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Ladies and gentlemen, thank you for standing by, and welcome to Tarkett Q3 Results 2019 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would like to hand the conference over to your speaker today, Mr. Fabrice Barthélemy, the CEO. Thank you. Please go ahead, sir.
Good morning and thank you for attending our Q3 call. I'll share this call this morning with Raphaël Bauer, our CFO.Let's go straight into the facts and numbers with a few highlights for Q3 2019. In Q3, our sales grew 8%, of which 2.6% organic growth. Perimeter amounted to about 2% and the favorability of exchange rates with more than 3%.The growth, organic growth, was driven by our Sports activities, but also we recorded stable sales in EMEA, in CIS, in Asia Pacific and Latin America with better trends in Q3 than in Q2. Adjusted EBITDA improved by EUR 10 million compared to the last year, of which positive EUR 5.4 million is related from the settlement of litigations in Sports.The margin improved slightly at 11.8%. What is very important and satisfactory is that our selling prices remained positive, and this quarter, they not only offset purchasing cost, but they also offset the wage inflations. You will see that in the detailed bridges.Our cost savings have accelerated significantly versus Q2 with a total cost savings of EUR 12.1 million in Q3. And this includes the benefit of restructuring actions, cost savings in the plants as well as the first results of SG&A cost savings during the quarter. So we are in line with the road map on these lines.Like I said, our industrial footprint restructuring is exactly in line with our schedule and was executed without any customer disruption and within our budgets.The mix and produced volumes are still unfavorable and mainly in North America. And obviously, we have a more challenging performance in North America that penalized the overall group profitability this quarter. So we are launching, and we have launched, a dedicated action plan for that region, and I'll come back to that.A few highlights on the progress we are making on our Change to Win plan. We are making progress on all aspects. We have, on the revenue side, we have recorded a better performance in all divisions in Q3 -- in Q2. And we've reorganized the sales force in North America, we've simplified our branding there, and we are just finalizing the SAP deployment in that region with commercial carpet, and we'll come back to that as well.Our Circular Economy focus is also showing great momentum. One example, our ReStart program, collecting leftovers from installation sites in EMEA, is showing progress by 74%. So we've increased by 74% the amounts of product collected from the job sites compared to a year ago.Our cost-reduction program and deleveraging plan is also progressing according to the road map. We are launching a more ambitious plan to even further reduce fixed cost. We're in line with our objective to reach a leverage around 2.5x EBITDA at the end of the year. So we'll give you more detail in the coming minutes, but this is progressing per plan.I'd like to add also on the people side that we have appointed during the quarter in September 2 key positions within the Management Committee, this was communicated earlier in September, with the appointment of President for the EMEA division, Francesco Penne, and the appointment -- the internal appointment of a group HR Director, Séverine Grosjean.Back to North America. I'd like to comment on the specific dedicated action plan we have launched for that division. This addresses all aspects of the business with, first, the top line. So we have reorganized the sales force, we have simplified the branding and we have action plans in all key regions. We are also, in Q4, going to introduce new products, especially on the LVT and carpet tiles categories.The manufacturing productivity has improved. The manufacturing sites have operated much better in Q3 than at the beginning of the year and the end of last year, but there is still some productivity potential. And the fact that volumes were lower has also led to some lower utilization of our capacity. We are progressing also on the roll out of the -- of our automation plan.On the footprint reorganization side, the restructuring of the 2 Canadian sites is now completed. 