Tarkett SA

PAR:TKTT

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Tarkett Q1 2021 Results Call. [Operator Instructions] Please be advised today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your first speaker today, Tarkett's CEO, Fabrice Barthélemy. Please go ahead.

[Fabrice Barthélemy, Chairman of Management Board & CEO]

Good morning, and thank you for joining this quarter ending this call. This is Fabrice Barthélemy speaking. On the call this morning, I will be with Raphaël Bauer, our CFO. Thank you for joining, and I know the call has been anticipated. As we know, we've anticipated the Q1 release, so as to have it sync with another announcement we've made on Friday. So of course, I will start with a few words on the current trading, and I will also give you more details on the simplified tender offer. Our sales in Q1 are down 8.5% compared to last year. This is actually 3.8% down on an organic basis compared to 2020 as the exchange rates, I mean the U.S. dollars are weighing on the reported net sales. Adjusted EBITDA is down from EUR 42 million to EUR 34 million with a margin that is resisting rather well above 6% at 6.1% versus 6.9% last year. As you know, last year, in Q1 2020, we were mostly unaffected by the start of the pandemic, having a few days of shutdowns in Europe and a few days also in Asia. But most of the impact of the COVID pandemic last year was already taken in the second quarter. So looking at the trend by region. We can say that our organic growth is still affected by the pandemic, mainly in some of the commercial segments, on Workplace and Hospitality, of course, but also Sports. On the other hand, Residential sales are quite strong in all regions, and that drives a bit also the trend of sales by region. In EMEA, where about 2/3 of our sales are in commercial segments, we've seen a strong rebound in the South Europe, namely France and Italy. We've seen also some countries severely affected by lockdowns, especially the U.K. and some improvements in some commercial segments, such as Healthcare and Education, but we see that Workplace, that Hospitality remain really subdued, and we have little visibility on the timing of recovery. The impact of Hospitality, of course, impacted countries, such as Spain and impact of -- Workplace impacted countries, a lot like the U.K. In North America, our business mix is totally different. We have 80-plus percent of our sales in commercial, and it's the area of the world where our share in Workplace is the highest. So we've been strongly affected by the depression of both Workplace and Hospitality. And the strong growth we enjoyed in Residential with market share gains and a very good performance in Residential was not enough, of course, to offset that decline in our Workplace and Hospitality. And unlike in Q4 last year, we could not benefit from a favorable comparable -- basis of comparison because Q1 2020 was actually better in North America. In the CIS, Asia Pacific and Latin America, you know that we have a strong share of our business in Residential, and we have seen the effect of that with continued growth, double digit, actually in Q1 after a good Q4 2020, and that is mostly driven by the CIS but also by Brazil, where despite the situation in the country that is dire, we have had good growth in sales and a very good pricing also in Brazil and further recovery in APAC. You know also that Asia Pacific last year was the first region to be affected by the coronavirus. Sports is still on the negative trend after a negative H2 last year, and you see Q4 last year, minus 6%. We had some and postponements of projects that have an impact on Q1, and activity was a bit lower in turf in North America, which was mitigated by a better growth in the EMEA. We are facing, in our business, an extremely volatile environment. It was already the case and the topic of our call in February 2 months ago. And since then, the situation on raw materials, both on procurement and on pricing, has deteriorated. We've seen a rapid increase in all derivative prices and also on freight costs. We've seen disruptions at suppliers, driven in some cases by natural disasters. Cold wave in Texas affected heavily all the chemical industry of Texas, and we are still suffering the impact of that situation, as we speak. We've had some force majeures in -- at some of our suppliers in Europe, either related to accidents in some factories, or in some cases, some maintenance that didn't take place as planned. And also, we see, like all industries importing from overseas, a very sharp increase of the price of containers and difficulties as well to find containers to ship our products from Asia or from Europe to North America for the products that we have to ship there. So we've had to revise our inflation impact up to EUR 100 million for the full year of 2021 compared to 2020. And this, of course, is a major impact on our profitability. So we have responded with very strong actions. The main action, of course, is increasing selling prices. We've done that at the beginning of the year, but we've had to announce additional price increases that are effective in some of them at the end of March