Tarkett SA
PAR:TKTT
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Good afternoon, everyone. This is Fabrice Barthélemy speaking. Thank you for joining us on this call. Tonight, I am with Raphaël Bauer, our CFO. As you know, we've just issued a press release to update you on our Q4 trading results in North America and the consequences for the group EBITDA. So what I would like tonight is to take you through what led us to hold this call today. As we stated in our Q3 earnings release, we expected that the activity in Q4 in North America would be affected by the go-live of our group ERP system, which is SAP, in the commercial carpet business unit. So maybe one word on that system. It's a group standard that is actually operated worldwide in the flooring business. And that's also operated in the rest of our businesses in North America, except the newly acquired Lexmark. So we've done many of this SAP project. But this time, we faced a much slower ramp-up of production and shipments after the go-live than we had previously experienced including with similar projects in North America. So what we've done is that as soon as we identified that the ramp-up was slow and the learning curve was a bit too long, we have launched a task force, and I have sent a task force from Europe to support the local team. Of course, there was a very close monitoring and a daily update to me. And as production was progressively ramping up, we have given priority to large projects and to key accounts, and top customers have been indeed very helpful actually and accepted to reschedule -- to reschedule some of their orders. However, we have to admit that we have lost some sales. The situation has improved throughout November. Production has come back to nominal, but sales haven't yet come back to nominal, and we estimate that sales will progressively improve over the next few months. Besides, also, as we communicated previously with our Q3 release, the activity in hospitality at Lexmark is lower than last year and will be lower than last year in Q4. But that's a separate issue not linked to SAP. So for North America in Q4 2019, we now expect sales to be down around minus 25% compared to Q4 2018, and therefore, also a significant drop in the adjusted EBITDA in that region. Consequently, we also have had to adjust our estimate for the group of consolidated EBITDA and we now anticipate an adjusted EBITDA before IFRS 16 slightly below 2018 level, with a margin below last year level. Previously, what we had communicated was we expected an adjusted EBITDA slightly up versus 2018 level with the margin globally in line. We maintain, however, our objective of a net debt-to-EBITDA ratio of around 2.5x EBITDA. So let's be clear. We have an issue in North America this year and turning around our performance in North America is our main priority today. The improvements that we are going to deliver will be supported by a sales action plan that we presented at our Q3 earnings release. In the coming months, we focus on promoting the newly launched mid-range carpet tiles and LVT. The sales force is also focusing on key end user segments under one brand now and is clearly incentivized to win projects and increase business and distributors through our Quickship Program. We have also launched specific actions to improve the cost structure in North America which are progressing on schedule. So we will benefit in that segment in 2020 from the industrial footprint reorganization that we have executed this year, well in line with the plan. And also, it will benefit from an ongoing cost-saving program for general and administrative expenses. The other thing I wanted to share with you tonight is that meanwhile, the other reporting segments are performing well at Tarkett and the adjusted EBITDA margins in all other segments, so in CIS, in EMEA, in Sports are progressing in H2 compared to H2 2018. We have implemented some key top line initiatives that have been successfully rolled out. We are focusing on commercial end user segments. We have an innovation road map that is very clear. We have recently announced a major step in closing the loop on carpet tiles with 100% recyclable carpet tiles and an industrial process to commit to that close loop to our customers. And our cost-saving program is on track, and we will deliver the targeted annualized savings of EUR 30 million in 2019. So this is the update I wanted to share with you tonight. I'd like to thank you for your attention. And of course, we are now ready to take your questions.
[Operator Instructions] The first question is coming from the line of Priyal Woolf.
It's Priyal here from Jefferies. I've just got a couple of questions, I'll take them one by one if possible. So firstly, I just want to be completely clear. So obviously, production was what was impacted. You're saying production is back to normal but sales haven't caught up yet. So presumably some sales were lost. Is there any sort of indication of -- or what gives you confidence that sales can get back to normal? Is there anything like an order book or data like that, that we can look at?
Yes. No, we don't -- we -- as you know, we have a short order book in our business, so we don't have a very long visibility on order book. And what we are saying is that the sales we have lost last month, some of them will be recovered in the next few weeks. But some also, in some cases, customers have found other solutions. So there are some sales that are definitely lost. So the reason we are saying that is that minus 25% in Q4 in sales will not be pushed, if you want. It doesn't mean that there is a pent-up demand for the equivalent amount in the following quarters.
Okay, great. And then just in terms of you're saying adjusted EBITDA at the group level will be down slightly versus 2018. I just wondered if you could quantify the scale of that decline at all, just to give us some sense of what slightly means.
Slightly means, I mean, slightly, so several million euros.
Right. Okay. Great. And just in terms of dividend policy as well, obviously this will hit the bottom line earnings. You've recently switched back to a sort of payout basis. Does this mean that most likely, the dividend will be down year-on-year as well because you've shifted away from that minimum of EUR 0.60 per share policy recently?
The purpose of this call was really to update on the Q4 trading and our estimate for the full year EBITDA. I mean, it's too early to talk about impact on dividend policy, and we are talking about a few million euros, so it's really separate from the dividend policy.
The next question is coming from the line of Charles Scotti from Kepler.
I've got 4 questions, please. The first one, I mean, you fail on some contracts, which means that have you damaged your relationship with some customers? My second question, how do you get to the 2.5x net debt-to-EBITDA by year-end? Because on my numbers, it will mean more than EUR 160 million free cash flow generation. Then when do you expect the production level to be back on track? And how should we look at the sales and margin of North America next year? And my last question, on the weakness of Lexmark. How do you explain this? Do you think it is -- it will continue to drag on your earnings next year?