310 people have left, actually, during the summer. The transfer to the American U.S. facility has been completed. The sites are now fully closed. We are now also moving on to a review on our -- of our logistics and warehousing capabilities and footprint, and this will take place in the coming quarters.The plan is also addressing our cost structure, overall, and SG&A, in particular. And we have started some actions during the summer. We have actually already generated some savings that will be fully visible in our Q4 results. And we are finalizing the implementation of SAP for commercial carpet.Now let me move on to a few successes and examples of major projects that have been installed in the last few months. These few references also to remind you that we work in a specification business where design is key. And as end-users demand more and more friendly space and pay more attention to design, our solution offering is being adopted. And you see on those examples also more and more the use of different product categories.It's the same also in Sports where the market is more and more segmented and our innovation capability is also enabled -- enabling us to perform very well in a market that is dynamic. Every market, every need is being addressed with a specific solution. For example, you see for our French listeners in France, the Stade Toulousain rugby stadium has been equipped by -- with our solution, which is natural grass reinforced with artificial fibers.We're making progress on our CapEx plans and investment plans to fuel growth and productivity. So 3 specific examples here. We have finished during the quarter the installation of our LVT capacity in Luxembourg with a new LVT line that will be not only adding capacity that was needed, but also actually improving productivity. We have a new plant for accessories like a wall base or stair tread in Ohio that has actually welcomed the production from the closed sites in Waterloo in Canada. This facility is now fully operational and the start-up of the facility was extremely efficient. So we are very pleased with this brand-new facility that is also a very good showcase and showroom for our customers who want to see where the products are manufactured.The last one is the new automatic inspection system for wood in our Swedish plant that enables to improve, not only efficiency, but also quality with a more reliable way to check the quality of the finished products. So these capital expenses are progressing as per plan and they will be behind us at the end of the year.With that, I'd like to invite Raphaël Bauer to comment in more detail the activity and financial results for Q3, and I'll conclude after this financial presentation.
Thank you, Fabrice. Good morning, everyone.Looking at our sales. Our reported sales are up 8% with a good contribution of currency and also from perimeter effects. Organic growth was solid at plus 2.6% in the quarter, and it's also a sequential improvement after a second quarter that was slightly down. That's really being driven by Sports, which is still quite dynamic at above 10% organic growth, but it's also thanks to the stabilization of the activity both in EMEA and in the CIS in an environment in those 2 regions that is still more difficult than last year. North America is still down as was commented by Fabrice, and we have a dedicated action plan.So let's have a quick look at each segment's performance, starting with our largest segment, EMEA. I mentioned that the environment is not as good as last year. And we have, in particular, 2 countries where activity is down. The U.K., where a number of projects are being delayed or canceled, and that's really related to the uncertainties around the Brexit. In Germany also, the macro environment is penalizing both the new build and renovation. These trends was already seen in the second quarter, and that's ongoing.On the other hand, in France, we have stabilized and we're actually seeing good results from our commercial vinyl ranges, in health care and education, and are seeing a good traction on those end-user segments.The Nordics are still up and South Europe grew well in the quarter and is also growing year-to-date.Looking at North America. I think it's important to have in mind that the market is not easy as we speak. Residential activity is soft and the commercial carpet market is down. Demand for LVT is up in the market, but LVT is a disputed product and that's putting pressure on the mix and on the margins. So all volumes at Tarkett are down in commercial and residential, except for the accessories and the rigid LVT products.I want also to stress here that in commercial carpet, in the quarter, we're also benefiting from some anticipated deliveries prior to the SAP go-live in commercial carpet that is taking place in October. In other words, without these effects, we are not yet seeing a change in trend in North American sales compared to the second quarter. So in that context, we have a dedicated action plan to improve the top line and started with sales force reorganization with improvement of the product offering and also cost reduction, as commented by Fabrice.Let me also highlight, in North America, the activity of Lexmark, the company that we acquired last year. You may have noticed in the sales bridge, the perimeter effect is lower in the third quarter than it was in the