Tarkett S.A. (TKTT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Tarkett Full Year 2019 Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Friday, 14th of February 2020. I would now like to hand the conference over to your first speaker today, Fabrice Barthélemy, the Tarkett CEO. Thank you. Please go ahead.

Good morning, and welcome to this call about the Tarkett full year results 2019. I'm Fabrice Barthélemy, and I will share the call with our CFO, Raphaël Bauer. Let me start with a few key figures about 2019. Despite the challenges we faced in the end of last year in North America, and we'll come back to those, we record positive organic growth of 0.7%. And overall, our sales grew 5.5% and reached EUR 3 billion threshold. Our EBITDA increased slightly to EUR 250 million and the EBITDA margin before IFRS 16, reached 8.3%, so 50 basis points decline compared to 2018. Having said that, as we will see later on, we have delivered an absolute record year in Sports, both in terms of revenue and in terms of profitability. We've also improved in all regions except in North America in the second half of the year. We are particularly pleased with our performance in terms of free cash flow generation. We generated EUR 231 million of free cash flow thanks to a strong improvement of working capital. And also, thanks to the use of factoring facilities that are now in place. This enabled us to significantly deleverage the company. You know this was an objective for last year. And to reach a leverage before IFRS 16 of 2.2x adjusted EBITDA with a net debt amounting to EUR 548 million. Let's turn immediately to North America. This was the major piece of news at the end of last year. You remember that we launched an ERP system in one of our plants in the U.S., the plants making commercial carpet tiles, and we experienced unusual difficulties in restarting that plant. So October was very weak. The situation improved in November, thanks to the very strong task force that we put in place immediately. And we practically normalized production and deliveries in December. A bit faster actually than we were anticipating at the beginning of December. So we have put that task force in place, [ sales are now ] and production is still heavily supported by the task force, but production is considered as back to normal now, and this was demonstrated again in January. We are also launching midrange LVT and carpet tiles at the beginning of this year to complement our range and boost our sales. The performance of the Lexmark or the ex Lexmark acquisition in hospitality was disappointing, especially during the second half of last year. And we have also implemented there a change and a change in management to turn around that activity. Clearly, the focus for this year, 2020, is to turn around the performance of North America, both on the top line, and the cost side. So on the top line, we have one brand now and the sales force have been unified. We have also revised incentive schemes, sorry. And in order to turn around the residential part, we have also created a stand-alone business unit with a clear plan to improve the performance of that part. The industrial footprint that we put in -- reorganization that we put in place last year has been successfully executed. We've closed 2 plants in Canada last year and merged them, consolidated them with plants in the U.S. One of those sites in Canada has already been sold, actually, and we received EUR 4 million cash at the end of December. The other one will be sold in the next few months. And those shutdowns and transfers occurred in a satisfactory manner. We're also simplifying the product offering, and we are deploying action plans to reduce SG&A in the U.S. as in other regions as well. Let me come back to the strategic plan and the 4 pillars that we have announced in June. So we, Tarkett, want to be the global leader in commercial flooring and sports surfaces. We want to continue to grow but more selectively in residential segment. And we really want to change the game with circular economy, and I'll come back to that. The 4 pillars being: growth, One Tarkett for our customers, cost and financial discipline, and people and planet. I will start -- there is no specific order for these pillars. I'll start with the recent update on cost and financial discipline on 4 things. In the cost saving, you might remember that H1 productivity was a bit slow. We've accelerated in the second half of the year to reach EUR 32 million in savings for the full year, EUR 27 million being achieved on the manufacturing sites. So improving productivity in the sites, including the restructuring we put in place in the U.S. and about EUR 6 million were derived from reduction in SG&A and structural costs. We are rolling out the automation plan. This is also in line with plan. The level of CapEx last year was in line with what we expected, EUR 125 million, with some investment to increase capacity