or beginning of April to offset, as an objective, 50% of the inflation cost in 2021 on a P&L basis. Why only 50%? Because we know that in our business, the products we quote today will not be delivered for commercial projects until later this year or even for some of them next year. So there is a natural time lag between the time we announced the price increases and the time when we have the full effect of those price increases in our P&L. So as you know, the activity is also subdued. Demand in commercial is still low. So we have to focus on our cost saving programs, which are well ahead of plan. We have flexed -- continued to flex all cost lines in Q1. SG&A are very well under control. And in total, we have posted EUR 24 million of cost reduction, of which EUR 15 million are really structural cost savings, and we intend to achieve in total for the year more than EUR 30 million of structural cost savings ahead of our initial plan. So we are very strong on this. But as you understand, the impact of raw materials can only be mitigated by selling price increases, given the sheer size of that impact. Meanwhile, business is going on, of course, and we've actually posted some very interesting installations in Sports in California and Louisiana. Also hotels, we keep saying Hospitality is actually very depressed, but there are still some renovations at hotels although at a much lower pace, and the activity is down, but we are managing to actually win some sizable projects. And also in Workplace, where the activity is down, large double digits compared to last year in North America and in Europe, we have still some very interesting projects actually to report. Now the big announcement of Friday that actually results in this advanced or anticipated Q1 release is the fact that our controlling shareholder, the Deconinck family has decided to launch a simplified tender offer on all Tarkett shares, partnering with Wendel as a minority shareholder. So this tender offer will be launched at EUR 20 per share. As you know, the share price listing or quotation has been suspended on Friday morning, and we'll probably resume tomorrow. The structure of the operation is the following: we -- the Deconinck family has created a new entity called Tarkett Participation. The Deconinck family has contributed all its Tarkett shares that were held through Société Investissement Deconinck, which is about 50.8% of the share capital. All of these shares have been contributed to Tarkett participation, and Wendel is investing alongside the family as a minority shareholder in that Tarkett Participation entity. So it's, of course, a way for the Deconinck family to reiterate its very long-term commitment to Tarkett, which is the main investment of the family. Wendel, as you know, is a listed entity. So it's an entity that's investing for the long term. And they will bring to the family and the management, both expertise and financial support to support the ambition and the entrepreneurial spirit of the -- so the intent of this operation, of course, is to pursue the development and the transformation of Tarkett in an environment that is very uncertain and volatile, as you've understood. The key steps of the operation is the following. So we've announced that simplified tender offer. And let me remind you that it represents a EUR 20 per share, a premium of 38.1% over the VWAP of the last 20 trading days. This offer has been unanimously welcomed by the Supervisory Board of Tarkett, which has appointed an ad hoc committee composed of independent members of the Board, and this ad hoc committee has also recommended the appointment of an independent expert, French expert called Finexsi, that will be in charge of issuing the fairness opinion on the operations. So the simplified time line is the following. We filed this morning a draft information document with the AMF. Tarkett Participation actually intends to acquire shares immediately as soon as the trading resumes, of course. But immediately, Tarkett Participation has the financing and equity that allows it to acquire Tarkett shares and to provide liquidity to shareholders, who would like to get that liquidity right now at the price of the offer. Now we are in a time line that is constrained also by legal milestones. By mid-May, Finexsi, the independent expert, will issue a report and the ad hoc committee will issue its recommendation to the Board. At the end of May, Tarkett will file a reply document with the AMF with the recent opinion of the Board, and the offers would be able to be launched by the end of June with an end of the offer mid- to end of July. Tarkett Participation and the Wendel and the Deconinck family have already also announced their intention to proceed to launch a squeezeout procedure, if at the end of the offer, minority shareholders, do not hold more than 10% of their share capital. So these are the main milestones of this offer. Of course, we can come back to this topic in the Q&A session. Meanwhile, I would like to hand over to Raphaël, who will give you more color on Q1 results. And I will come back at the end of this presentation for the outlook and the Q&A session. Raphaël, up to you.

