank you, Phil. I'm -- I will be taking this. I think there is 2 elements I'd like to point out on Q3. On the one hand, the material cost impact or increase was actually quite significant in Q3 even with increasing prices. So basically, the impact here was very similar to the first half year in terms of material margin and reduction. The second one, on the cost side, I mentioned one factor is a onetime gain we had in the last year in the third quarter related to a pension effect, roughly CHF 8 million. If you deduct this, we are basically at like-for-like EBIT growth in the third quarter of around 10%. Now looking forward into the fourth quarter, over time, the price component will overcompensate what is a more flattening and raw material cost input curve, so this effect should be bigger in Q4. And also, we will not have this negative effect in the previous year as we had in Q3.

[Philip Anthony Roseberg, Senior Analyst]

Sorry, can I just one clarification there? Because from my understanding, if you take out the CHF 8 million, you get to 10% like-for-like growth. But if you take out the Saint-Gobain's CHF 23 million in H1, you get to around 16% underlying. If the material cost impact is similar, what makes that different?

[Adrian Widmer, CFO & Member of Group Management]

The impact has been increasing actually throughout the year. So the Q3 was quite significant in terms of input costs.

[Philip Anthony Roseberg, Senior Analyst]

And what are the key materials that are really moving the needle on this? We're trying to track this and predict things, but it's very, very difficult for us to really understand what has really changed in the third quarter. Can you give us any more detail?

[Adrian Widmer, CFO & Member of Group Management]

I'd say while there's further push on the epoxy side and silicone has continued to go up, we have also seen a further impact on the plastic [ side-to-side ]. The situation has been quite volatile, so not uniformly across the regions with foreign exchange moving having some impact. There is a number of factors which has influenced this.

[Paul Schuler, CEO & Member of Group Management]

On the positive side, we already increased our prices throughout region where most affected in the mid of September, so we expect the relief in the October, November numbers.

[Operator]

The next question is from Hüsler, Martin with Zed KB.

[Martin Hüsler, Research Analyst]

I have 2 questions. I'm looking with the heading into 2019 and trying to understand what's going to happen there on the margins side. Maybe you can help us. And you showed on Page 33 in your presentation that the gap between the price increases and cost increase, and I was just wondering basically if you assume for next year that the gross margin could be on a level of 2018 because you are mentioning those price increases and kind of flattening of the cost increases. So basically, my first question is what about gross profit margin for 2019, your best estimate? And the second question is turning to your acquisitions, that's added about 7% to overall sales. You are mentioning a 30 basis point impact on gross profit margin. Can you elaborate a bit on the impact on the EBIT margin or maybe the contribution of this 7% sales to EBIT? Was there any contribution at all? Or was it all -- did it show up because of integration costs and amortizations? That's basically my second question.

[Paul Schuler, CEO & Member of Group Management]

Okay, Martin, I'll take the first question, where is our target for raw material margins. As we said, we expect now -- rather reflecting out, was it the fourth or fifth price increase in the last 3 months? We see clearly signs that in certain areas, the prices will stay or come down. So without price increase, as we said, we are lagging behind. However, we feel strong for 54% to 55% to quoting our guidance.

[Adrian Widmer, CFO & Member of Group Management]

On the acquisition side or the dilution, it is correct that particularly the initial month, there is typically only a notional contribution. We're seeing a gradual -- actually a significant increase in relative contribution throughout the year and continuing as these synergies and also growth leverage.[Audio Gap]In this target throughout. But for 2019, we have a strong pipeline. We have a strong -- a lot of new projects, so we feel good in keeping the results and increasing our guidance.

[Martin Hüsler, Research Analyst]

Okay. And maybe just to add to Adrian's answer. You said just as a rule of thumb, didn't you say contribution of acquisition 7% to sales, maybe contribution to EBIT about half of this, 3% to 4%. Is this a fair assumption?

[Adrian Widmer, CFO & Member of Group Management]

I mean, particularly, in the first couple -- or first few months, the EBIT contribution is typically, if you factor in all these sort of integration and transaction costs, below 5% of sales. And then quite strongly increasing thereafter.

[Operator]

The next question is from of the line of Karlsson, Erik with Industrial Equity Partners.

[Erik Karlsson]

I was just wondering on the price of raw material spread that has been negative throughout the year. Could you just confirm if you think that spread could now be neutral in Q4 or whether it's still a negative but smaller than prior quarters?

[Adrian Widmer, CFO & Member of Group Management]

Just on the material and input side, yes, the curve should be flattening. Therefore, the margin impact or the negative ones should be smaller in the first and fourth quarter given the increase in effect of price increases.