second quarter. We are seeing lower activity in hospitality. A number of projects have been delayed. There may be some effects from the 25% tariff increase on the Chinese imports to the U.S. because the hospitality business imports significant product fixtures and equipment from China, and that's increasing the cost of the project and delaying some projects. But really, what we see on the flooring market in hospitality is a rapid increase of LVT, and that's slowing down carpet roll activity.So now in Lexmark, in our hospitality business in North America, we have the complete offer: carpet, LVT and accessories. It's available and we're ready to read out. We've actually already won some project with these complete solutions. Costs synergies on their side are on track. They're relying mostly on the shutdown of our Canadian site that has taken place and starting to bring benefits in the third quarter.In the CIS, Asia-Pacific and Latin America, reported sales are up 3.4%, and that's thanks to the positive net effect of selling prices, which are relatively stable in the CIS, and currency. The ruble, in particular, is stronger than last year. But also, what's encouraging in the quarter is that volumes are up in Russia in an environment that has not really improved, so that's really positive for us.And I will end with Sports, with a very strong growth that is really driven by artificial turf, not only North America, but also in Europe. Looking at the running tracks business, it's slightly down in the quarter, but it's stable year-to-date. Some of the project have been delayed, but it's also compared to a very solid year in 2018 that was actually a record year in terms of activity in running tracks. So very good performance in Sports, overall.Fabrice mentioned that our adjusted EBITDA has improved and reached EUR 107.5 million before the application of IFRS 16. Looking at this bridge, you see in the first column that we are still being penalized by unfavorable volume and mix effect. Actually, 80% of that effect is related to North America, and there are 3 main drivers here.First of all, as I commented, we have lower volumes sold in North America, our activity is lower. The second effect is destocking. I mentioned already in June and July that we have taken a number of initiatives to reduce inventories throughout the group, and it's actually in North America that we had the highest potential and we've seen, actually, the best success. So it's positive for cash flow generation. This is clearly contributing to deleveraging, but there is a one-time negative effect when we destock as we recognize in the P&L the fixed cost that are part of the inventory value. And the third driver of this volume and mix effect is actually the mix in North America with a lower weight of commercial carpet and a higher share of LVT.Now if we move further in the bridge, we are really pleased with selling price management. As we have announced, it's offsetting more than raw material and freight inflation, and it's actually offsetting most of the salary increase of the quarter.Looking at cost reduction. It's accelerating and it's in line with our plan, thanks to a good contribution from productivity in operations. And that includes the first benefits of the 2 sites shutdown in Canada. And there are also in the quarter some cost reduction in SG&A.Last comment on this slide on the nonrecurring bucket. This includes the positive impact from the one-time settlement in sports related to patent infringement, and that's EUR 5.4 million positive effects reported in that column. So year-to-date, after 9 months, our sales are up organically 1.8% driven by Sports and also positive growth in EMEA, plus 1.5%. And still a strong contribution on the reported sales from perimeter and currencies.In terms of EBITDA, we're also improving year-to-date, before the application of IFRS 16, we reached EUR 219 million EBITDA. Compared to last year, we are being penalized by the volume and mix effects, and a significant part of that effect, year-to-date, is coming from the second quarter, that's EUR 20 million. And overall, it's largely driven by North America. But after 9 months, we're also more than offsetting inflation with selling prices and our cost reductions are well advanced. If we sum up productivity and SG&A cost reductions, we're totaling EUR 23 million and we are on track with our plan.Reported EBITDA after 9 months is EUR 242 million, so that's impacted by IFRS 16 by EUR 22 million. And as a reminder, the expected impact on the full year results of IFRS 16 application is a positive impact on EBITDA of EUR 29 million and it's also an increase in net financial debt by around EUR 90 million, knowing that this will be the reported financial debt and it's not taken into account into our covenants.I will now hand over to Fabrice for the outlook.