[Raphaël Bauer, Group CFO & Member of the Management Board]

Thank you, Fabrice. Good morning, everyone. I propose we move on to Slide #9 to have some more details on the sales of the first quarter. Organic decrease of 3.8% compared to 2020. It's actually organically also still below the first quarter of 2019, which was a more normal quarter by 6% to 7% below. One segment was -- has grown in Q1 2021 compared to last year, at CIS, Asia Pacific and Latin America. North America was down 11%, owing primarily to its large share of activity in commercial. And in the EMEA, it's more contrasted as we will see minus 4% over the quarter. Sports is down 9%. As you noticed, currency effect, negative, mostly driven by the U.S. dollar weakening, actually, EUR 20 million on sales. And the net effect of the currency fluctuations in Eastern Europe and our selling price adjustments, selling price increases, it's a net negative effect of EUR 9 million on the top line. And as you will see later in the EBITDA bridge, EUR 3 million negative effect on EBITDA. On Slide #10. EMEA has decreased organically by 4% over the quarter. It's a slight improvement compared to the trend that we were seeing in Q4 last year. Residential remains good. We see a good development in many countries and mostly driven by vinyl product categories and be it LVT or homes. In commercial, it's still the same dynamic at the end of last year. The Workplace segment is still slow. Hospitality is still very slow also. And we know in Hospitality, the season for project and for installation is now or ending now, actually, as the hotels are planning to reopen for the spring and summer season. So there will clearly be a low activity throughout the remainder of the year. When we look at the country-by-country view, in Q1, this year, we were still penalized in several countries by the various measures due to the sanitary situation, thinking of Germany, in particular, with much more stringent lockdown than in other countries. However, we've seen a good rebound in spite of that situation in a few countries, but mainly in France, which is a very large country for us in EMEA, and that's very positive. And not only in Residential, we've seen also good trends in commercial, driven by our vinyl rolls used in Healthcare but also in Education. So that's a positive. Italy did well also in the quarter. In EMEA and in the rest of the geographies, we are deploying selling price increases in order to fight off inflation. You know that historically, EMEA, it's taking -- it has been more difficult, it is probably more difficult than in North America, but we are clearly deploying all the efforts to mitigate the impact of inflation in EMEA. In North America, inflation and selling price increase is also a big topic. Inflation has started earlier, actually, by the end of last year. Our competitors have announced selling price increases. We've announced significant selling price increases and are actually planning further actions on that front. So that's going to help directionally. The first quarter, however, was down 11% with a very strong performance in Residential, but Residential is 15% of our revenues and still very slow activity in Workplace, which is a significant segment for North America. Hospitality is still down also. Toward the end of the quarter, in March, we've seen a positive pickup in our activity of accessories. And we are a leader in North America in accessories, in the rubber products, rubber tiles, rubber accessories, rubber sheets. So those products are going mainly to the Healthcare and Education segment. So we are seeing some positive letting in 2Q and this will confirm. Moving on to Slide #12. The CIS, Asia Pacific and Latin America grew well, double-digit growth. And it's true in all the 3 regions. Of course, Russia and the CIS is the largest region. We've seen good growth in volume. So that's still very positive. The mix is slightly less favorable than last year with demand moving somewhat toward the entry and mid-range of products. But it's a positive plan, knowing that we've announced significant selling price increases also for the 1st of April. So we'll monitor closely the second quarter volumes, but the trends remain sound in Russia and in the CIS, generally speaking. In Latin America, you know that last year, we've succeeded in implementing a significant level of selling price increases to reduce