[Erik Karlsson]

So negative but smaller negative? That's the --

[Adrian Widmer, CFO & Member of Group Management]

Yes.

[Erik Karlsson]

Perfect. And I had one question on EMEA construction. You probably haven't seen this but KONE, which is a large elevator manufacturer, they lowered their construction outlook for EMEA going forward. Have you seen any change in demand trends in EMEA?

[Paul Schuler, CEO & Member of Group Management]

I think we have a very nice position here where we work on refurbishment and new builds and on the project. So we don't see that this will [ soften for any ] region then. In certain countries, yes, there will be a change. Therefore, other countries will go strong, so we cannot -- we don't see that in the moment in our business.

[Erik Karlsson]

Perfect. And if I can ask just a third question, please. Auto production has been weak, specifically for China and Europe. And I appreciate, it's very much a penetration game for you when you had the OE manufacturers lower the weight of their cars and strengthen them and lower emissions. But do you think that will have any impact on your auto business? Or it's so much penetration it won't really be meaningful for you?

[Paul Schuler, CEO & Member of Group Management]

I mean, to be fair, if they produce less car, which we have existing, of course, we will slow down in auto. However, on the other side, the penetration rate, the new project we have and the build rate, I think, we are still feeling confident we had the 6% increase, even the market went down by 1%. So we are confident that although in a slower auto market, we will continue to grow. And looking to Europe mainly, I think if the Germans get hold on their issues, I think they continue the impact on the growth, but I'm not so pessimistic for 2019.

[Operator]

The next question is from Flueckiger, Martin with Kepler Cheuvreux.

[Martin Flueckiger, Equity Analyst]

Actually 3, if I may. Going back to the old macro story regarding the U.S. and Chinese trade tensions, just wondering whether you have any updates with regards to potential signs of a market slowdown in the relevant markets for Sika in that market. That would be my first question. My second question is with regards to coming back to the outlook for EMEA, and particularly Europe. I understand that your answer that you've just given a couple of minutes ago. But looking at building permits, particularly on the residential side but also on the nonresidential side, that's started to slow, and I think on the resi side, even flat now year-on-year. If any, when would you expect slowing building permits to have an impact in your business in Europe? That would be my second question. And then I'm just clarifying, the squeeze from FX on the margin, could you quantify the total currency impact that you've seen on your Q3 EBIT? And assuming constant FX rates, what do you think could be the estimated impact on the full year EBIT?

[Paul Schuler, CEO & Member of Group Management]

Okay, Martin. I'll take the first question with trade war China to U.S. I mean, the whole world is nervous. The whole world looks what's going on. From our side, we are in a lot of new projects. I don't expect that they stop building. I mean they will be very critical. But I -- we believe that we'll continue over the next 6 to 7 months, we're on the strong side to continue this project. Then we have a strong side on refurbishment. We're still strong there, so there's not really an impact regarding to the building permits. However, we prefer high rates on building permits. That's clear. It's easier for us to go double digit with a lot of start building permits out there. But for the next 6 to 12 months, confident we can continue on our guidance of 6% to 8% growth rate.

[Adrian Widmer, CFO & Member of Group Management]

Maybe on the EBIT squeeze margin, I mean, the translation impact basically is very, very similar as to the top line. In the first half year, we had a more 2 percentage point positive effect, which has now squeezed. So I would assume the actually the foreign exchange impact for the full year is pretty much going to be flat.

[Martin Flueckiger, Equity Analyst]

Okay, is that -- just to clarify, sorry, is that on top line growth? Or is that on EBIT growth? Because -- just asking because other companies have complained about the Brazilian real, the Indian rupee and also the Turkish lira and some of them being down heavily. And I was just wondering whether there's also a transaction impact for you guys, even though I realize that you well naturally hedged.

[Adrian Widmer, CFO & Member of Group Management]

Yes. The transaction impact is very insignificant. So it's really translation very similar on top as well as on EBIT.

[Operator]

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

[John Fraser-Andrews]

Four for me please. The first one, Adrian, you mentioned operating leverage of 50% of organic sales growth on the other expenses, personnel and other expenses. Should we think about the kind of level going forward into '19 and '20? That's the first question. The second is in the Global Business, which slowed down a bit. You mentioned the auto, auto plus 6 in Q3. But it seems that, that was higher actually than the other parts of the industry. So was there a sort of wider slowdown, not just in auto? The third question is on FX, and I hear what you say just now, Adrian, but your dollar costs must have increased. And was it because of the FX depreciation against the U.S. dollar? Was that part of the gross margin squeeze that we saw? And is it just chemicals that you pay for in dollars? And my fourth and final question is, can you give an update on cyber trading, if you're able to do that?