Thank you. So let me remind you the highlights of this Q3 release. Organic growth is improving sequentially and it's better than Q2 in all divisions. 2.6% organic growth, overall, improvement in EBITDA and EBITDA margin and a specific area of challenge with North America that penalizes the overall profitability of the group but that we are addressing with specific action plans.As for the outlook for the rest of this year, it is clear that trading conditions are more challenging than last year, especially in Europe and in North America. Brexit is -- and uncertainties about Brexit, especially, are clearly not helping. And there's a few regions within Europe, where we are seeing a slowdown. And likewise, in residential North America, the overall sentiment is not very positive.We don't expect any short-term rebound in the CIS, but so far, we've seen a stabilization. And within that stable environment, we've performed very well during Q3.The only activity, as you know, where we have a very much better visibility, thanks to our backlog, is the Sports division where we have a very healthy backlog for the rest of the year. So the only uncertainty is about the weather conditions towards the year-end and our ability to install outdoor sports offices until the end of the year or if we have to postpone some fields, but the underlying backlog is a strong one.Very specifically in Q4, we are cautious for North America. One of the reasons was mentioned by Raphaël. We anticipated some deliveries at the end of Q3 to mitigate the impact of our SAP launch for our customer. So this has worked out very well, but it has a knock-on effect on Q4. Hospitality is slowing down, so we are cautious on that front as well.We maintain our outlook for raw material price increases. It should have an overall impact between EUR 15 million to EUR 20 million on a full year basis, and it will be more than fully offset by selling price increases.We are really focusing strongly on productivity actions. We are on track to achieve EUR 30 million cost reduction by year-end on a full year basis. And we also, more specifically, accelerating the cost-reduction plans in SG&A, especially starting with North America, but not only North America.For the full year, our adjusted EBITDA should be slightly up with the adjusted EBITDA margin before IFRS 16 around last year level. And we are confident to achieve the -- around 2.5x EBITDA in terms of leverage ratio at the end of December, which is in line with what we've announced previously.So we are continuing to deploy our strategy in order to achieve growth, improve profitability and to maintain a healthy financial structure.With that, we have covered the main highlights of the Q3 presentations. And I would like you to -- I would like to invite you to ask your questions in the next few minutes. So I'm handing over to the operator for the Q&A session.
[Operator Instructions] Our first question comes from the line of Charles Scotti.
I have a couple of questions. The first one is on the restructuring action. Beside the logistic footprint in the U.S., have you already identified other area where restructuring are needed?My second question, can you help us to quantify the impact of the advanced deliveries in North America, just to figure out what would be the reverse effect in Q4?And then I would like to have an update on the raw materials evolution at charterers, should we expect tailwinds in 2020? And would you be able to keep it, or do you think you will have to pass it on through end customers?And the last question on factoring. Should we expect factoring in line with end of H1 or have you stepped up your factoring line in Q3?
Charles-Louis, thank you for your questions. So as for restructuring, as we said, we are in line with the plan for this year. We believe there is further potential in warehousing and logistics setup in North America. And we have also adjustments to be done in other regions such as Europe, even in CIS. And we've done some things in the CIS without any site closures. So we are adjusting our level of capacity to demand, but right now, we don't have any other site closure planned, except the one that we announced in Q2, which is a site in The Netherlands, small site in The Netherlands called [indiscernible] that will be closed at the end of 2020. But so far, no announcement of a full site closure.
Regarding your second question, Charles-Louis, Raphaël speaking, on advanced delivery in North America. The impact of the advanced deliveries are around $5 million. So that's why I commented that if we restate from that impact Q3 performance, we would have been close to the second quarter performance. And so, of course, as we commented, there is a reverse knock-on effect on the fourth quarter for around $5 million.
Your third question was about raw materials. What we're seeing right now is a stabilization of raw materials. It's too early to talk about tailwinds for next year. We are, as we speak today, we are not seeing any tailwind for next year, but there's stabilization. Keep in mind also that in the recent weeks, we've seen a lot of volatility in oil price, and oil price can be very sensitive to macroeconomic shocks or even political issues in the Middle East, so we are cautious with that. And our selling price strategy is unchanged, so what we intend is to continue to increase selling prices, or at worst, maintain them next year. Tactically, there are always some work categories or segments where we need to be a bit more aggressive, but we have a good track record also at keeping selling prices when raw materials go down. But we are not anticipating a real tailwind from raw materials right now.The last question was on factoring?
And yes, on factoring, Charles-Louis, our program is still well active and, actually, we are deploying in a number of additional countries. So you have to make sure that it's fully efficient end of December. But factoring is only one of the tool that we are deploying to deleverage. As I commented, we are also working on inventory decrease, and that's being successful as we speak already. We also, concerning CapEx, we've also benefited from the scrip dividend, the good take up of the scrip dividend, 80% take up. So all of that is contributing to deleveraging and makes us confident that we'll be around 2.5x EBITDA in terms of leverage at year-end.