the effect of the Brazilian real depreciation. We're still maintaining those level of selling prices, and that's contributing positively to the top line. And in Asia Pacific, we've seen good trends, both in Australia but also in the various countries of Southeast Asia. China was less of a growth for us in the first quarter. And let's conclude this segment-by-segment view with Sports. Sports was down. This was not unexpected. On the contrary, we know that last year, in the second part of the year, a number of projects were canceled or were delayed due to the uncertainties in terms of usage of the field -- utilization of the field. Clearly, the mood is still cautious in Sports. And this is a segment, as we said in February, where we were expecting still slower activity overall in '21 compared to 2020. And the bidding season is ongoing, and we see clearly cautiousness. The order book, as we speak, is still below last year level, and we expect it's going to be a slow year in Sports. Once we said that, there are some areas of growth in the first quarter, not necessarily a proxy for the rest of the year. You know it's a small quarter seasonally for Sports. But we grew in tracks in North America. We grew in EMEA also. And to be noted also in Sports, we do see some price pressure, some competitive price pressure. And of course, we are working to pass through the inflation effect. But there is a lag in Sports. As you know, we are quoting several months before we are starting and that's really a project business by the sense and the lag that we are commenting on selling price pass-through will also occur in Sports. Now moving on to EBITDA on Slide 14. Our adjusted EBITDA is EUR 34 million with a resilient margin of 6.1%. We suffered significantly from lower volumes and poor mix and that the EUR 20 million negative impact on EBITDA that you see in the first bar of the bridge chart, this is a combination of slower volume overall, but also significantly slower volume in some of the most contributive ranges, such as commercial carpet for the office segment, be it in North America or in EMEA. We mentioned also slightly negative mix in Eastern Europe with entry and mid-ranges having a higher share in the total sales. So that's detrimental by EUR 20 million, all in all, that we are more than offsetting through cost reduction, as commented by Fabrice. EUR 24 million over the quarter of cost reduction, some of that is structural, and it's EUR 15 million of structural cost reduction, both from the manufacturing, environment and from SG&A, G&A, more specifically, cost reductions and also still some short-term cost flex measures. Looking at the inflation balance. Sales pricing is positive, but we clearly do not yet see all of the effect of the selling price increases that we are implementing. The inflation balance is negative. Raw material and freight is a negative of EUR 5.6 million. As we said, our new estimate for the year is around EUR 100 million based on the current prices that we are seeing today, following the fast acceleration of prices that Fabrice has described earlier. So this negative effect of raw material and freight is going to grow significantly in the second and the third quarter, and the sales price effect will grow so progressively, aiming at offsetting around 50% of the total inflation impact. On Slide 15, we wanted you to have, first, a view on the net debt situation, the financial situation. As you know, in the first part of the year, first quarter and also over the first semester, we usually have a negative cash flow. We really consume cash flow, owing to the very low working capital point end of December, and that was even more true at the end of last year, where we reduced significantly inventory level and the level of activity was low. So we need to increase slightly working capital. We've done so by increasing inventories. We've been sometimes even constrained in our inventory buildup by supplier shortages. So at the end of March, the level of debt at EUR 537 million or 2x last 12 months adjusted EBITDA is a low level of debt, is very much under control and compares to a level of 2.7x at the end of last year. So leveraging that we've performed last year is still paying off and the level of debt is fully under control and cash flow consumption is fully under control. I will now hand over back to Fabrice to conclude with the outlook of the year.

[Fabrice Barthélemy, Chairman of Management Board & CEO]

Thank you, Raphaël. So as you understand, we are pretty satisfied with the way we've been able to counteract against lower volumes by reducing costs and managing cash. And I think we have demonstrated again our ability to manage costs in a volatile environment and our ability to maintain a healthy capital structure in this volatile environment. Unfortunately, demand is still uncertain for the rest of the year. The timing of recovery of some commercial segments fully lacked visibility, and it is certainly expected to be progressive, especially in Workplace and Hospitality. And as we see leisure and business traveling resuming slowly, which has an impact on Hospitality, of course, on the other hand, we are expecting still for this year further growth in Residential, as households actually arbitrate between traveling and leisure and home improvement. So we expect that trend to continue and to benefit us actually in the countries where we are heavily represented or participating in the Residential segment, such as, of course, Russia, but also several countries in EMEA. We have protected well the margin in Q1, but very clearly also, the wave of raw material price increases is still ahead of us for the most part. You saw the impact in Q1, EUR 5.6 million. That's because actually, we have inventory, and it takes a few more for the purchase costs to flow through, through the P&L. We are facing a sudden and brutal deterioration of our input costs. As we speak, we still are suffering a combination of shortages at suppliers. In some cases, we have to stop some plants, and we lose sales because of lack of raw materials. The effect of a natural disaster, such as the one we had in Texas, are still visible right now, as we speak. And there are persisting tensions on the freight cost. I think a few months ago, we were all thinking that, that tension on container costs would actually ease very quickly. So far, it has not been the case. So we have increased selling prices at the beginning of the year. We are increasing them again at the end of March. But you know in this business, it is difficult to avoid a lag. And the prices we got today, will not be delivered for some of them in projects until the end of the year. So that's why we expect to offset about 50% of the raw material and freight inflation in our P&L this year. Given that situation, we believe that our midterm objective of 12% EBITDA margin that we had indicated would be likely to be delayed, will be delayed and at least by 1 year. In terms of growth, indicators are still disturbed by the pandemic, but we expect to be able to grow both GDP and, as you know, the leverage objective is satisfied. It was satisfied at the end of 2020, and it still is at the end of March, and we have no reason to believe that they would not be satisfied going further. So the real objective that we've had to revise is the one about profitability. And given the trend we are seeing on raw material and the lag time that will be necessary to fully offset those raw material costs by selling prices, we believe that with the information we have today should be delayed by at least 1 year. With that, I would like to thank you very much for your attention, and I propose that we now turn over to Q&A session. So we'll take questions on the phone and on the web.

[Operator]

[Operator Instructions] Your first question comes from the line of Charles Scotti from Kepler.

[Charles-Louis Scotti]

I've got 4 questions. The first one on the EUR 100 million headwinds. Can you give us a split between raw materials, energy costs and freight costs? And also, can you tell us if there is a [indiscernible] effect going into 2022 as well? The second question on the price increases. Can you give us a sense of the magnitude of the price increases by region and how customers are reacting to that? My third question on the end market dynamics. On your assumption now, when do you think Tarkett should be able to renew with precrisis sales of nearly EUR 3 billion in 2019? And finally, on the offer, what is the rationale for the Deconinck family to launch this offer beside proceeding with the squeeze-out because they already have the full control of the company? And also, can you give us a view on the timing of the offering? Why now?

[Fabrice Barthélemy, Chairman of Management Board & CEO]

Raphaël, will you -- yes.

[Raphaël Bauer, Group CFO & Member of the Management Board]

Yes. Thank you for your questions. On your first question on this raw material and freight increases, most of that EUR 100 million estimate is coming from the main oil derivatives that we purchase. And if we take the bulk of PVC and pesticides, that's about 60% of the total effect. So that's really the first driver. But freight is an important component also of that inflation impact. We estimate that EUR 12 million, the overall cost of freight in 2021 compared to 2020. And as we commented, actually, this inflationary issue is really impacting all product categories. So wood typically is also impacted. You will see that throughout the building industry, actually, and not only for flooring but all raw materials for wood and laminate are increasing by around EUR 8 million. And then we have a variety of, I would say, a long list of small increases on materials used also for other products. Carpet is also impacted, for instance. And yes, to your question, there will be some carryover effect on -- in 2022. It's too early to quantify that. But definitely, purchasing prices has been increasing since the end of last year, but they have increased up to now, I would say. So even if we say prices remain even from now on ones, given the lag also and the inventory amount, the inventory that we have around 60 days, there will be still an inflationary impact, at least, in Q1 of 2022.