So thank you, Charles, for these questions. So on the relationship with customers, I think, first, we had warned our customers about this SAP go-live. And you remember, in the Q3 earnings release, we had mentioned that we had anticipated some sales in September, exactly to mitigate go-live issues in -- with SAP. What we have done well, I believe, is communicating with the customers actually and trying to accommodate as much as possible their project, rescheduling when it was possible, prioritizing deliveries based on their priorities. So in most instances, actually, that communication with customers has been very well-managed by Tarkett teams.
So Charlie, Raphaël speaking. To your question on net debt, let me just remind that here, we're talking about covenant ratio, so it's before any IFRS 16 impact. So we will our divide net debt by the adjusted EBITDA before IFRS 16. Net debt last year, end of last year, was EUR 754 million. So then I'll let you factor in your estimate of net debt and EBITDA for 2019. But definitely, the figure of net cash flow that you mentioned, it's too high clearly, hence you are surprised. However, let me remind you that we have activated this year significant actions compared to 2018 to improve working capital. Big inventory reduction that is going as planned. Be it also factoring. And again, we've started already in the first half. But we'll activate a few other programs for year-end. And of course, in '19 compared to '18, there is a lesser cash outflow in terms of dividends since we proposed the scrip dividend option, and there was a good pickup and actual dividend outflow is much lesser than last year. So I hope that answered the question.
So -- sorry, there were 2 other questions from Charles. On production level, Charles, so the production levels have progressed regularly day after day throughout November. So we are -- we are getting close to nominal now and we are normalizing the production, still, of course, with a very close monitoring, and we maintain this close monitoring as long as necessary. Then you had a question of -- on -- I think you had 5 questions, but you had a question on Lexmark. We -- as you know, we have indicated -- I mean our hospitality market has been more difficult for us this year. Lexmark in Q4 have been down versus last year. Of course, we also have some plans to turn around the top line in that business in the beginning of next year, December and beginning of next year. But it's a separate issue also from SAP because we are not [indiscernible] in that division.And you had another question, I think, also on the sales in North America.
So in 2020.
In 2020, clearly, there could be a halo effect in the first quarter as we restore progressively deliveries and we rebuild the order book. But clearly, the objective is to grow next year in North America and we believe that our action plans allow us to do that. But I would not be surprised if there was a halo effect in Q1.
We take in the next question from the line of Pierre Bosset from HSBC.
I have 2 questions, if I may. First of all, regarding SAP implementation, do you have all the SAP implementation program in North Americas, maybe at Lexmark or in other businesses in North America that you have planned for next year or the year after? That's my first question. And my second question is on factoring. As far as I remember, the factoring amounted to EUR 109 million at the end of June. You said that you may use more factoring to offset the lowest cash generation from North America. Do you have an idea of how much you will finish the year in terms of factoring?
Thank you, Pierre. So on SAP implementation, except Lexmark, the SAP -- the SAP system is running in all flooring divisions worldwide. So this is why also we have been caught a bit by surprise having so much difficulties because the rest of North America has been running with the system for a while as well. The rest of the -- all businesses in Europe and in Eastern Europe as well, so it's a standardized system that really has been deployed across the group over the few years, the last few years. There's no more large SAP project in front of us, except at the later stage, Lexmark. But this was actually the large -- the last significant SAP project within Tarkett.
And Lexmark to be when, next year or later?
We -- the first priority is to stabilize and learn the lessons from what has just happened in Q4. There's no urgency in deploying SAP at Lexmark right now. And it would probably be more simple.
And to your question on factoring. Pierre, at the end of June, we had activated a number of programs in some countries. At the end of June, as you know, this starts to be the busy period for us. So the balance, the customer balance are quite high. At the end of December, in the low season, the trough of the season, if I may say so. So for the existing program, the balances will be lower. But as we are activating factoring in additional countries, we estimate that the factoring amount could be close end of December to what we've done end of June. Your figure that you mentioned, EUR 109 million, is too high. So that will be below. But this is progressing well.
[Operator Instructions] Sorry, we have another question. Yes, from the line of Pierre Bosset again.
Sorry, a last question, my last chance. It's the -- in terms of CapEx, the implementation of SAP, what was the cost -- the CapEx or the cost associated to that on top of the loss of EBITDA?
It was -- so in terms of CapEx, specifically for North America, it was several million dollars this year. The SAP program across Tarkett has gone -- has been running for 8 years. And so it's been implemented regularly throughout the group. So a few million dollars this year.
We have another question from the line of Priyal Woolf from Jefferies.
Yes, I just had one quick follow-up. Everything you've said suggests that what's changed between Q3 and now is company specific related to all these SAP systems being rolled out. I just wanted to double check that has anything deteriorated in terms of the underlying market conditions which is caught up in this at all?
No. Really, the reason for this call is to update you on our Q4 trading that is really specifically leading to SAP launch in North America. As I said during the call also, the rest of the businesses are performing well, within expectations, at expectations. So we are confident with this. And of course, in Europe, you have, as we said also in Q3, countries that are more dynamic than others. Certainly, the Brexit discussions is creating in the U.K., but this is not creating large differences for us. So really, the reasons for this update and our change in estimate for the group is related to what happened in North America, more specifically linked to the launch of SAP.
There are no further questions at this time. Please continue.
Thank you for your questions. I would like to thank you again for attending this call. Once again, I would like to stress that we are very conscious that we have an issue this year in North America. We are very confident that all other businesses are running very well and are on a positive trend. And I'm also confident that given the fact that this issue is well identified and we have taken the right measures to restore production and the trust of our customers in North America, we will improve and turn around that business going forward in 2020. Thank you very much for your attendance and for your questions.