Just one last question, if I may, on the LVT business in North America. You are mentioning very challenging market there. What are the reasons behind this challenging condition? And do you see similar tensions in the European market as well?
The LVT category is growing fast in all regions. Obviously, all the tariffs in the North America are changing a little bit the dynamic because the North American market was relying a lot on imports from China, so this is also moving things.In terms of product offering, there is a lot of innovations. We are -- we have introduced last year, in both regions, rigid LVT, that is actually performing very well. And it's pulling the overall market. So I would -- it's a very dynamic category where there is a lot happening.And of course, as many people have invested, prices are a bit more pressured than other more traditional categories where the competitive environment is much more stable.
We have a new question that comes from the line of Jean-Francois.
Jean-Francois Granjon from ODDO BHF. Three questions, please. Could you just come back on the Lexmark evolutions? You expect a lower business for the Q4. Could you explain why? And what do you expect for next year, do you expect an improvement for [indiscernible] next year?The second question concern the plan involved in North America. Should we expect more cost for restructuring for the full year due to the -- this action plan in North America?And the last question concern the CapEx. So could you add a little bit on the CapEx budget for this year or next year, and do you expect lower CapEx next year compared to this year?
Thank you, Jean-Francois. As for Lexmark, clearly, we've been disappointed in Q3 and we are cautious for Q4, but we also have a clear action. It's part of the action plan as well to grow the top line, so we are confident we will improve next year.On the cost side, we got the expected benefits that -- from the integration on the industrial and back-office functions, cost side. And also, in terms of relationship with key customers, we got also the benefits and we start seeing some benefits in Europe as well. So this is more, I would say, a conjunctural issue than a structural one.For the North American plan and the impact on restructuring expenses. As you know, restructuring costs are generally lower in North America. So we don't expect a material impact on our restructuring expenses for this year or next year. We're in line with what we announced previously.In terms of CapEx, we will -- it's been a year of fairly high CapEx compared to our historical trend. We will finish the year around EUR 125 million CapEx. And that includes some key investments to increase capacity and growing product lines like LVT, like accessories in North America and start deploying automation. Also, it includes IT systems, like SAP in commercial carpet North America. Clearly, many of these capacity investments are now behind us. There will be some carryover into next year. But, clearly, we are approaching 2020 with a more cautious view on CapEx. And I cannot give you a number or numbers already, but 2020 CapEx will be lower than 2019 CapEx.
[Operator Instructions] You don't have any questions at this time, sir. [Operator Instructions]
We received question by webcast from [indiscernible]. Two questions, what is going wrong in the U.S.? Is it structural or conjunctural?And the second question on the leverage. Does your 2.5x leverage objective include factoring and if yes, how much?
Thank you, [ Laurant ] for your questions. So as far as the U.S., there was a mix of structural and conjunctural issues. The structural ones, we are well advanced in addressing them, one of them was the cost base and manufacturing footprint. So this is part of the structural part that we are addressing. We believe there is more to be done in terms of footprint with warehousing, clearly. There's also a more conjunctural issue. I mean, last year, we had some rather severe disruptions in terms of manufacturing, and we are improving the situation month after month. And Q3, from that respect, was a much smoother period for manufacturing performance in North America. All that in a market that is in some areas not as dynamic as before, especially residential. But also, in some commercial segments, we see softness in the market. So there's really a mix of both, but we are confident that we are taking the right actions to address the structural issues and as for the more conjunctural or temporary ones, we are also on the right path to solve them.And regarding your question on factoring. Yes, our target includes the impact of factoring at year-end. We estimate a factoring at year-end could be around EUR 90 million, 9-0.
Our next question comes from the line of Eric Lemarié.
