Cewe Stiftung & Co KGaA

XETRA:CWC

Earnings Call Transcript 2022-Q1

[Christian Friege, executive]

[Audio Gap]

from Christmas. There was a little bit of this Christmas scale effects in 2021 and we peaked at EUR 8.6 million in EBIT.

Now what we are seeing here is that our business is getting back to normal. We're not quite there yet, and I'll show that to you also as far as Q1 is concerned. But we are clearly getting back to normal. And we can tell you also why we think that getting back to real normal is in sight.

So what we see is if we compare ourselves to 2020 -- and you remember, corona actually hit us in March. Then we are a little bit better with EUR 2.1 million in EBIT. If we compare ourselves to 2019, it's EUR 200,000 better. So we are getting back to where we left off before COVID-19 hit us.

In photofinishing, we expected for this quarter a reduction in sales and in EBIT. And we reached EUR 2.5 million in EBIT and minus 10% in sales with EUR 112.6 million.

In commercial online print, and I'll show you the details, we actually good increase of turnover of 38.8%. Again, previous year's comparison, 2021 was a lockdown quarter, where obviously commercial online print, leaflets, flyers, posters, et cetera, were not in demand. But again, there is an increase of 38.8% to almost EUR 80 million in sales and an improved EBIT of minus EUR 300,000.

And in hardware retail, we're even able to grow a little over last quarter in 2021, and I shall show that to you as well.

What is a very important information for you and also that we will show you in more detail, we clearly confirm our targets for 2022. We are on our plan. We had always expected that this first quarter would be less profitable than 2021. So we are absolutely on plan, and we are happy about that.

Now what also needs to be mentioned here is that we were distinguished at the end of April as one of Germany's best employers. In fact, we were among the 100 best employers in Germany. Great Place to Work is a very widely used benchmarking tool that helps to gauge corporate culture, staff satisfaction. And we have had good participation with 84% of those that were entitled to participate. And 81% of the participating employees ranks CEWE as a very good employer.

We are proud of that. All of our staff are proud of that. But it's also a reflection that we are not managing this company at the expense of our employees but together with our employees and that they feel obviously very happy to work at CEWE.

Something else that I want to share with you is that we have extended our range of CEWE PHOTOBOOK accessories. In fact, a few weeks ago, we went live on our HPS software. For those of you who want to try this out with our XL CEWE PHOTOBOOK, XL Square CEWE PHOTOBOOK with a personalized slipcase.

Now you would think from very expensive art books that this is something that is easy to produce. In theory, it is. But the challenge, obviously, is to not only make this personalized in that you can actually find the photos that you want to print here, you can even use other photos that are on the cover. But you also have -- of course, the challenge of bringing these 2 products then together, et cetera, et cetera.

I would not know of any photofinisher in the world who does this. It is enhancing our uniqueness and our premium positioning. And I can tell you we've had a presentation upon going live a few weeks ago. And the team of different departments actually worked on this was very, very proud of what they achieved. And I think they have every reason to do so.

Something else that I want to mention is our CEWE PHOTOBOOK competition. Finally, finally, finally, with COVID moving away slowly but steadily, we were able to have the awards ceremony. And you can see hidden behind the people and [ eat out ]. So even with the first price, this little car, we are staying into our sustainability of promises. And we very much enjoy getting together with our customers. Now these are obviously customers who put a lot of effort into designing their CEWE PHOTOBOOKS. And it was very, very rewarding for us, I have to say, to talk to these customers, to understand about their thinking, et cetera, et cetera.

Now what I would also like to share with you is the first prize was a travel book about Chile. The second price was a book about food photography. And the third price was again a travel book, Rome, Buongiorno Roma. And it underlines how very important travel is for our key product CEWE PHOTOBOOK.

And you can see on this next slide how actually corona or COVID impacted us as far as the traveling is concerned. On the left-hand side of the slide, you can see pre-corona. And we pulled a valid sample of photos. And that valid sample -- and when we looked at the locations where we could see that. We put those little dots on a map. It's a valid sample.

So you can see here a lot in the Caribbean and Central America, Florida, around the United States and all along the coast of Chile, going all the way to Thailand. You can see South Africa. You can see Australia, New Zealand, very heavily -- [ SA Rock ]. You can see Southeast Asia and, of course, Europe. That's 2020 before corona.

Now we are looking at 2021 -- the corona lockdown. And you can see that all this long-distance travel is actually gone. And what you may see there, most of what I would suspect, old photos from the pre-corona times that were actually used in orders that we were fulfilling at the time.