in LVT in Europe, in wood in Russia, in LVT in North America as well. We anticipate that this year, in 2020, the level of CapEx will be slightly reduced to around EUR 100 million as these large capacity investments are now behind us. I mentioned deleveraging and the free cash flow generation. In addition, we also refinanced successfully most of our debt facilities at the end of H1, improving covenants and reducing the cost of that debt. This financial situation allows us to pay a dividend totally in line with the dividend policy we announced in June. I remind you that we announced a dividend policy with a payout ratio comprised between 30% and 50% of earnings per share. We are paying 40% earnings per share in cash, and that is EUR 0.24 per share. One of the pillars of our strategic plan is sustainability and circular economy. We have set targets. One is to dramatically increase the level of recycled raw materials that we use in our products from 12% today to 30% by 2030. And the other big objective is to reduce our greenhouse gas emissions by 30% between now and 2030, after having reduced by 15% between 2010 and 2019. So we are already on a positive path, and we want to accelerate that path. And things are changing in our market, I want to mention an initiative that we've deployed in Europe in the last few years, which is a program that we call ReStart. With ReStart, we take back from the job sites, the offcuts of vinyl rolls that are left over after installation. And on this slide, you see the amount of products that we have taken back over the last 3 years, and you see the strong acceleration of this program in Europe. And that's a combination of opening the program in new countries and having more and more success with our customers who are more and more sensitive to that circular economy side. So 77% increase in volumes collected last year, mostly in Europe. We also put in place a unique initiative in Europe. We are the first one to do that. We are the first one to offer to our customer a fully circular solution for commercial carpet tiles. We have opened in November in the Netherlands an industrial facility to give us some more carpet tiles at the end of the -- not of their life, at the end of their use. And so we can now commit to our customers to the fact that after 7, 8, 10 years of use, their carpet tiles can be disassembled, and we can already take back existing carpet tiles today. And from that disassembly process, we create mainly 2 streams of products, the fiber that makes the top of the carpet tiles is depolymerized and totally recycled in -- at one of our suppliers and partners. And the backing, so the back of the product, is recycled into our process in the Netherlands. So this is a huge breakthrough for the industry because it's the first fully circular solution, and it replaces, of course, other solutions, which were incineration or landfill. With that, we have actually invested in capacity increase of our EcoBase production line. EcoBase being the backing solution that is fully recyclable, compared to the traditional backing solution used in Europe, which was bitumen. We are also investing and -- to reduce greenhouse gas emissions last year, we've made a big breakthrough also in 2019, reducing by 5% our greenhouse gas emissions versus the previous year. Overall, it's 15% reduction. And of course, it's a combination of saving on energy, reducing the watts that we use and improving the mix of our energy sources. And of course, acquiring more green energy. Today, 28% of the overall energy, electricity and other types of energy, is renewable. We've also made progress on the so-called people side with 3 KPIs that are extremely important for us. We have progressed immensely on safety over the past 10 years at Tarkett, going from a frequency rate of 9 to a frequency rate of 2. Now we want to go much further and reach 1, which is really the performance of best-in-class companies worldwide. We have also commitment to improve the diversity and to improve the ratio of management position fulfilled with internal candidates. We are about 2/3 about now, of our positions are filled with internal candidates, and we are committing also to increase the proportion of women in management position. And my personal commitment is that in any shortlist of candidates, there will be at least 1 man and at least 1 woman. So that's for diversity. We have also deployed a program that is called Tarkett Cares, which is not centralized but a fully decentralized program, where our teams locally take initiatives to help local communities to refurbish hospitals, schools or shelters, things like that. And this is extremely successful with our teams and the number of initiatives have actually increased. One of the pillars is One Tarkett for our customers, and we are making progress there as well, leveraging our global scale, reorganizing our R&D forces and objectives and projects. The global presence in