Cewe Stiftung & Co KGaA

XETRA:CWC

Earnings Call Transcript 2021-Q1

[Olaf Holzkamper, CFO & Member of the Board of Management]

Good morning, and a warm welcome to CEWE's call -- conference call for the results of the Q1 of 2021. I just learned this morning, there's nobody introducing us nicely, so I'm trying to do this myself. Just in case you don't know, my name is Olaf Holzkamper, and if we move through the presentation, then you would see that there's Christian Friege right next to me, our CEO. We are jointly presenting the results as in the last years. Agenda-wise, I can only reiterate, as in the last years, we are running through the main segments. I give some details on the financials, and Christian finishes the presentation with the outlook. And with no further ado, Christian, why don't you take over?

[Christian Friege, Chairman of Management Board & CEO]

Thank you very much, Olaf. A very good morning to you all. Unfortunately, it is not as sunny outside here in Oldenburg as it would need to be in order to really appreciate the results. We have steady results to present for the first quarter. And what we are presenting to you today is, in fact, a continuation of what we have seen in 2020 with CEWE's results. We had a strong photofinishing in the first quarter. And we have, again, in the first quarter, with COVID-19 still significantly impacting not only society at large, but also our businesses, a loss in turnover compared to Q1 2020 in the commercial online printing and our hardware retailing. And in summary, as was the case in 2020, we have a positive result that we are not entirely unhappy about. In a little bit more detail, you can see on this slide that our turnover in photofinishing increased by 9% to EUR 125 million, and it improved as far as the EBIT is concerned by a considerable EUR 6.5 million to almost EUR 10 million. On the one hand, this is in line with the long-term trend towards a consistently stronger first quarter, and on the other hand, we probably have still seen some effects of people being confined to their homes, being not able to go out as much as they would have in the time before COVID-19. And I'll just remind you that 2020, the first quarter until the mid of March, was not COVID-impacted as far as we are concerned. So this is photofinishing, the strong backbone of the company in the first quarter, 85% of our turnover comes from photofinishing. And obviously, the lion's amount -- the lion's share of the EBIT. As far as the Commercial Online Printing is concerned, we have a significant turnover loss compared to 2020. Just as a reminder, again, last year, for the first 2 months, we actually were slightly ahead of budget, slightly ahead of our own expectations and ahead of 2019 as far as the sales in the Commercial Online Printing division were concerned. And we basically stood in front of empty production facilities in the mid of March, and that impacted a little bit the first quarter in 2020, but very significantly, the situation does impact the first quarter this year 2021. What we've seen last year, we again see in the first quarter here, is that EBIT is marginally impacted, if at all, and that we've been able to manage our costs in a way that EBIT is basically in line with EBIT in the first quarter 2020. Same news as far as the hardware retailing is concerned. Our turnover there is 16.8% below the previous year's quarter, with an EBIT in line with the first quarter last year. Again, our cost management obviously stuck. And so overall, we report an EUR 8.6 million EBIT, which is EUR 6.6 million above the comparative number last year. Now if we look a few minutes into some of the things that happened this first quarter. You know that we are very much focused on innovation, and that our Innovation Day in February is an important event for the whole company. Now this year, obviously, we couldn't meet. It's not 600 people from all over Europe in the biggest conference facility here in Oldenburg, but it was more than 1,000 members of staff who were online, and we celebrated. And I carefully use this word, we celebrated our Innovation Day on air, as you can see here, in this year with our colleagues. And we were able to identify innovations that we wanted to -- that we will be implementing this year. We were available to share with our colleagues progress that we've made in certain areas. And the event was very well received. Also very well received was our new CEWE truck. I just want to introduce this new means of presenting the CEWE brand as a premium brand to you all before you see it on the motorway in Germany. Our CEWE truck is basically an exhibition facility, 70 square meters. It is basically a conference facility. We can sit up to 30 people in here. It is basically a statement as far as our brand is concerned. And I can tell you that we're a little bit proud to be visible as such in the open in Germany. First, we'll see how this works and whether we will be investing into trucks beyond Germany as well. Now the new CEWE truck, as you can see here, is a colleague to the CEWE engine in the German railways and the CEWE Air of the aircraft, the [ CEWE ] aircraft that is painted in CEWE red, with mein cewe fotobuch on it. I read in the Handelsblatt this morning that airlines are very, very positive about the prospects for the second half of this year, bookings are going up by 100%, 150 seats in an airplane are filled within an hour or 2 after putting that connection back into operation. So it seems to be that there is some traveling going on this year. It seems to be that there is some tourism going on this year. And again, I'm hopeful that this will contribute to people ordering their CEWE PHOTOBOOK from us in the second half of this year. Now we did report to you quite substantially in our annual press conference and analyst conference in March about the things that we do around sustainability, and we introduced the sustainability report to you that we have been publishing for the past 11 years. So you're very familiar with what we are doing here. Now this has recently been externally acknowledged by ISS, the Institutional Shareholder Services that I'm sure you're all familiar with, a leading provider of corporate governance services, of responsible investment solutions and proxy voting services. And they are ranking all the companies that they are following in a ranking. And the top echelon of these companies gets the highest rank, the Environmental QualityScore 1. And we are proud that this is being awarded to us very recently because it does reflect that the investment community sees the sustainability efforts that we are putting into place as we do. And then last but not least, a little bit marketing for ourselves. CEWE has been recognized for the second time in a row by Deloitte, WirtschaftsWoche, Credit Suisse and the Bundesverband der Deutschen Industrie as one of Germany's best managed companies. You may hopefully remember that we've been awarded with this award last year as well. And what we are happy about is that our long-term focus, the long-term orientation of our strategies, of our management focus and the innovation of the whole company with all of our employees have been recognized here specifically. Now some numbers, as I know that you're always interested in numbers. The number of prints and the turnover in photofinishing, not very surprisingly, with the figures that I disclosed to you previously, not only did the number -- the total number of prints rise a little bit by 2.4% and within the upper part of the range that we're expecting, but also the value per photo increased and the turnover in photofinishing overall increased by 9%. The number of CEWE PHOTOBOOKs shows a slight decrease. And what we see here is that, obviously, the occasions, the bigger occasions, the weddings, the tourism, the travels, all of those things have obviously been impacted by COVID-19. And obviously, also the number of CEWE PHOTOBOOKs orders has been impacted. However, I do want to point out to you here that in terms of turnover, the CEWE PHOTOBOOK increased slightly compared to the previous year's first quarter. The trend towards a stronger first quarter continues. You can see here, as far as the turnover is concerned, that we've consistently increased the turnover in the first quarter for the past 5 years. So this has nothing to do with COVID in itself. We've also been able to increase the profit contribution to the overall -- the annual results every quarter since 2017 here. And obviously, there is a special effect here included in the profitability of this first quarter as well. If we look at the overall development of the quarters, you can see on the left-hand side, in Q1, that we've actually met our target as far as the turnover is concerned. And on the next slide, you can see that we've also significantly surpassed our target as far as the EBIT is concerned. I do want to take the opportunity, however, to point out to you that we have long-term developments as far as these 3 -- 4 quarters are concerned. Obviously, Q1 has been on an increase consistently for the past 5 years. Actually, Q2 had this business a bit of a special effect last year. You can see that Q2 is more a mellow quarter usually. And Q3 has been on the decline, not only for the past 5 years, but probably for the past 15 years. It used to be our peak season. Those of you who have been covering us for a long time will remember that at the end of the summer holidays, everybody was bringing their films, and we were developing films like no one else in Europe. But obviously, now with digitization, it is more of the Christmas season that actually brings us the peak season. So the next 2 quarters are a bit of a question mark as far as their impact for COVID-19 are concerned. We can see some positive impact like the travel industry that I pointed out to you. We can see some question marks as far as specific peak as in the profitability in Q2 last year, which we have to run against. But the one truth is actually in the end, Q4 will determine the annual result of where we are. If we move on to retail, I can report to you that we are making good progress in our project accelerate. You remember that we have decided to close some 30-plus, 40, around 40 of our retail -- of our own retail outlets in Norway, in Sweden, in Poland, in the Czech Republic and Slovakia, and we've decided to close -- because most of them have actually been closed by the end of April. There is a half dozen or so that is still under operation for another few months. And so we are on track with the cost measurements, and that actually does also then show why it is that with lower turnover, we can still yield the same EBIT, and that is because we're managing costs here. The lower turnover has 2 reasons. One is that hardware in photofinishing, the cameras are on a decline and have been on a decline.[Technical Difficulty] Okay. I hope this is okay again. My apologies for that. There's been an interference.So coming back to retail, the decline in turnover has 2 reasons. One is, as I pointed out, the camera market is on a decline. People use their smartphones to take photos and do not buy photo cameras anymore. And that declined with an increase in quality of the cameras built into mobile phones. Obviously, the need for specific cameras is now more and more focusing on the very upper end of professional and semiprofessional cameras that are being sold with all the impact on lenses, on tripods, et cetera, et cetera. So this is the one reason, and we would have expected that a good half of the decline of 16.8%, something around 10% of the decline in turnover is actually going back to that effect. The rest is obviously still that stores are closed. We've had some significant closings of stores in all of the countries over the first 3 months, and that actually does show in revenue. But I can also tell you that our shift into the online business is actually showing some positive results so that we feel that we are on good on track, well on track with our program accelerate. Commercial Online Print is obviously significantly impacted still. In our turnover, again, in the first 2 months of 2020, we're actually looking towards a good increase in sales above -- slightly above expectations, with good preparation of some cost management measures. We're really happy with the development. And then COVID-19 came. And still, we can see in the order intake that restaurants are not open, that there is no fairs out there, that people who would meet and need business cards don't need business cards at this point in time. And so this explains the shortfall in revenue. Again, cost management is working at its best and where it should be. So despite the fact that it is a little more than half of the revenue of 2020, the base -- the bottom line result is the same and the impact of the Kurzarbeitergeld of about EUR 0.5 million or EUR 0.6 million is actually not the entire explanation, not at all the entire explanation of this result. So Other is easily explained. The increase in turnover always goes back to futalis, our specialized dog food business that is also yielding a positive result. These days, more positive results these days, so that is not a burden on us, but a contributor as small as it may be. And so overall, sales at the same level, give or take of the previous years, minus 0.4%. I would like to say it's probably running [ around year ] and so it's on the same levels. We've been able to offset the shortfall of sales in retail and commercial online printing by the increase in sales in photofinishing. And since we all understand that the margin in photofinishing is more attractive than that of retail and commercial online printing, clearly, this is the obvious outcome as far as the EBIT is concerned. Now this is the high line results. Olaf has some more detail as far as the financials are concerned. To you.

[Olaf Holzkamper, CFO & Member of the Board of Management]

This is below line, yes, you're right. So let's dive deep into a couple of numbers there. And if we start first with the P&L structure for the first quarter of this year. You have seen the minus 0.4% in terms of revenue. That's clear to you. The next lines don't reveal anything worth mentioning. And then I think it's probably worth talking about are the 3 important lines, materials, personnel and other operating expenses. You know that we tend to have this long-term structural shift in terms of revenue split in between the different segments. Photofinishing, as this quarter as well, photofinishing increases in terms of revenue share, whereas retail is decreasing share-wise and also commercial online print, share-wise, has been decreasing sometimes. That led to the fact that this business, where we have the most value-added in terms of real value we are contributing there, not buying just material, is the one that has been increasing the most over the last years, which was driving the different shares of the 3 most important cost lines here. And this happened very much in Q1 again. You know that photofinishing increased their share. And that is why the cost of materials in terms of percent of revenue went down quite a bit from 25.3% down to 22.7%. Now that is a very strong decline in terms of percentage points, and that is due to this shift that we have a lot higher share in photofinishing there. We are producing more value added. Now this leads generally to the effect that in terms of percent of revenue, we then have a slight increase in terms of personnel expenses and other operating expenses. Now if you look this year, this quarter, into these 2 lines, you see that there is no increase, but a slight decrease in those lines, too. And that is part from special effects along the digital lines, also driven by 2 very important developments we have there. One point is we have a general cost consciousness going on. You know that we have been very cost-conscious in the last year due to the pandemic situation. We have been very careful there, and this still continues into Q1 clearly this year and potentially continues also into the next quarters. We are still very careful not to increase cost rate, doesn't need to be at all. So we are very careful. That is point one. And for instance, you do see specific items. Like in other operating expenses, you see the point we don't have travel costs right now. Basically, no travel costs, yes. That is certainly something we're going to increase again when we get back into a new normal. We're going to increase that [ from degree ] to build the relationships to customers, to suppliers and also to our financial community there. But for now, this is very big cost savings in their general cost consciousness, also traveling, for example. And the second reason why we do see some kind of slight decrease here in 2 other cost lines here in terms of percent of revenue is due to operating leverage. We have this effect in photofinishing. We have seen this over the last years more and more that we do see operating leverage effects. We don't have to increase our fixed costs along with the same speed as we are able to increase our revenue in photofinishing, and that is contributing to the development there as well. Having said that, I'd like to leave the P&L structure. I think the rest is pretty clear for all of you. It's just worth mentioning how all the structure is continuing along the lines that we've seen in the past already. Moving on to the balance sheet. You do see balance sheet end of March year compared to the balance sheet a year earlier. We see that we do have an increase in the balance sheet length in total by EUR 40 million. And if you look into the details, you can see that this is happening in current assets. And if you read through the -- all the boxes, you will see that it basically happens in cash only. So cash is increasing by more than EUR 40 million, and that is increasing the asset size of the balance sheet. That's the reason for it. If you look at the other items, noncurrent assets, the yellow part on the left-hand side, there is some scheduled depreciation, which is a decrease. On the other hand, we have deferred income taxes increasing. Nothing unusual in there. So that is completely okay, and results in a basically stable noncurrent assets. If we look at the current assets, that is where we do see the increase in cash that is driving the more than EUR 40 million up there. And this is very much in line with the increase in cash we had seen end of last year. End of last year, we had seen an increase in [ cash net of EUR 70 million ] even. Now it's only compared to the year before, EUR 40 million. And the reason for that is the cash out effects that we had due to the one-off cash ins end of last year, which we're going to walk through on the cash flow sheet again. So in addition to the cash effect that is basically running the show in the current assets, we have some ups and downs there. You can see there in the detail, we have a bit more stock on the one hand side, which we do in large to be safe, on the safe side in terms of on-site commissioning, for instance, given all the issues we had with the channel in Africa, getting our -- also our material through there at some point in time, we'd rather be on the safe side and we'd rather increase our stock a little bit higher in order to be able to supply our customers. That's more important than optimizing working capital for a second. So that's one reason why we increased current assets. We have been decreasing the current assets because we had lower tax advance prepayments in this quarter compared to last year's first quarter. That's the reason why the stock increase was counterbalanced there. So I'm not pointing that out in order to sort of point out minor ups and downs. We had net to the -- net to the cash effect. I'd like to point this out, especially regarding the prepayments because it looks or it could look out to you and say, "Oh, why did you have lower prepayments in Q1 2021 looking at the results of the year of '22 -- sorry, the year of '20, which has been quite, quite strong. Now it takes some time, but we are increasing the prepayment again. We have seen very helpful movements into our direction from all the tax authorities in many locations during the pandemic when no business knew what was going to happen here, and they were really helpful in terms of reducing the prepayments. So we want to play absolutely fair with them and increase prepayments now as we have seen how strong our business went in 2020. And we have already communicated to them, we have announced and we have negotiated prepayments with them, and they don't yet -- are not affected. So that's the only reason why prepayments of Q1 '21 were below the prepayments of Q1 in '20. In Q2 already this year, we will see higher prepayments there. We want to play fair and open with the tax authorities there as well. That's on the asset side. On the liability side, there's nothing really big to mention. The only and probably the nicest thing is the increase, obviously. We've seen our equity there. You see an increase of EUR 43.9 million, which is driving the liability side up by the EUR 40 million you see in the total liabilities. And this leads, and that's great, to an equity ratio of 58.2%. So it's again more than 4 percentage points higher than equity ratio end of 2020 -- sorry, end of Q1 2020, and that is a great development. The balance sheet of CEWE is stable. Looking at capital employed and capital invested. You see an increase there of EUR 32.2 million. If we look at the capital employed side first, yes, noncurrent assets, you see that is basically stable, minus EUR 1.6 million. As on the sheet before, there's no changes here. In cash, you now see the detailed development there of the cash acquisition. You do see the increase by more than EUR 4 million we just talked about on the other page. In net working capital, we do see another extended version of the development we have had end of last year already. In December -- end of December, I communicated to you that we had a strong increase for the special effects at the end of the year by more than EUR 30 million in terms of negative increase of working capital. We had a positive effect there. Now it's still a positive effect in terms of working capital, a negative increase of working capital by minus EUR 7.6 million, which is still driven by the same effect. If you look to the effects, we see net operating working capital at the top part of the small box there. There is ups in stocks and there's downs in trade payables. All in all, it's basically no change there. And the increase we see, the increase of the negative working capital by the minus EUR 7.6 million, we do see from the points below in other net working capital. And what you see there is the 17% are mainly driven from income tax changes we've seen there. We have less receivables because we have the lower prepayments we just talked about on the page before. So that's one part of the EUR 17.9 million. And we had an increase in short-term tax liabilities by EUR 13.7 million, which are visible on the liability side on the balance sheet before. Now we're adding them into the working capital. You see the strong impact that the taxes had there. But that is going to balance out over time. Having talked through the capital employed, the major parts there, looking at the capital invested, yes, we do see the increase in equity. That is the same EUR 43.9 million, no big change there. Gross financial liabilities are decreased because we are able to repay back -- to pay back financial liabilities there. That's a great development. And the increase in nonoperating liabilities is due to the normal increase in banking provisions. There is no big movements in there. We've touched already a lot on the cash effects, and the best way to look at them is free cash flow statement. So let's have a look here what's happening there. On the left-hand side, you do see the cash flow from operating business. There's a reduction of minus EUR 14 million. You do see in there from minus EUR 9.1 million to minus EUR 23.1 million. And if you look into the details, you see that looking at the EBITDA and the noncash effects, they even contributed positive more than EUR 5 million as a start-up for this calculation. So taking the minus EUR 14 million we are seeing here and looking at the plus EUR 5.5 million, we would actually see EBITDA plus noncash tax, you would ask so where is the EUR 20 million, EUR 14 million, plus EUR 5.5 million? Where is the roughly EUR 20 million that we are missing here kind of? I'm looking at the 2 [ currents ] in terms of operating cash flow. And that is due to all these cash flow effects we had talked to already before. Looking at the EUR 18 million that are leaving our company in terms of cash there, that is due to higher cash out due to our trade partners because we had a strong online business end of Q4. We had the cash in from consumers, and we had to pass that out already in Q1, obviously, to our retail partners. And that is contributing a large chunk there. We had a big online business, which also means a big mail order business. So we had to pay our mail order providers. That cash out was happening in Q1 as well. And we had less cash in from our retail partners because they typically also do point-of-sale cash in for us in Christmastime and pass that cash that belongs to us on to [ CV ] in Q1 after Christmas. Now as they had a limited point-of-sale business due to all the lockdowns, we had less cash in from that side. So there is 3 reasons why we had substantial cash outs in Q1, they are directly related to the success our online business in Q4 and that we had already announced to you when we communicated the great cash numbers of Q4 end of last year. And now guess what, this happened. It's exactly as we had announced it to happen, and that was the big effect there. In addition to that, we paid some more cash. That is the EUR 2 million, EUR 1.8 million you have seen at the bottom of this box here. We paid some more cash in terms of taxes. And if you add the EUR 18 million you see there and the EUR 1.8 million below, you are exactly on the level of EUR 20 million that we were just trying to find when we said we don't bridge the minus EUR 9 million to minus EUR 23 million. It is in these effects that we already predicted end of Q4. And it fits to what we said there end of Q4. We already announced that we will see some roughly EUR 30 million cash effects to happen in order to wind back all the special cash in effects we have seen in Q4, end of last year. Now we didn't get -- quite get to the level of EUR 30 million because we still continue to operate in the strong online business mode. But you see that we developed strongly into that direction. So all we see here is exactly what we had already foreseen to come. Cash flow from operating business, that's cash flow from investment activities, basically no change in terms of normal investment. We spent a little bit less than last year. We just happened to acquire the last chunk of shares of Cheerz. That is EUR 9.8 million we paid there. Now Cheerz is 100% part of CEWE, and we appreciate that. All in all, that adds up to a free cash flow of minus EUR 37.4 million, which is again completely in line with what we had foreseen to come in Q1. So we do have a strong cash position and that cash position increase is also our ROCE, but nevertheless, ROCE is on a nice level, as you can see here. Starting with an EUR 86.3 million in terms of 12-month EBIT, now that is an increase from the EUR 79.7 million 12-month EBIT we have been showing to you at the end of December last year. So there's the EUR 6.6 million increase. That is the increase of Q1 compared to Q1 last year. Average capital employed is pretty much on the same level as last year. Now given the strong increase in terms of EBIT and capital employed being on the same level, you do see the nice increase there in terms of ROCE to a level of 21.9% starting from 14.6% last year, same point in time. So that's a great increase you can see there. And again, it's an increase from 20.6% we had seen end of December last year. So all in all, nice performance, balance sheet is not distracting at all, and nice performance in terms of [ ROCE terms ]. Now we are moving to the outlook. Christian?

[Christian Friege, Chairman of Management Board & CEO]

And if we sum all that up, we obviously can look at this long-term slide. It's now covering 31 years of our company history, from the analog days through the digital days and to the days where our photofinishing is actually peaking as the significant contributor to what we are doing here. We can confirm our outlook as far as the turnover is concerned between EUR 710 million and EUR 770 million. And we can also confirm our outlook as far as the EBIT development is concerned. We will not change the outlook, but we'll just confirm it. Why? Because there is still significant insecurity around COVID-19 out here. And as I pointed out earlier, we have a limited visibility of what's going to happen in the next 2 quarters. And we have the challenge and the need to return a strong Christmas quarter, strong fourth quarter again. So what we do today is we are confirming the targets that we have communicated to you 2 months ago. Thank you very much for your interest. We hope that you will support and come with us for the next 3 quarters as well until such time that we can hopefully have an annual analyst and press conference again. And maybe, maybe, maybe if vaccinations are working and if airlines are coming back into business and all those things, we can even meet in person. I personally -- I trust the same applies to Olaf and Axel Weber, who's with us today as well, the 3 of us would very much welcome to see you in person again after then probably almost 2 years. So bear with us, follow us, support us, and we'll probably see you on the TV screen again in 3 months' time. Thank you for your interest, and have a great day.

[Olaf Holzkamper, CFO & Member of the Board of Management]

Cheers. Bye-bye. Thank you.

[Axel Weber, Head of Investor Relations, Planning & Reporting]

Thank you.