And now we did the same sample or a similar sample as valid as the others for 2022 post COVID, I would -- their underlying this. And you can see not only how Europe is expanding, but you can also see how Caribbean, Florida, et cetera, is coming back, how there is more going on in Africa. Even Australia has its first dots, New Zealand is out there still. Southeast Asia has its first dots, so traveling is coming back. And that is one of the things that actually we feel will support us this year to match our expectations to match our targets and our budgets and plans.

I put together a few quotes here. On the top left-hand side, the CEO of Lufthansa, who is quoted, "People are traveling again. We expect more tourists onboarding this summer than ever before." On the top right-hand corner, "We expect a strong summer," the CEO of TUI, a travel -- package travel company.

So these are actually companies who are not looking at who is currently traveling, but they are looking at their books, who has actually booked a holiday with them and who is actually expected to be traveling over the next weeks and months. Or FTI Touristik another of the big tourism providers here in Germany, "Bookings are good for the entire Easter vacation period until fall. Easter until fall, better than expected in many cases and exceeding 2019 pre-corona numbers in highly desired destinations."

So these are some of those quotes and some of the research that we are obviously studying that makes us looking forward to the coming weeks and months. And I am quite are hopeful that those shortfalling that we still see in terms of specifically the photofinishing also compare -- and we'll look at that now for a moment, also compared to the pre-corona times will actually be caught up over the next quarters.

Now getting into photofinishing in more detail. You can see that the total number of prints is down, obviously. I did explain to you how that is actually affected by the lockdown. Also, by the way, the value per photo is impacted by the lockdown.

And then you will tell me how can this be. This is an average number. It's less photos. It still should actually come out as a valid average, it does. But one of the effects that we see through corona is that people were redecorating their homes.

So whilst we were selling less photo books, we're actually selling more wall art. And this more wall art, you have one photo that costs between, I don't know, EUR 10, 20, 30 and even EUR 100. And that obviously brings the average up.

Now we are back to people are going out. They are taking photos. They're not redecorating their homes. So obviously, we are selling a bit less wall art. But the averaging effect actually would subdue the value per photo.

So if we take out this -- the wall art effects, the 2021 number for value per photo would be EUR 23.51. And so you can see if you were to put that in, the development is as straight as you would have expected from us.

Same, by the way, is for the turnover in photofinishing overall. If you look at that and take out the special effects from 2021, we're almost back to this development that you're used to from us. That goes still slowly but steadily up. And as I said, with the traveling, I'm confident and are very hopeful that you will see the usual development that you're all used to from the pre-COVID times again.

On the next slide, you can see PHOTOBOOK is going down. And it is -- and we did the analysis around that. It is a location restriction effect of COVID. We truly did this analysis. You can see this with the dots that I showed you on the maps, the world maps. It is an effect from vacation. So I actually explained that with vacation coming back, we'll also bring back numbers that you are more used to.

If we're looking at the EBIT effect in photofinishing, we had a very similar -- I mean this is not surprising for you following us. It's a very similar image as we had with the sales, the overall EBIT of the whole group. Obviously, photofinishing is so important for us, and that cannot be fundamentally different.

So you have 2021 as the exception to the rule. But if you then go back to the overall development from 2014 to 2020, even in photofinishing, that is so much still impacted by the travel shortfall and the shortfall of photos that people have comp higher over the last years -- when they see all of their photos while they were locked away. And now since they can go out, there is no piles, no stockpile of photos anymore that they can use. So that will be built up over the next months. And we will then see also the numbers yet.

So the comparison with the last pre-corona quarter 1 in 2020, we had a slight decline in demand in earnings in photofinishing due to the corona-driven reduced -- photos of customers.

And that's also visible here. That is the 10% shortfall in turnover that I mentioned in the introduction. It is the EBIT of EUR 2.5 million for photofinishing that you've seen before. We have a lack of revenue-driven scale effects. I did mention the scale effects positively for last year "Christmas effect", so obviously with a few less photos. The contrary is the case here. And so the 2 corona years reduced the customer stocks of imaging and decline in turnover.

And that's something that's important for you to understand. We did this decline in turnover. We always knew that the first quarter will be the quarter where the comparison for previous year is the one that is making us look not as good as the fundamentals actually are.

Photofinishing turnover by quarter, this is one of the slides that you always look at. And as I said before, we are on plan with what we see here, both in the turnover as well as the EBIT.

And with that, I continue to our commercial online print. Again, a reminder for you, we are looking at Viaprinto with the service focus at SAXOPRINT our big client and our big brand in Dresden with the LASERLINE extension for the metropolitan area of the link.