Sports has also enabled us to gain share. We are also reinforcing our local presence and the adherence between manufacturing, supply chain and the customers. In the CIS, for example, we have completely changed the distribution model, going direct, and this has given extremely good results in the second half of the year. In North America, I mentioned that we've gone to single branding. All this is also in a frame of simplicity and agility, it is a big thing for Tarkett. We want to be faster, more proactive and easier to deal with for our customers. And to do that, we are streamlining, sometimes our product ranges. We are also streamlining our support functions and optimizing the back office. You've seen in the numbers that 2019 has been an extremely good year for Sports. And it's not just 1 year of strong results, it's actually 3, 4, 5 more years of very good results in that activity based on the revamped product offering. That is one of the largest on the market. Very strong relationship with our customers and partners. A very strong focus on experience for our customers. And one of the teams that is most probably the most customer-centric at Tarkett. The result of that strategy has been a CAGR of sales of 12% over the last 3 years, with 12.9% in 2019; and an improvement of EBITDA margin that is now double digit, 10.6% before IFRS 16. And we are gaining share in all geographies. We have always been the #1 in artificial turf in North America, but we are now also the #1 in artificial turf in EMEA for sports application. We are #1 in running tracks in North America; and in hybrid turf, we are #1 worldwide. One of the examples of what we can achieve in that Sports activity is this -- the Independent School District of Abilene. It's a $10 million project in Texas, and you see the number of fields that are invested by that school district: 8 turf fields, 4 natural grass fields, 4 track surfaces. And we have the ability to actually take responsibility for the entire project. We have the project teams, the engineers that allow us to offer turnkey solutions to our customers. Not everyone on this market is able to do that. And $10 million for a company like us, in our market, is really a huge project. Already a customer to whom we invoiced $1 million. A $1 million project is a large one for us, so $10 million is big. And Sports is a key example, a very good example, of our segment strategy with a dedicated value proposition, a very deep knowledge of the channels to go-to-market on that segment. But it's not the only one. If you take workplace. Workplace is a specific segment, where things are changing fast, actually. There are new ways to work in all companies, and we have a role to play in offering solutions to our customers, to the architect, to the building owners, to the installers for -- to deliver the best experience in these new ways to work. Here, you see some examples on the left-hand side of LVT with the offer -- the ability to do a very fast installation, therefore, limiting the downtime when doing renovation. In health care, same topic. We are also innovating in products to offer faster, easier installation. You see on the left-hand side, what is the -- what we demonstrate here to the installer is the flexibility of the product, the ability to make sure that on the corners, you will ensure a full ceiling which is very important in health care facilities. Education also, in all different countries, we have relaunched product ranges and the one that we've relaunched [ Tarkett Space ] Essential in EMEA has been extremely well received, and we have seen a pickup of sales, especially in the second half in Europe and namely in France as well. Hospitality is a key segment for us now with the acquisition of Lexmark, where there are changes, we see LVT coming more and more in the hospitality. And therefore, we are innovating with dedicated products for those ranges. And of course, residential is -- remains a key segment in some geographies. We are the #1 in Eastern Europe. We are also a very strong player in Western Europe. And here you see examples of products on this slide, where, on the right-hand side, you have a real wood, wood parquet. On the left-hand side, this is rigid LVT produced in our plant in Eastern Europe. So this plan, we expect will help us to reach our midterm objectives for 2022, which are to grow more than GDP in all our key regions. To improve our profitability and reach an EBITDA margin of 12%. This is after IFRS 16 by 2022. And to maintain a sound capital structure with a leverage between 1.6x and 2.6x EBITDA. And you see that on that side, we have actually -- we are in line with our plan from day 1 from the first year with a leverage of 2.2x in 2019. So with these overall highlights of our numbers and our strategy, I'd like to hand over to Raphaël, who will give you some more color and detail about our financial results. And we'll come back for a conclusion and Q&A.

Thank you, Fabrice. Good morning, everyone. So as we announced back in December, the fourth quarter organic growth is down, it's down because of North America because of the issue we had post the go-live of SAP in our large commercial carpet factory. However, December was slightly above what we expected, and North America is down 19% in the fourth quarter. In the fourth quarter, we saw real strong growth in Sports, almost 19%, and that was due also to good weather conditions, allowing to install late in the season. And we've also seen some slightly improving trends in the CIS and in Russia, in particular. On a full year basis, our sales are slightly up, plus 0.7%, and that's really being driven by the very strong performance of Sports that Fabrice has already commented. In EMEA, we grew slightly, notwithstanding the stop of production of laminate that impacted the fourth quarter in particular. In North America, we had a difficult year throughout the year. And in the CIS, APAC and Latin America, sales are slightly down on a full year basis. But as I mentioned, trends are slightly improving in the second part of the year. So this second part of the year, we've seen an improvement in our EBITDA by about EUR 5 million with a stable margin in spite of the sharp drop of performance in North America. North America EBITDA drop in the fourth quarter is slightly above EUR 20 million due to the significant issues we had post-SAP go-live. All the other segments have improved their performance, both in value and in margins. In Sports, we see a very strong pickup of the performance driven by both the operational leverage and higher sales and also to the favorable settlements that we had in the third quarter. In EMEA and the CIS, we've seen good selling price management and also a strong level of productivity that allowed to improve margins throughout the second half. On a full year basis, our EBITDA is stable, very slightly up. We've actually been able to offset the very significant impact of the drop of activity in North America. In the first bar of this chart, in the volume and mix, you see minus EUR 39 million, that's actually mostly coming from North America and a significant part of that from the second half and the fourth quarter. But we've increased our selling prices and we achieved a very high level of selling price increase of EUR 22 million, and that's allowed to offset more than raw materials and transportation inflation. Actually, to the most, offsetting also salary increases. On top of that, we've delivered above our target in terms of cost reduction, EUR 32 million cost reduction. I remind you that our target over the duration of the plan for full year is EUR 120 million. So that's EUR 30 million per year. And we've achieved that, thanks to good level of productivity coming from manufacturing, and that's also owing to the shutdown of the production sites in North America, primarily. But we've also started initiatives to reduce costs in SG&A. We've been hit also by some one-offs, and that was mostly inventory impairment in North America. But on the other hand, we've seen a good effect from the selling price management in CIS. What you have in the currencies and lag effects column is actually, most of that is a positive effect of the lag effect in the CIS countries. So the net effect of the selling price and the currency. So we maintained the selling price even while the ruble gradually improved throughout the second half, leading to that favorable impact. But to get a better sense of our results, let's zoom quickly by region, starting with EMEA. EMEA is our largest segment, our largest division. And revenues are slightly up organically in the year. The decrease in the second half is actually related also to the exit of laminate production, as I mentioned. We've faced the difficulties in the U.K., a challenging market also in Germany. But on the other hand, in the second part of the year, we've seen a pickup of sales in France and a return to organic growth. So adjusted EBITDA in EMEA is slightly up. But actually, as I mentioned, it's improving in H2, thanks to a good level of productivity and selling price increases that have more than offset inflation. In North America, it was a difficult year, definitely. In the first 9 months, we saw a decrease of commercial carpet sales in a market that is down and we know that strongly contributed product range for us. In the fourth quarter, we mentioned the difficulties following the SAP go-live. The good news being that since end of December last year, that factory is back to normal. So we're actually, today, producing and shipping normally. But still, that has a significant impact on the growth of 2020 -- of 2019, sorry. In Lexmark, Fabrice mentioned that sales were below our expectations. But actually, some product lines performed well also in North America, through the year. The accessories, for which we've invested also on our U.S. site to receive the production from the site that we shut down in Canada, that is doing well. That is going well and all lines are running well. In the CIS, the second part of the year is looking slightly better with some volume growth in Russia, in particular. With -- in the rest of that segment, you know that there is also Asia Pacific. And in Asia Pacific, we've grown in China, we've been down in Southeast Asia. And we've grown also quite significantly in Latin America, thanks to Brazil. In Brazil, we are the only local manufacturer of the LVT tiles. And we have grown significantly volumes and also improved selling prices in the region. In the CIS, you see a very nice pickup of EBITDA and margin in the second half, in particular. That's owing first to a very strong level of productivity, mostly coming from manufacturing. But also, as I commented earlier, to the good management of selling prices, which remained almost even while the ruble strengthened gradually. And last, Sports, with a very, very solid year. And in particular, our solid fourth quarter related to good weather conditions where we could install late in the season. We've improved not only in North America, which is larger, more than 80% of the segment, but also in EMEA. Our activity was solid in turf and also in trucks, in particular, towards the end of the year. So as a result, we see a significant improvement in EBITDA coming, first of all, from the operating leverage and also from the favorable settlement in the third quarter. So I will go quickly for the nonoperative indicators, starting with EBIT at EUR 96.6 million. Just 2 points of attention here. First of all, D&A, depreciation and amortization, it's increasing significantly in a reported figure compared to last year. IFRS 16 has almost a EUR 30 million of impact year-on-year. And on top of that, we have the amortization from Lexmark that is also being recorded on a full year basis. Looking at the adjustments to EBIT, it's really stable year-over-year, but with actually much more restructuring costs as was expected and announced due to the 3 sites closure of the year. On the other hand, we've been able to sell one of these sites, the Waterloo side in Canada that we shut down in the second part of last year. It was sold in December and we see on the second line, on gain and loss, on asset sales, the profit related to that. Our net result for the year is slightly below EUR 40 million. That's a diluted EPS of EUR 0.61 per share. Again, here, I want to highlight the change in norms in financial expenses year-over-year. We recorded a EUR 4 million interest charge coming from the IFRS bookings. On top of that, we've had, in average, in 2019, higher debt than in 2018 and a slightly higher financial interest. So the success of last year is a very strong free cash flow generation, EUR 231 million. And as you can see on this chart, there is a very strong contribution from working capital, EUR 190 million positive contribution from working capital. Two major effects. One is the deployment of factoring programs in Europe and the U.S. and that accounts for EUR 126 million. And the second driver is a very tight management of inventories, and that accounts for EUR 30 million improvement in North America, in particular, but not only, also in EMEA and in the CIS countries. A very strong level of free cash flow allow us to reach a leverage of 2.2x EBITDA before IFRS 16. So it's a significant drop in absolute value, also in net debt by more than EUR 200 million, reaching EUR 548 million before IFRS 16. After IFRS 16, where we book the liabilities of the lease as a financial debt, our reported financial debt is EUR 637 million. That's a leverage of 2.3x EBITDA, which is well within the range of what we announced in the plan, the range being 1.6 to 2.6x. I will now hand over to Fabrice for the outlook.

So how are we looking at 2020? We are looking at 2020 with cautious optimism. We are not expecting a very strong or buoyant demand in EMEA or the CIS. Every country is different within EMEA, some will be stronger than others. And actually, the trend we are seeing in H2 can differ from one country to the other. But overall, it should be a fairly soft demand in those countries. So really, our growth strategy is about gaining share and making sure we have the right offer for our customers. In Sports, the dynamic is a bit different. Among all our segments, Sports is the fastest-growing, and we see that in the results of the past 3 years. We have taken share, we have the best product offering and we also benefit from a market that is more dynamic, especially in North America. We expect also some continued inflation driven mostly by energy and probably a bit led by raw materials. And we intend to continue to offset those type of inflation by our proactive selling price management, and with the target to offset. And if possible, more than offset the inflation coming from energy and raw materials and transportation. I would also to mention China with the flu situation that we have these days in China. Tarkett is a company group, little exposed directly to China. China as a market represents just less than 1% of our sales. We have 2 plants there that serve the local market only. So as a direct end market, it's a very small exposure. Nevertheless, we also source products or raw materials, certain raw materials from China, so we are very precisely monitoring the situation and working to limit or mitigate the potential disruptions that will certainly occur in the supply chain, not only for Tarkett but for the overall economy. Our priorities for 2020 are very clear. Turning around North America, both in terms of sales and EBITDA is an absolute priority, and it's very strong. There's a strong focus from the management team on North America. We also continue the execution and deployment of our strategic initiatives that I mentioned, including sustainability strategy. And we continue also to very tightly manage our costs, with a specific action on SG&A. And of course, our working capital and our CapEx in order to maintain a financial structure as healthy as the one we are ending 2019 with. So overall, given the market situation and what we see today, we intend to improve, increase our EBITDA margin in 2020 compared to 2019. And we will hope that the results will confirm that target in the coming months and quarters. So again, a good year on the top line last year. Record year in Sports. Positive organic growth in spite of the issues we had at the end of the year in North America. And a resilient EBITDA and EBITDA margin given those circumstances. And again, very strong performance on free cash flow that really gives us more flexibility and headroom to start 2020. With that, I would like to hand over to you, actually, for a Q&A session that Raphaël and myself will host. So Q&A will come from the room or from the phone.

Who's taking the first question? Charles-Louis?

Yes. Charles-Louis from Kepler Cheuvreux. My first question, how much of cost savings is already on back for 2020? And when are you planning to get the EUR 30 million cost savings target this year? And how do you compare to your peers when it comes to recycled materials? And behind the views on [indiscernible] impact, is there any clear economic benefits to use the recycled materials?

So on the productivity, Charles-Louis, we have a target over the duration of the plan to achieve EUR 120 million, which means about EUR 30 million per year. Overall, if you want, productivities are evenly spread over a year. So when we say EUR 30 million, about EUR 15 million is actually a carryover from the previous year overall. What is a bit specific in 2019 and 2020 is that we did some restructuring actions that occurred actually just in the middle of the year. So this restructuring will have a full year effect in 2020. But overall, it's evenly spread over the year. In terms of recycling, I don't have the equivalent recycling -- use of recycled material for all our competitors. Everyone is trying to use more or less recycling. What is key is that our product categories, vinyl and carpet are products that you can technically recycle. And we have invested in the past few years in developing the technologies. The most difficult to recycle was, probably among our product, was carpet tiles and we're very proud to be the first ones to have developed that technology. And it's not just Tarkett, because you need to make partnerships to achieve that. To recycle the fiber, you need a chemical process that Tarkett doesn't have, and it's a process that really needs to be put in place by a partner. So on carpet tiles, we are very confident that we are ahead of the competition. And we have also -- we are ahead in terms of collection and offer to our customers. On vinyl, we are also -- we are the first ones to recycle vinyl in 1957 in Sweden. So we have already established schemes and developed technologies to do that. Now economically, it's a very good question. Because today, the target that we have is for recycling to be a breakeven, to be a wash. Why is that? Because right now, the incentives that are given to our customers to recycle as opposed to incinerate are not huge. The cost of incineration in Europe is not high enough, the cost of landfill in Europe is not high enough. So for us, the offer we have to our customers makes it about breakeven from a financial point of view, which is good already. And I'm convinced that in the future, this can only turn out to be a financial advantage, because the cost of incineration will go up, the cost of going to landfill will go up and the cost of virgin raw materials will go up as well. So that's -- on the long run, it will also benefit to us financially, and this is not the case today.

Steve from MainFirst, Steve Levy from MainFirst. Three questions, if I may. The first one is on Sports. Can you give us an idea about what could be a normative margin for the Sports division? And if growth continues like as it is, can we reach the average of the group? And regarding the 2020, do you think that double-digit growth in Sports is achievable again this year? The second question is about the working cap. You've made an excellent job in 2019, even if we exclude the securitization. Can you expect further improvement in 2020 on this side. And third question about North America, in particular, can you elaborate a bit more, the impact of being under one brand and if we start to see much more growth in the -- despite the event in December?

So for Sports -- thank you, Steve. For sports, clearly, the potential to -- for Sports to be at the 12% margin, like we have targeted in our plan, is absolutely reachable. Thanks to growth, thanks also to a very lean and cost-effective organization. And thanks to a certain pricing power in certain subsegments, that is better than competition. So there will be always a pressure on price. It's a competitive market, but we are very confident we can reach the 12%. On working capital, Steve, you understood that in 2019, there are 2 main components, the factoring program that we started. In 2020, we expect to keep -- to maintain these factoring programs so that shouldn't have any significant impact on the working capital variation in 2020, we will keep using these programs throughout the year. In 2019, we've also worked significantly on our inventories level, in particular, in North America, but not only. So we've done a nice job reducing by EUR 30 million that inventory level. We believe there are still some opportunities for 2020, albeit not at the exact same magnitude as in 2019. So some opportunities for working capital, yes, but not the same magnitude as in 2020.

So we will have a cash flow for 2020?

We could expect a slight positive contribution from working capital to the free cash flow, yes. So one brand in North America, we haven't seen yet the benefit of the one brand strategy, to be clear, because this has been actually offset by the other difficulties we've had. Nevertheless, this -- what we see is some very positive indication on the brand equity of Tarkett or the unaided -- unprompted awareness -- brand awareness in surveys. And this is -- the aim actually is raising the awareness of the Tarkett brand. People and our customers are more and more, really making the link between the ex Johnsonite brand, they're very strong in accessories and Tarkett or tenders that was in commercial carpet and Tarkett. All this is -- this is really taking shape. And this on the long run, it's a good strategy because investing and maintaining a brand is expensive in terms of material, in terms of communication, so there's a reason -- that's one of the reasons why we're also consolidating over one brand.

Jean-Francois Granjon from ODDO BHF. I have 3 questions, please. Regarding the North America, could you [indiscernible] the Lexmark contribution? Do you expect an improvement compared to the low contribution last year? I understand that there is a new management. The second point, what about the mix products in North America? The mix was pretty -- was lower than expected last year. So do you expect an improvement for the mix in North America? And last question regarding the exceptional costs. So last year, you have integrated EUR 25 million for exceptional costs. What do you expect for 2020?

Okay. Thank you, Jean-Francois, for your question. So starting with Lexmark, you understood that performance in '19 is disappointing. We've made those changes with new management. What we've seen also with the hospitality market is that there is growth in North America. There is a pipeline of projects, so there is no issue with the market in itself. So we've also developed our LVT range for hospitality because one thing that we need to grasp is that the market is developing more and more a mix of surfaces and mixing LVT with carpets. So carpet is fully relevant, but you need to be able to prepare the mix, and we are now able to prepare that. So we believe we've taken the right measures. Now we need to deliver, but we expect increase in activity from hospitality in 2020. When I look at the product mix in North America, it's true that we've been penalized by the lower sales in commercial carpet, which is a strongly contributed product range. Again, as I mentioned, production is back to nominal. So we are able to ship normally. Now we need to regain the level of activity that we have, in particular, in the discretionary business. Fabrice mentioned that we're quite cautious for the first part of the year and for the first quarter, but we should see some pickup toward Q2 and the second part of the year. Our objective for 2020 is to regain organic growth in North America, partly also in commercial carpet. So we expect that to contribute favorably. To your last point, you've -- on exceptional costs. You understood that we have this significant cost reduction program over the duration of the plan. Part of it was related to manufacturing footprint action that we've taken in 2019. So regarding manufacturing footprint, really, we've taken a significant part of the cost. There are still other actions, but probably to -- of a lesser impact. But we have also initiatives on SG&A. So all in all, we should expect still a significant level of exceptional costs and restructuring costs, more or less in line with what we had in 2020. It's a bit early to be more specific -- with 2019. It's a bit early to be more specific, but...

We have a follow-up question from Charles-Louis.

Two quick follow-up questions. The first one on the LVT. There are actually a lot of products that are coming from China. And do you think that thanks to your local production, you are better positioned to cope with the potential supply issue? And the second question, on the selling price increase, do you expect them to fully offset raw material, energy and SG&A costs in 2020?

So on the second -- to your second question, Charles-Louis, the price increase will fully offset energy and raw material increases, if any, SG&A cost will go -- should go down actually. So -- and they will probably offset partly the salary inflation. But salary inflation is not only SG&A, it's also salary inflation within manufacturing and therefore, within the gross margin. For LVT, I think it's important to qualify. There's a lot of product coming from China. We, Tarkett, have a dual model where we make and buy and we don't give precise proportions, but there is still more than 50% of our products sold in Europe, for example, that are made in Europe. So depending on product lines and collections, we choose to make in Europe or to buy from China. Right now, we are, of course, working with our suppliers in China. We are very slowly resuming production because even if their factories are reopening like ours, they have difficulty in having their employees actually coming back to work after the Chinese New Year vacation period. So there will be disruption in the supply chain and probably also related to transportation. The strength of our model is that we have alternatives to offer to our customers, not exactly the same products, but we have alternatives that are manufactured in Europe and where we are fully autonomous in Europe with a plant in Germany, in France, in Luxembourg and in Poland. So we have already started to work with customers to offer them alternatives from a product construction and design point of view. And in that, we are in as good a situation as some of our competitors who manufacture also locally, and in a better situation than some of our competitors who only source from China.

So we have a couple of questions coming from the web. The first one is coming from Eric Lemarié from Bryan Garnier. The question is what about the utilization rate in your plants globally at end 2019 now that these 2 Canadian plants have been closed? How does it compare to end 2018?

So we don't we don't disclose the global utilization rate, and it really varies by geography and by product category. One of the 2 plants in Canada that was closed -- actually, it wasn't closed because of underactivity, it was shut down because we created -- so it was a plant making accessories, so [ wall base ], for example, for commercial applications. We closed the plant in Canada because we invested in additional capacity in Ohio, in a state-of-the-art-plant in a [ profitable ]] category that is growing. So actually, the aim was really not to face excess capacity, but actually to merge 2 plants in a 1 that is -- with more capacity and also a better cost base. The one in Nova Scotia was more a utilization issue. It was utilized around 50%, and we merged it with another plant in Dalton, Georgia. But -- and the third one that we shut down, a laminate in Europe, was a completely different dynamic. We had that plant in partnership with Sonae Arauco manufacturing laminate. Overall in Europe, on the market, there is excess capacity. But what was very specific to us is that, that plant needed to be upgraded to comply with new emission regulations. And given the market situation, the profitability of that product line, we preferred to put in place a buy strategy when we found a partner to do that rather than investing a significant amount of money, north of EUR 15 million into the upgrade of that plant.