[Fabrice Barthélemy, Chairman of Management Board & CEO]

So I would answer your questions, the other questions on selling prices first. So the area where selling prices are the most complex to increase are in Europe because of the share of commercial projects and the low share of distribution. So we are increasing prices since the beginning of the year in that region. Most -- and the market is actually receptive to those price increases because it's not just a Tarkett issue, but it's an industry-wide and beyond, actually, our industry. So there is more and more an inflationary sentiment in the billing material industry that will make it a bit easier to pass on price increases. But clearly, with the proportion of projects, it's the region where the flow-through of price increases will be -- will take the most time actually to flow through. In North America, we -- as you know, we are not the leader in North America. And I have to say that the leaders of the market are really exercising their pricing power. They've announced. As you know, it's public. They've publicly announced large price increases. So that sentiment of inflation is also widespread among our customers. And we are very positive on the yield of those price increases and the fact that they should be able to the flow through rather rapidly. It's a bit the same in Russia, where we are the leader. So we have announced price increases to our distributors. We are passing those price increases through to the retail. So that also should flow through pretty well in the next few months and quarters, and we are optimistic about it. So overall, I would say that the reception -- because of the magnitude of the raw material increases across a variety of industries, it's probably a good environment to pass price increases. Regarding the market recovery and when can Tarkett recover EUR 3 billion in sales, there's 2 dynamics at play. One is the organic growth, and we believe it will take at least 2, 3 years to recover organically the same level of activity because -- mostly because Hospitality and Workplace even more will take time to recover. The vacancy rates are increasing. Hotel chains are cash constrained as well. So they are more today focusing on increasing the revenue per room than really launching larger renovation works. On top of that, we have about 45% of our sales denominated in U.S. dollar with activity in North America, and U.S. dollar is weaker than it used to be in 2019. So that is weighing also on our reported net sales. And therefore, it's the second reason why it will take several years for us to come back organically to EUR 3 billion in sales. Of course, I exclude any M&A from that discussion because I don't think M&A was part of your question at this stage. Your fourth question was about the rationale for the offer for the Deconinck family. Yes, they are controlling the company today, but they want to actually reinforce their stake in Tarkett. And that -- and doing that, they want to do it with financial and industrial partner that is able also to support them in that strategy. If you remember, I mean we have spent several years actually with KKR as an investor as well, and that was a good experience for the family and the period that they actually liked that type of partnering. Why now? Because it is -- clearly, over the past couple of years, we've had first to restabilize the management team since I've been appointed as CEO about 2 years ago. There has been a lot of work done on the cost base. Last year was fully disrupted by the COVID situation. So it was a difficult time to launch such an operation. Now I think although the raw materials remain very volatile, we have a little bit more visibility and, very importantly as well, there is appetite from like a -- company like Wendel and financing available to do such an operation.

[Operator]

[Operator Instructions]

[Alexandra Baubigeat Boucheron, Investor Relations Director]

We have a question from Pierre Bosset. So who have started the discussions, the Wendel group or the family Deconinck? And was it a competitive project?

[Fabrice Barthélemy, Chairman of Management Board & CEO]

So the Deconinck family has started very condensed and competitive process. It was a competitive process that has really taken place over the past few weeks and been very fast and condensed, but it was clearly the willingness of the Deconinck family to find a financial and industrial partner to partner with -- for the next few years.

[Operator]

[Operator Instructions] No question at this time. Please continue.

[Fabrice Barthélemy, Chairman of Management Board & CEO]

Let me thank you very much for your attention this morning. So once again, we are pleased with our Q1 results despite the lower sales that we have managed to protect the margin and capital structure. Of course, it's an accelerated announcement given the tender offer by the Deconinck family. So we expect to speak to you soon, and we remain at your disposal for any questions. Let me remind you that Deconinck family and Wendel with Tarkett Participation have announced that they had the intention to purchase shares on the market at the offer price as soon as this week. Thank you very much, and have a great day.

[Operator]

Thank you. This does conclude our conference for today. Thank you for participating. You may now disconnect. Speakers, please standby.