I've got several questions, please. The first one, on Lexmark, again. When you look at the bridge of your EBITDA and reducing in Q3 and 9 months, correct me if I'm wrong, but I can see that the profitability from Lexmark and I guess Lexmark is much -- the biggest part in the scope effect, is down at 10% in Q3, compared with 18% for the first 9 months. Is it this low profitability, is it mostly explained by a lower top line or is there any cost issue there? It's my first question.My second question, on your guidance, on EBITDA, a slight increase this year. When you are talking about a slight increase, should we understand a low single-digit number?I've got a third question, regarding the LVT product. Should we understand that the pricing of this product is down year-on-year in Q3? I understand your point regarding competition, but I've got some difficulty to understand why the competition is now higher, why -- apparently you've got less product coming from China, so at least less competition from China on that -- on LVT.And the last question, on Sports. Could you maybe give us or share with us your view on the return on capital of the Sports division and maybe the WACC, the cost of capital of the Sports division, please?
Thank you, Eric for your questions. Raphaël speaking, I will take the first 2 questions. Regarding Lexmark margin. You're right, Lexmark is most of the perimeter effect. We do have also some contribution from smaller acquisition in Sports. Most of the EBITDA decrease that we're seeing in the third quarter is really related to the volumes that are lower. But bear in mind that Lexmark is project-driven, so a few major project that are postponed or not won in a quarter compared to another quarter can have a significant effect on margin also. Lexmark is a profitable business, good profitable business and has a strong operating leverage, so that can have a strong impact.In a running mode, there is no change in the cost structure of Lexmark. And we don't expect any issue going forward. On the contrary, as we commented, we are starting to see the benefit of the synergies following the shutdown of Truro. So we believe hospitality will be a good business going forward.To your question on guidance. We gave some indication and I will not comment in more details. I think you -- we said that the margin will be around last year. And we gave some indication on the trends and sales, so I would let you factor in if it's a single-digit increase or not.On LVT, Fabrice, you may want to...
Yes. On LVT, in North America, clearly, the tariffs are creating a barrier for Chinese imports, but not a waterproof barrier, there are still Chinese imports. And actually, the struggle is to completely offset the cost of tariffs because some importers are more aggressive than others. And there is also unused capacity or idle capacity in China that is trying to find an outlet in Europe. So we see more aggressiveness from Chinese competition in Europe than in the past.Having said that, we are also developing new products to make sure we cover the whole range. And rigid LVT is progressing very well with -- which is a way also to enrich the product and reach higher selling prices and margins in euro per square meter.In Sports, the ROCE, we don't disclose ROCE by division. What we said before, and which is still true, is that the ROCE of the Sports business is actually higher than average, the average of the group, on average, throughout the year. Although there is a big seasonality in that business with the heart of the activity between May and October. So there's a whole -- very big concentration of activity, which has, of course, a knock-on effect on the seasonality of working capital. The WACC itself is no different from any business with 80% of its activity in the U.S. and 20% in Europe.
Okay. Okay. And in terms of capital intensity, Sports compared with -- compared to the other businesses?
It is slightly lower, actually, because for 2 reasons. One, although the tufting part of the carpet is fairly low-capital intensive business. There's an installation part because, especially in the U.S. but also in Europe, we perform our own installation work. Not for the full business, but we do some installation work that requires mostly manpower and very light pieces of equipment. So these are sales with very low CapEx intensity. And where we added CapEx actually now nearly 10 years ago was when we in-sourced the manufacturing of fiber. But this is also a reasonable and very scalable investment. So overall, the CapEx-over-sales ratio is lower in Sports than in rest of the group.
We have no more questions at this time over the phone, sir. You can proceed.
I would like to thank you very much for attending this call today. So once again, our Q3 performance shows 2.6% organic growth. We are quite pleased with that, an improvement versus Q2. Also we are seeing first effect of our plan, especially on cost reduction and restructuring plans, but also on the initiatives to grow in all regions. We gave you a cautious outlook for Q4, especially in North America, but we are confident that with a dedicated action plan, we will soon recover growth and improve our financial performance in North America.Thank you very much for your attendance and your questions today.
Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect.