Tarkett SA
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Good day, and welcome to the Tarkett's Analyst Q3 2018 Financial Results. Today's conference is being recorded. And at this time, I would like to turn the conference over to Fabrice Barthélemy, Acting CEO. Please go ahead, sir.
Thank you. Good morning. Thank you for joining our Q3 investor call. I am Fabrice Barthélemy. I am Acting CEO of Tarkett. And this morning, I'll share the call with our Group CFO, Raphaël Bauer. A few words of background. I've been with Tarkett for more than 10 years after 13 years in the automotive industry with the Valeo Group. I joined in 2008 as CFO and member of the Management Board. I was also part of the team that took the company public back in November 2013. Beginning of 2017, I took operational responsibility for our EMEA division and, later on, our operations and sales in Latin America. On September 18, I was appointed Acting CEO following a decision from the Supervisory Board to change the leadership of the company. And here I am.Over the next weeks and months, I would like to reassure you that our road map is aimed at improving Tarkett's profitability. Together with the team that I'm leading, the executive management team, we are focused on the following priorities: first, continue to implement price increases in an inflationary environment; secondly, stabilize the operations in North America that has penalized us during the summer; and of course, define and implement further cost reduction and deliver synergies enabled by the recent Lexmark acquisition.With that, let's focus on our Q3 results first. As you've seen in our press release, we have posted a very solid organic growth in Q3 at 3.4%, with net sales reaching EUR 840 million. Two divisions are contributing solidly to that performance: first, the Sports, where the momentum is still extremely great with a double-digit growth at plus 11.8%; and also a very strong growth in North America, about 4% with 4.3% organically. We also see a growing contribution quarter-after-quarter of the selling price increases that we started to implement late in last year and beginning of this year. As you know, this is absolutely necessary in the context of a very high inflation of our purchasing costs, both on raw materials and on transportation and freight costs. Our Q3 adjusted EBITDA stands at EUR 98 million and EBITDA margin at 11.6%. And you know that we announced the signing of the Lexmark acquisition earlier this summer, and we closed the acquisition at the end of September, so fairly quickly after the signing. And this is a very important acquisition for us. It makes us the #3 player on the North American carpet for hospitality market. And this company with about $120 million in sales will be immediately accretive to our EBITDA margin, and we expect, of course, further synergies derived from the acquisition.Just a few words just to remind the composition of the portfolio of Tarkett by geography and by reporting segment. We have an exposure that is very well balanced between North America, our first geography, EMEA and emerging markets with Russia and the CIS, Asia-Pacific and Latin America, and is balanced in terms of division with the Sports division accounting for 18% of our sales.In terms of products, the carpet -- commercial carpet represents 20% of our sales and even higher with the addition of Lexmark. Most of our activity is actually linked to renovation projects. Only 20% of our sales are directly linked to renovation. And over the past years, we've increased the exposure to commercial segments as opposed to housing and residential, and commercial represent now more than 2/3 actually of our activity.With that, I'd like to hand over to Raphaël, who will go into more detail about our Q3 results, and then I will conclude and open the Q&A.
Good morning, everybody. Let's start with sales. Q3 was a good quarter in terms of activity with a solid organic growth of plus 3.4%. It's driven by Sports segment, who enjoyed a very dynamic growth, above 11%, and a good momentum in North America. And we also start to see a good contribution of selling price increases. Almost 1 point of organic growth is related to selling price increases. EMEA is up organically by 0.9%, and the CIS, APAC and Latin America segment is down on the back of a weaker market in the CIS. When I look at the non-organic growth and at the perimeter effect, we enjoy a positive impact of EUR 4 million brought mostly by the turf company that we acquired at the beginning of the year in Australia in the Sports segment. When we look also at the net effect of currency in the CIS and the selling price adjustment, the lag effect, the last column of the bridge, it's very limited. And actually, the weaker ruble was offset by selling price increases.EBITDA for the quarter is EUR 98 million or 11.6% of net sales. As expected, the performance of the quarter was penalized by significant inflation not only in raw materials but also in freight. That's a negative effect year-on-year of EUR 13 million for the quarter. But the good news is that we were able to offset more than 50% of that negative impact through selling price increases mainly in North America and EMEA. That's a positive impact of slightly more than EUR 7 million. On top of that, the net effect of selling prices and currency in the CIS countries, the lag effect, is positive on EBITDA by EUR 3.5 million, allowing to further mitigate the headwinds. Looking at productivity, it's only EUR 3 million in the quarter, and it's below our targets. It's penalized by -- mostly by poor performance in 2 factories in North America, and that's clearly a priority we're working on. Fabrice will elaborate on that. Looking at the last part of the chart, the last bar, on salary increase and SG&A, thanks to cost containment measures, we were able to mitigate both the normal impact of a salary increase and also sales force reinforcement. Some of you might recall that last year in the third quarter, we had an abnormally high level of open positions in particular in North America in our sales force. So now those positions are filled, and that's an increase year-on-year, which is contained through cost reduction measures in SG&A.We've updated the follow-up of the oil barrel and the key oil derivates that have an impact on our raw material purchasing price. The oil barrel as well as the key derivatives kept increasing in the third quarter. Naphtha, in particular, which is a close derivative to oil, increased in the past winters, and we know that ethylene will follow. That's important to track because when we look at our material consumption, material consumption is 54% of our total of cost of goods sold. And within that raw material bucket, half of it is oil derivatives. Those oil derivatives that we purchase -- PVC, plasticizer, nylon for carpet flooring -- those prices have kept increasing throughout the third quarter, and we know will have a further negative impact in the fourth quarter. On top of that, other raw materials, such as wood prices and oak in particular, keep rising. And when we look at freight cost, of course they are significantly influenced by the oil price, and they keep rising also. Therefore, we have updated the full year impact of inflation on raw material and freight on the group's EBITDA. We estimate it's going to be between EUR 50 million and EUR 55 million year-on-year in 2017. That's the gross impact of inflation before price increases -- selling price increases that we implement.Let's have a look segment-by-segment to understand the recent trends in activity. Looking first at EMEA with good growth in several areas. Germany, South Europe with Spain and Italy performing well but also Poland. We've seen lower activity in France. And in the U.K., the slowdown is clearly confirmed in a difficult environment and pre-Brexit. So that's clearly weighing on the total performance, and we see we've reached plus 0.9% of organic growth. When we look at the product ranges that are performing the most without surprise, it's still LVT that is contributing very nicely, the Luxury Vinyl Tiles.In North America, very good momentum, plus 4.3%. Actually, a significant part of that comes from the good contribution of selling price increases. We implemented selling price increases in H1. We also had to increase further prices in September on our vinyl products. And at the back end of September, we increased prices for the products imported from Asia in order to offset the impact of the tariff increase implemented by the U.S. administration. Those 2 increases will benefit more in the first quarter. But all in all, prices -- price increase are sticking in North America.When we look at the volume by product category, again very good growth from the LVT product, the modular products, and in particular from the rigid board products. Very good growth also in accessories, where we are a leader in North America. Looking at commercial carpet, the activity is below last year in a market that is weak.In the CIS, we see a slowdown of activity, minus 4.8% organic growth. That's mainly driven by low activity in Russia. You know that ruble has weakened in the third quarter. The market context in Russia is a bit uncertain, and we believe it will remain uncertain for the remainder of the year. The good news is that we've been able, as I mentioned already, to offset the currency impact through a selling price increase implemented in July. In Latin America, we have a good trading with volume growth in Brazil and also selling price increase to offset the currency fluctuations. And in Asia-Pacific, China is driving the growth.Our last segment is Sports. Great momentum in Sports. The third quarter is seasonally the highest quarter of the year, so it was very important to succeed in this quarter. Almost 12% organic growth, and that's coming from all products, be the it the turf in North America, landscape applications, tracks, EMEA. So it's really a great success. On top of that, the integration of the company we acquired in Australia at the beginning of the year, Grassman, a turf company, is doing well, and we were even able to leverage synergies, using that sales team to sell off first a track in Australia. We've won a -- we've installed a number of major projects, be it in North America for tracks with the University of Minnesota, be it in Europe with our hybrid solution with the Olympique de Marseille training centers and in Australia for a rugby application that's a new type of field that we are now able to propose to our customers.I will now hand over to Fabrice for management priorities.
Thank you, Raphaël. So in the coming months, we are focusing on improving the profitability of Tarkett businesses across the world. And to achieve that, I'm focusing with the rest of the management team of 3 groups of priority. First, the environment is inflationary, as Raphaël has shown, and we need to continue to increase prices. We will benefit from the carryover of H1 increases. We are launching additional actions in North America, and we're also preparing negotiations for next year, especially with distribution. We expect that 40% of the raw material and transport inflation will be covered on a full year basis this year in 2018, and we're ending the year with a run rate that is above that number because in Q3, we achieved 50%. But over the full year, it will be around 40%. The second priority and focus is to accelerate the cost reduction initiatives. Of course, we are continuing to reduce our discretionary spending. We don't exclude reduction in headcount where and when it is appropriate. We are focusing the North American and Central team to the recovery of normal operations in the 2 plants that penalized us in North America. And we are also accelerating our cost -- productivity initiatives with a strong focus on automation, and that is across the group. The third priority is to deliver the synergies that we expect from Lexmark. The hospitality segment will be under Lexmark synergies -- leadership, sorry. And we are expecting not only cost synergies in North America but also sales synergies, both in North America and globally.Just a quick focus on Lexmark. We are very proud to have Lexmark in the Tarkett family now. Lexmark is a strong company and a well-recognized brand within the hospitality segment with net sales of $120 million and with less than 500 employees and one production site in Georgia, very -- in Dalton, Georgia. So very close to our own operations already in Georgia. And Lexmark had invested throughout the years in state-of-the-art equipment. Thanks to Lexmark, we will have an extended flooring offering to global accounts. So we will not only offer commercial carpet but also Luxury Vinyl Tiles. We have made the Lexmark management in charge of our hospitality segment in North America. And we expect sales synergies that in -- when achieved would be -- should be accretive to the group EBITDA by about 50 basis points. And I confirm the closing was done at the end of September 2018. So as of the 1st of October, it will be consolidated in Tarkett's account. So we'll have the full benefit of Lexmark as a stand-alone company in Q4.Of course, we are also working to fuel the growth with new products. We are -- we've launched a new surface treatment in the -- in North America called Tectonic that provides superior product performance in terms of resistance and look. We also strive to create unique spaces, and thanks to a new rubber offering with pentagonal tiles and that offer a low-maintenance cost across the life cycle and improved comfort and as well as safety. Safety for us means stiff resistance in that respect. And we got -- we obtained the award at the NeoCon show back in June 2018. We are also deploying digital printing and digital designs like with the iD Supernature & Tattoo that are enhanced natural designs with digital printing. And we've recently launched a new technology for LVT called iD Revolution with a Cradle to Cradle Gold certification and with more than 80% of recycled mineral and bio-based raw materials. So those initiatives, among others, will fuel the growth we expect in all regions. The outlook for Tarkett in Q4 is right now, we expect a good overall activity level expect -- except, sorry, in some specific regions. In the CIS and namely in Russia, there are uncertainties both on the economic and also the political side with Russia right now. Other areas, such as the U.K., suffer from the uncertainty around Brexit. So we don't expect a very high level of activity in those 2 regions. But apart from that, overall, the demand is still at a -- is at a very satisfactory level. What is sure is that we will incur much further pressure from raw material and transportation costs, and we have revised our estimate for the full year impact of these costs to a range between EUR 50 million and EUR 55 million for the full year of 2018. And we expect that about 40% of that will be covered by selling price increases, as I just mentioned. So we are fully dedicated to -- and focused on improving profitability through those selling price increases, through the progressive improvement of the industrial performance in North America and the acceleration of cost reduction across the entire group and, of course, the implementation of synergies with Lexmark.This is the main messages of our presentation. So with that, I think we should turn to question and answers through the operator of this call.
[Operator Instructions] We'll now take our first question from Mehdi Boudokhane from Raymond James.
I have a couple of questions. First one on cost reduction. Could you quantify the positive impact in Q3? And could we have an idea of what to expect for 2019? Secondly, on the productivity gains, also couple of questions there. So first, could you give us more color on what happened in North America? So you mentioned underperformance of 2 production sites. I remember also in H1 you mentioned that there were some outages still in North America, and the performance seems to be actually rather weak even, I mean, in the last couple of quarters. Is that just a question of North America? So last one on productivity gains. Could we have an idea of -- I mean, when should we expect you to go back to normal on that? And last one, so still North America. Could you give us the split between volumes and prices for Q3 in terms of organic growth, I mean?
Okay. Thank you, Mehdi, for your question. Raphaël speaking, and I will take the first question on cost reduction. In the third quarter, the cost containment and cost reduction action that we took on SG&A are benefiting between EUR 2 million and EUR 3 million in the quarter. And again, they allow to mitigate the impact of normal salary increase and sales force reinforcement where it was needed. So we'll still benefit from that down the road this year. For 2019, going forward, as Fabrice mentioned, we are highly focused on costs and cost reduction. It's too early to quantify and to give a quantum. Looking at North America, you indeed highlight the underperformance on the industrial side. We mentioned that it's focused on 2 sites. We clearly know what's going on. Let -- bear in mind also that the third quarter is a peak seasonally in terms of activity, so we're talking about a high level of activity. And we faced production management issues in one factory in particular. That had an impact on our ability to deliver. In order not to penalize the customers and to keep the delivery level where it should be, we had to produce in the weekends as we're incurring over time and additional labor costs. And we had to incur also express freight in order to ship on time. So that's mostly what we're talking about here in North America. As we're talking about production management, it will take some time to recover. So we are foreseeing a progressive recovery throughout the fourth quarter. So we should see a slightly better productivity in the fourth quarter, but let's keep in mind that it's progressive. In terms of organic growth in North America, I mentioned that selling prices are contributing nicely. So it's a good proportion of the total organic growth of the quarter. We should expect at a group level we mentioned it's almost 1 point, precisely 0.9%, of organic growth at group level is coming from selling prices. And looking at North America again, I remind that we placed additional price increase in September. More targeted actually, first on the Resilient product, a vinyl product that are impacted by raw material price increase, and also on the imported products from China, but that's only 4% of the segment sales.
We will now take our next question from Elodie Rall from JPMorgan, who seems to have stepped away.We will now take our next question from Charles Scotti from Kepler.
A couple of questions from my side. The first one is on the margin on incremental volumes. It was again very weak in Q3, only 2%. I know the organic growth was driven by the Sports business that's -- can I ask kind of why the profitability on incremental volumes is so low? Also, on raw materials impacts, do you have already an idea of the -- this impact in 2019 at the current level of input cost of ethylene and naphtha and PVC? And also, my last question is on the target 2020. I know that it has been set up by the previous management team. But I also will look at the 12% EBITDA margin target considering that this year will -- you will likely be below 10%.
Thank you, Charles-Louis. Raphaël speaking. On the -- you rightly point out the weaker contribution from organic growth. Again, I need to reinforce here the fact that the Sports division is growing much faster than the average of the group. Sports division-contributed margin is closer to 20%, whereas our flooring division-contributed margin is around 35%. So that's clearly a negative division mix. In addition to that, I mentioned that within North America surface -- or commercial carpet sales were lower than last year, and those products have a better contribution than the average. Within North America, we're also penalized by a negative product mix, hence at the end the low contribution of organic growth on our EBITDA. To your second point on raw material impact in 2019, of course, as you know, a significant share of our raw material are depending on the oil barrel price, and I will take no bet here. I -- very difficult to say. What we can say with current level of feedstock prices is that we know that on the raw materials that we purchase, PVC, plasticizer, nylon and the like, we have further purchasing price increase to come in Q4, so we'll start 2019 at high price level for some of them, higher than 2014 prices. You can see it even on the feedstock graph that we provided. So that's why we are saying that we're still focused on selling price increases, because we believe there will be needed for complementary selling price increase in the coming quarters in order to offset raw material prices. But it's too early to give a quantum and to put a figure on this at this stage. I'm going to hand over to Fabrice for the last point.
Yes, good morning, Charles-Louis. So the midterm target. If you remember 2 years ago when the midterm target was communicating -- communicated with a 12% EBITDA margin, we explained also that, that target was set under the -- assuming a rather stable input costs. And whatever the level of input cost actually, it was more that -- stability was the -- that was important. What we are facing right now is a real, a very fast increase of purchase pricing and transportation, which is really new in our industry. And the speed of that increase is penalizing us because whatever price -- selling price increases we are posting to our -- or giving to the market, there's always a lag and a lead time to -- for these price increases to show in the P&L. When we quote commercial projects today, it is for installation and delivery between 6 and 12 months from now. And the same for residential or distribution, you don't negotiate prices. It depends on countries, but you don't negotiate prices more than once a year. But there is a lag. The good news is that the price increases that we have posted since the beginning of the year are sticking in North America, are sticking in EMEA, and we are seeing the growing benefits of those price increases. That will not be enough to reach our 12% margin objective, which is why we are increasing the focus on productivity and cost reduction on all aspects of the business. So that, of course, includes production. And over and above the effects of lean management and regular productivity, we are also increasing our investment in automation to make some more breakthrough in terms of our cost structure. And outside of production, we're also looking at all cost lines. In addition to that, but for us, it's a bit the cherry on top of the cake, acquisitions such as Lexmark, which are accretive immediately to group margin, which will bring also additional synergies, will also contribute. But really, the 12% objective remains the right target in my view and in our -- in the management team's view. And therefore, we are focusing on all actions to achieve that objective in the next couple of years.
We will now take our next question from Pierre Bosset from HSBC.
I have a few questions, if I may. First of all, I'll just do a quick calculation on the back of an envelope for Lexmark. If it adds 50 basis points to the full year to the whole group on a full year basis plus synergies, does it mean that the EBITDA of Lexmark post synergy will be something like EUR 25 million. I just would like to double-check if the [order of magnitude] is correct. That's the first thing. Second thing, just a follow-up question on the raw material price. I understand that you don't want to give a lot of guidance for 2019, but will it be fair to assume that even that we are seeing throughout the year in 2018 a price increase of all your raw materials, which led to a EUR 55 million increase in raw material cost, if everything being equal, does it mean that we are at least EUR 25 million of additional costs over the full year next year? That's my second point. And my third point is on the management succession. Do you have any time schedule that you can share with us?
Raphaël speaking. To your point about Lexmark, we've indicated that Lexmark -- so Lexmark is a $120 million business. It's indeed a very solid company, generating a margin way above the average of its industry. Commercial carpet in North America, when we look at comparables like Interface, it's around 16% of EBITDA. So indeed, Lexmark is above that. What we are looking at also is synergies. We mentioned that these synergies, we had more short-term synergies on, for instance, our purchasing cost. It will take more time to realize the full synergies on sales, probably within 18 months to 24 months. But after those -- this implementation time, we expect this 50 basis point impact. So I'll let you do the full calculation, but the ballpark figure are there. Looking at your second question on the raw material price increase for next year, it all depends on the assumption that you take for 2019 prices. Of course, what we've seen this year is an increase or the -- in Q2 and in Q3. So the base is moving. We'll see further increase in Q4. So it's not a stable basis in 2018. It's clearly a further ramp-up in costs. So it's basically at this point in time to say raw material impact will be EUR 20 million, EUR 25 million, EUR 30 million. But clearly, one should expect another -- at current prices -- another significant impact in 2019. That's what we're working on, looking at the selling prices by region, that we need to place to mitigate that effect. I will hand over to Fabrice.
And so regarding your question on the CEO succession, there is currently a process -- a recruitment process and selection process, both external and internal that is managed by the board and more specifically the Nomination and Remuneration Committee. Having said that, the board has not fixed any precise deadline. What they want to do is to run the process properly to make the best decision possible, knowing that, as we are today, they feel that they have reaffirmed the trust they have in the current management team and there is leadership in the company. So nothing is being stopped. And on the contrary, we are actually accelerating on some initiatives. So we -- I cannot comment on the process itself, and I cannot give you any precise deadline. It's not imminent. It will take some weeks or months until the board announces their choice. But in the meantime, the whole management team is really focused on improving the business going forward.
We will now take our next question from Elodie Rall from JPMorgan.
Fabrice, Raphaël, sorry for earlier. I think my line got cut. So I have a couple of follow-up questions, hopefully, they haven't been asked. Just on Lexmark to start with, a follow-up from Pierre's question. So if we assume that the EBITDA post synergies is around EUR 25 million, given the pro forma net debt-EBITDA that you gave us of 2.5x and assuming there's no other moving parts in the net debt, is it fair to conclude that you paid around EUR 300 million or 12x EBITDA post synergies? And so that's my first question. Second on France. You mentioned lower activity levels. Can you give us a bit more color about what's happening in this market? And lastly, you mentioned that you had to announce some price hike to offset the impact from tariffs in the U.S. Can you quantify what proportion of your sales in the U.S. are imports?
Okay, Elodie. Just on the -- I will start with the last question actually. The proportion of sales in the U.S. coming from imports from China is actually between 4% and 5% of sales. On these products, we raised prices on the 24th of September by 10% actually in order to offset -- actually more than offset the 10% tariffs hike that was decided. We know potentially there could be another tariff hike in January next year, but that has not yet been decided. Now coming back to your first question on Lexmark. You've mentioned a figure that is very high. We actually purchased Lexmark at an amount that is way below that. Let me get back on the indication that we gave. We bought this company based on the current EBITDA prior to synergies within market prices. So a valuation between 9x and 11x EBITDA. And we plan post synergies to go down back below 8x EBITDA. Looking at the indication that we gave on net debt at the end of the year, around 2.5x EBITDA, it's, of course, factoring Lexmark. But let's bear in mind also that we have a higher level of CapEx this year in particular since we've set up a new production line in Russia for wood, and we're also investing significantly in tiles in LVT products, both in North America and the U.S. So that will also weigh on net debt.
I'll take the question on France and Europe. The weakness in France right now, we see it as a temporary one. It doesn't signal any either inflection or very strong underperformance, but it's more a temporary weakness, which is not the case of the U.K. market and demand in the U.K. where we see that with -- in the context of uncertainty about the Brexit, how Brexit, et cetera. Lots of customers or builders or building owners are actually postponing projects or waiting until they have more clarity on the way that Brexit would be managed. So we are seeing a more difficult time ahead of us in the U.K. Having said that, the U.K. is one out of many countries for us in Europe. France also, by the way. And that only offsets a little bit the very strong performance we have in our other regions in Europe, especially in Germany, Central Europe or the Nordic countries.
Can I just follow up then on CapEx? Do you have an updated guidance on CapEx for this year?
Yes, we believe we'll be around EUR 120 million for CapEx this year.
We will now take our next question from Eric Lemarié from Bryan Garnier.
I've just got 3 questions, if I may. Regarding the Lexmark deal that you mentioned that already, but should we expect any restructuring cost with this acquisition? My second question, regarding Turkey. You mentioned Turkey several times in your press release. Could you share with us the revenues generated by Tarkett in this country, in Turkey? And I got a follow-up question on raw materials impact next year in 2019. At the current level of prices and considering your strategy to further increase selling prices, should we -- is it fair to say that you should be able next year to fully recover raw material increase by higher -- through higher selling prices?
Thank you, Eric. Raphaël speaking. Looking at Lexmark, we mentioned, of course, synergies. We mentioned cost synergies are mostly related to purchasing cost, right. It's commercial carpet. So it's the same type of raw material than what we purchase already for our business. So that's where the main synergy come from. Sales synergies, by being able to sell through Lexmark channels our product and mainly LVT or the vinyl tiles, and also being able to capture the global coverage of some of their key customers, the largest hotel chains, and leverage that. So that's what we're looking at here. Of course, there are some optimization of the back office in the second -- let's say, later down the road. But at this stage, no major restructuring so far. When I look at Turkey, Turkey is actually a small country for us, and it's less than 1% of total group's turnover. In Turkey, we have a very proactive selling price management. So we adapt all the time selling prices to offset currency fluctuations, the issue in Turkey being, of course, the market conditions and the volume. But that's where we stand in Turkey. So Turkey -- just to give a bit more color, so Turkey is one of the Tier 2 countries for us in Europe. We've had a very good growth over the past few years, and we are one of the leaders in Resilient Flooring there. And as Raphaël said, you don't see in the bridges any impact of currency or selling price because the way we manage the business there is on a euro basis. So actually, we update our price list in local currency every day based on spot exchange rates. So we don't bear any risk on that part. And to your last point, Eric, about raw material in 2019, I already commented that we -- what we are seeing now is further price increase. So prices of the product that we purchased in Q3 have increased. We'll see further increase in Q4. So we'll start 2018 at a high level. We start at a high level. And should it stay at this level, it will be, of course, a negative impact on 2019, a negative growth impact. Now when I look at the selling price management what we've implemented this year will allow us, as Fabrice explained, to offset on a full year basis 40% of the raw material and freight inflation impact. And actually, as I commented in the Q3 and we should expect that at least for the Q4, we are offsetting 50%, 50, 5-0, of this impact. So as we speak, we are looking at how to calibrate a price increase in the various regions. It's too early to give figures and to give you indications, but we're working actively to mitigate in 2019 what will be a very high level of raw material prices. But clearly, the target is to offset raw materials with selling prices. This is the target. So we are progressing towards this target. The level of price increases that we are achieving so far this year is unprecedented. And it's not enough. It's only the start. It takes time. But we are more and more disciplined in the way we implement those price increases. So depending on the volatility of raw materials, we will or not achieve the -- that target. As I explained, there's a -- there's that lag effect, but the target is to offset raw materials with price increases.
We will now take our next question from [ Manny ] from -- [ Mogadeux ] from Man Group.
[Technical Difficulty]
We're sorry, [ Mogadeux ], Raphaël speaking, we can't hear your question. The line is regularly cut. I don't know if you can hear as well, but we can't hear you.
Hello?
Yes.
Hello. Sorry, I had some problems on the line. I just wanted to understand. In terms of your debt, the EUR 500 million -- so EUR 680 million, is there any confidence of that debt, I guess, that you have to renegotiate it in 2020? What's the cost of the -- current cost that we have of the debt and if there any covenants attached? And if to any extent the dividend for 2018 would be in question because of the decline of profitability?
Okay, thank you for your question, [ Mogadeux ] Looking at our covenants, we have as the main covenants the leverage ratio; net debt-to-EBITDA ratio, pro forma, of course, in case of acquisition. The covenant is 3x EBITDA. And in case of major acquisition, such as Lexmark, for instance, we can go up to 3.5x for a period of 12 months. So clearly, our forecast for this year being around 2.5x EBITDA in terms of net debt, pro forma Lexmark, mean that we are well below the covenant. When – I believe you ask about the cost of debt. We have actually, in our debt, private placements through China that are quite competitive, and also our revolving credit facility that helped to finance the Lexmark deal, which is also quite competitive. So all in, we're talking about 2% to 2.5% of cost for that.
You asked also -- this is Fabrice speaking. You asked also about our dividend. The dividend policy we have communicated back 2 years ago is to pay out a dividend of at least EUR 0.60 per share every year. Of course, the decision is not made yet, but so far, there's nothing that suggests that we would not abide by this policy in the case of 2018 fiscal year. So the dividend policy is still valid.
Okay. Just, I mean, can you also -- or is it too early to guide in terms of -- I mean, you said that '18 has been a year-- a high year for CapEx in terms of CapEx for '19. And what to be -- if we can ask a normalized CapEx-to-sales.
Well, a normalized CapEx-to-sales is between 3.5% and 4.5% of sales. What's -- so we -- historically, we've always been fairly stable in terms of CapEx. Due to the nature of our business, there are no huge investments that are needed from time to time. So if you look at our historical numbers, it's been very stable. So, I mean, around 4%, 4.5% is probably a reasonable number. And what is important to us is to make sure that we focus our CapEx projects on the ones with a short payback, the ones linked to automation. And that's an important priority I'm setting for the teams across the group.
And last question. I mean, you mentioned -- in terms of price increase in particular in U.S., are you seeing also competitors? Are you following competitors? Are competitors following you in terms of these price increase? Or you see that some of the competition is not so keen to pass this price -- raw materials increase into prices?
In the U.S., clearly -- this is Fabrice speaking. In the U.S., we are seeing competition increasing prices, actually announcing big numbers. We are not the leader in the U.S. There are competitors that are much bigger than us. So we -- in the U.S., our pricing policy is more to be a follower. And we have to say that in the U.S. in the past 6 months, there have been lots of price increases announced across-the-board by all type of competitors. So the environment is favorable for pricing -- price -- selling price increases.
And in Europe?
In Europe, it's a bit more difficult because competition is fierce, both from within Europe and from outside Europe. So, so far, selling price increases have been of a lower magnitude. Having said that, there is more and more recognition, both by the customers and also by the competition, that the environment is inflationary and is not only specific raw materials but actually all kind of raw materials and transportation. And all industries are actually suffering both from the price of transportation and availability of transportation. So the awareness about the need to increase prices is more and more there, and I'm optimistic that we will -- 2019 will give us more room to increase prices than in the past.
We will now take a follow-up question from Pierre Bosset from HSBC.
Me again. Just a quick question on your financial objective for 2020. One of them was to add EUR 500 million sales by 2020. Is it still valid given what has happened at Tarkett and what is happening outside with the increase in raw material price? Do you still have the same appetite for growing the business in the current trading condition?
Pierre, we have appetite for good acquisitions that bring value for the group. But clearly, among all those objectives, we will not rush or do silly things just to achieve that objective. So we are very disciplined in the way we select and we execute the acquisitions. And so far, I believe our track record has been very strong in that respect. So the EUR 500 million is an objective. It still stands. But clearly, the priority is to select the targets well and when they are available to try and see them. Not at any cost. So this is what we have to manage. And -- but clearly, for us today, the 12% EBITDA margin and profitability is a higher priority than achieving whatever number of M&A. So we won't do -- we will not do M&A just for the sake of achieving a number in terms of M&A.
We will now take our next question from Simon Rowe from Henderson.
Just could you talk about what's going on in Russia and the CIS? It’s an important area for you and you haven't talked much about that.
Well, in Russia right now, the market is a bit weak. The -- what we are seeing in Russia, unlike in other cycles, is a combination of a rising oil price and a weak ruble. In the past what we've seen usually was that when the oil price was rising, the ruble was strengthening. So what we was -- what we were losing on one side, we were gaining on the other side. Right now, we are the worst of both sides actually. The ruble has never been as weak at a level of RUB 75 or RUB 80 to EUR 1. And demand is not very strong not because of -- or, probably because of the state of the economy and also because of political uncertainties and potential sanctions, et cetera. So we are strong in Russia in a market that right now is a bit weak. However, we maintain a strong pricing power. You've seen that in Q3, the net effect of currency devaluation on pricing was positive by EUR 3.5 million. And so we have -- we are catching up with pricing. We maintain a very strong competitive position in Russia, and we have a very agile teams and -- that are used to volatility. So the adjustments in the flexing of the cost base is very quick. And therefore, we are doing relatively well in an overall environment in Russia that is not very favorable.
Do the competitors follow your prices?
Yes, we are the leaders of the pricing. We are the price leader, and we take the lead in increasing prices. And in most of the case, they follow and then we adjust tactically when we have to. But we are recognized as the price leader in that region.
There are no further questions in the queue at this time. [Operator Instructions]
Thank you. If there are no further questions, we are going to close this call. Thank you very much for your time, attention and numerous questions this morning. Raphaël and I will remain available for follow-ups if needed. And I wish you all a very good day. Thank you.
Thank you, ladies and gentlemen, that will conclude today's conference, and you may now all disconnect.