[Paul Schuler, CEO & Member of Group Management]

Okay, I'll take the first question on operating costs. I guess we have a high leverage in the last few years on improving our efficiency. We have several projects running [ also double ] costs, so I guess guidelines are 50%. In this magnitude, it could be fair to say it's '19 but also '20. We have to see if we have enough capacity to invest in future results over-leveraging this 50%. So, yes, you could assume we go in this direction.

[Adrian Widmer, CFO & Member of Group Management]

Maybe on the foreign exchange impact on particularly the U.S. dollar and then in relation to the material margin. Because foreign exchange impact per se is not material, where we, of course, have a bit more of an issue that is rather short term is in markets where, for example, in Latin America, where a lot of the raw material costs are actually U.S. dollar-based, which means we have to even more strongly increase prices. But in this market, they're basically used to doing this. There is some slight impact, but this is not material.

[Paul Schuler, CEO & Member of Group Management]

Okay, and to the question of the Global Business, yes, we had over years double-digit growth with automotive. Now the build rate comes back, so we are single digit, high single digit. Yes, it hurts. And with new models, we can increase, as I said before. Besides auto you will surely aware that the wind energy here in Europe dropped quite significantly, so we had a big share there. So for the next 3 or 4 months, we think it's slowing down, but it will come back out in China, which already started to rebuild the wind parks. So from that side, it's a combination between wind and auto. And on the other side, we have neutral run-rates in the bus manufacturing, rail manufacturing. We're also strong in appliances. So as you said, we lost a little bit in all the different issues. But overall, we still feel strong with 6% to 8% growth rate over in the next months.

[John Fraser-Andrews]

And just the last one on October trading?[Audio Gap]

[Unknown Analyst]

Some of your peers also made some rather cautious remarks. And then the second question, how satisfied are you really with the capability of your sales force and also your industry to increase prices? You announced price increases in both Europe and North America already in May, but I'm actually not really sure whether we already have seen any impact of these price increases in the Q3 results. So do you agree that's probably your whole industry a little bit more active or proactive in increasing prices going forward?

[Paul Schuler, CEO & Member of Group Management]

Thanks for reminding me that we have other cost increases. Nice to have that. I though I'd have a nice afternoon, but yes. But I mean we have this situation in Germany where we have 3% more cost on personnel cost. We know that one of the biggest challenge is transportation cost to get it. On the transportation cost, I think we -- it's easier to hand it over to the customer because they're clearly cost allocated. So here we are strong and fighting. On the personnel cost, we have to find efficiencies, therefore, we go down with efficiency, push efficiencies, so to set off our additional costs. And I guess that's the measurement we have to do regarding the nice clash with the price increase. If our basic customers say don't come and show up again, usually, we have the third price increase. Sometimes we have to see -- we really can leverage our prices. We can't demand bigger prices. And as I said before, it's the third price increase or the fourth price increase incurred to material and we just can't continue to that. And usually, it has 3, 4 months period where you not just can go back. But I feel one of the strong suits we have in the industry or in our building market is a very strong sales force and confidence that basically it's compared with our competitors, we increase prices. It's clear, Sika is the market leader that drives the growth. The market leader has to increase the prices. But I fully agree, our competitors should do more so it would be also easy also for us.

[Operator]

The next question is from the line of Jelovcan, Daniel from Mirabaud.

[Daniel Jelovcan, Analyst]

Just one question, a tiny one left. On Argentina, you mentioned quite a strong business there to work. I mean, just today, one biggest company, not in your sector, had the substantial profit warning because of IFRS. They had to restate all sales on EBIT because of the hyperinflation. Actually, quite a complex topic. Can you maybe, Adrian, guide me or teach me on is that something which affects you as well?

[Adrian Widmer, CFO & Member of Group Management]

I mean, there is -- the rule if there is 3 years in a row of more than, I think, 30% or 40% inflation, you do apply as hyperinflation. And it should actually not have material negative effect on the P&L. It means basically, inflation adjusting part of your balance sheet. And we are applying this is as well, but it will not have a material effect on the P&L performance of the Argentinian business nor the group, of course.

[Operator]

[Operator Instructions] We have a follow-up question from the line of Karlsson, Erik with Industrial Equity Partners.

[Erik Karlsson]

Very impressive cost containment as that SG&A line where you have grown at only 50% of organic sales growth. Do you think that's sustainable also going forward?

[Paul Schuler, CEO & Member of Group Management]

Yes, we will work on it. I think we are confident. We have a lot of leverage in our factories. And yes, we will go there as before.

[Erik Karlsson]

Okay. And one more, if I may. You commented on the price to raw material spread. If we look at those two together, it would be negative in Q4 but less negative than before. Do you think they can be positive already in Q1 next year if you just freeze raw materials where they are? Or should it take a little bit longer during next year?

[Adrian Widmer, CFO & Member of Group Management]

I think it is possible, yes.

[Paul Schuler, CEO & Member of Group Management]

And it's our clear target to turn it around as fast as possible. And yes, this is clearly the target doing this possible.

[Operator]

We now have a question from the line of Rafaisz, Patrick with UBS.

[Patrick Rafaisz, Director and Chemical Research Analyst]

Looking into 2019 and you have mentioned also at the Capital Markets Day that you will provide new midterm targets. And just does the fact that we will probably end this year with a lower margin be unlike the initial expectation for this year? Does that affect in any way your thinking or planning around the new targets? Or do you think this is such a short-term issue, and just as you answered in the question before, it could be recovered by Q1 already that it won't affect your midterm planning at all?

[Paul Schuler, CEO & Member of Group Management]

Thanks for the question, Patrick. I think therefore we have a long-term planning, and we are in the process now to discuss it to define it. There are certain elements in there, how acquisition strategy was placed in the game, so we will come out with our targets in a moment. We confirm 2020 targets and we continue with that, and then we will enter as soon as we know more, but we are positive to go in the right direction.

[Patrick Rafaisz, Director and Chemical Research Analyst]

Okay. And just one more, if I think about the bridge for 2019, and, I mean, it seems that the M&A dilution has become smaller from maybe 70 to 80 bps in H1 to maybe 40, 50 bps now in Q3. So should we assume that the dilution gets smaller and smaller in the next 1, 2, 3 quarters as well assuming no major deal? And would you then say that you have kind of 0.5 percentage point of margin improvement in the bag anyway just in the space?

[Paul Schuler, CEO & Member of Group Management]

As you know, we said this one now our strong suits we have. Each acquisition usually have to work for a year or 2 to bring the margin up to our level. I think the past shows it's very good. We have now 2 acquisitions this year, where the dilution of that then explained is will be there. But yes, we will continue to bring them up to our levels as we did in the many, many acquisitions. Looking forward to 2019, the question is, what kind of acquisition we have? So we cannot answer question is, can it really go up if you have another acquisition. But yes, we are able to increase the margins of the candidate we acquired.

[Operator]

We have a follow-up question from Flueckiger, Martin with Kepler Cheuvreux.

[Martin Flueckiger, Equity Analyst]

Just coming back to your performance in Canada, if I remember correctly, I think in Q2 or Q1, Canada was a bit of a problem child in the North American market. Now I realize, U.S. is much bigger and it's thriving. How's Canada been doing in Q3? And what is the outlook there? And talk to me about Canada. Could we also -- could you also elaborate a little bit on your outlook for Brazil? Because looking at the economic situation there, it doesn't look like you're going to get much tailwind at least, let's put it that way.

[Paul Schuler, CEO & Member of Group Management]

Starting with Canada, yes, we have a tough year like many. I think the build rates, everything is very constrained in Canada. We managed a small grow rate, not on the level we would like to be. We have certain management team. We have certain new projects in. Yes, cost of market, I agree. And for next -- 2019, we are rather positive that this turns -- now is the third year, Canada is more or less will be in a recession of the country, so confident we can continue, but yes, one of them. Looking at Brazil, we have in the moment an excellent growth. Nothing shows with 8% growth rate. We are very confident as to the ideas they have. So far, we see no sign that will slow down, but there's no way to actually, in this country, never really predict the next 24 months.

[Operator]

And we have another follow-up question from the line of Hüsler, Martin with Zed KB.

[Martin Hüsler, Research Analyst]

Just a minor financial question. What about cash flow? After the first 9 months, you didn't show any number. What's the trend according to your expectations and according to EBITDA? And maybe for the full year, what do you expect at the end of this year the level of net debt to be?

[Adrian Widmer, CFO & Member of Group Management]

On the cash flow, cash flow development is positive. We're not reporting these numbers in detail. But the gap in the first half year to the first -- to the last year has basically vanished in spite of the CHF 70 million lease buyback we did in the first quarter. In terms of the reported net debt, I'm expecting this to be a little bit shy of 2x EBITDA.

[Operator]

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

[Dominik Slappnig]

Thank you very much and thank you. I think from our side, everything is said. We thank you very much for your interest and like to say goodbye to 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.