And you also remember, and we did explain in this group before, that we have adopted a clear distinction in strategy between Viaprinto with a service focused for small and medium enterprises and with SAXOPRINT to pursue a best price strategy because we feel that we have the best cost position in the industry and we can therefore be not only a cost leader but also a price leader. And that is actually a positioning that is paying off. And step by step, we are getting more confident that this is a position that probably makes a lot of sense.

On that slide, you can that the increase in revenues is almost 40% over 2021, again, 2021, a lockdown quarter. We're not there yet where we were in 2019, 2020. But as you can see, the profitability is getting actually even better than it was at the time.

And so we are benefiting from an ongoing corona normalization and significant increases in sales. And that is something that you should not. And we don't think that we are back to normal yet. So if you make your expectation on that, we feel that there is still some more that could possibly come.

In retail, we are looking at CEWE Japan Photo, FOTOJOKER CEWE in Poland, CEWE Japan Photo in Norway, PHOTOLAB CEWE in Czech Republic and Slovakia and our traditional store, Wirtschaftswoche in Oldenburg, actually the start of the whole company 110 years ago.

We are increasingly -- and I've shown some of this to you maybe before. But I wanted to underline this again specifically since I've just had a look at our Czech colleague stores. You can very clearly see that this is actually a CEWE store.

And we are using the hardware to pull in people into photofinishing. And we're using our photofinishing customers to also upsell them to hardware. We are focusing our -- hardware sales to those bits and pieces that are actually profitable.

And with that strategy, we've actually been quite successful, I have to say, in that why do we have reduced the number of outlets. And you all remember our strategy of taking a significant step towards optimization of our retail chain-wise. We've actually closed down about 30% of our stores. We've been able to increase the revenues by 4%.

And what it doesn't say here is that we are still struggling with some of the camera producers with supply chain issues. I don't need to get into more detail. If you look at chips, electronic chips, for example. So we do not get the stock that we would like to have to sell that we have had that stock. And again, it was made quite clear to me when I look at the warehouse in Prague yesterday. If we had that stock, maybe it would have even be a few pennies better.

However, at the end of the day, we've actually had the best result we've had in the first quarter in a long time. And if you then take into consideration that in the previous quarter, where we were benefiting in some countries from what we would call short-term work here in Germany to the tune of about EUR 0.5 million, then you can actually see that the profitability is getting to where we would like to see it. And so we are relatively happy with what we see in the business segment retail.

And then quickly over to other. You will remember that the revenue here is solely futalis, our personalized dog food company that is still growing nicely. And the habit is an amalgamation of all kinds of different effects. But as you can see in the long-term development, it's neither here nor there.

And that brings me to the group results in terms of the turnover. It's minus 4.8%. You've seen that this was driven specifically by photofinishing. It was, to some extent, compensated by retail and specifically by commercial online printing. Last year's corona-generated boom in photofinishing was not repeated. And we had expected that. And so this is what we would have expected when we had planned this year.

And as far as the EBIT is concerned, it where I told you. It would be EUR 2.1 million. And you can see the different effects, compensating each other to that EUR 2.1 billion. Again, 2021 was an exceptional year because of the COVID implications.

And with that, I can hand over to Olaf, who has minute details for you as far as the numbers are concerned.

[Olaf Holzkamper, executive]

Exactly. Thank you very much for that, Christian and [ Christoph ].

And we are moving over to the P&L to the income statement of Q1. The details you see there, we've talked about the revenue. And there's not more said about that.

The next line that looks kind of interesting is the other operating income, where there was a slight increase. And the reason for that is that we have recharged operating costs, in particular, in what we call operating costs in on-site finishing, so to operate the on-site finishing machines, the CEWE photo stations in the stores for our retail partners. We are recharging that to our retail partners. And that success of on-site finishing is driving the little increase there. So that is moving into the right direction. A little bit inflation is mentioned there, but it's actually not the biggest driver of the success of on-site finishing here.

Looking at the cost of materials. You realize we have a little increase there. And in terms of percent of revenue, it is something that goes up anyway. But that is true for all the other numbers on the other lines below, which is due to the fact that revenue is decreasing obviously.

So -- revenue this time -- of revenue this time due to the structural shift we have seen due to a lack of corona effects. It's not a very meaningful number this time. But in absolute numbers, the cost of materials go slightly up because we do have this change in revenue structure this quarter. Photofinishing goes down. And commercial online trends and retail actually move up. And they are the ones that are driving. Because of materials, they have a lot of materials in their businesses. And that is why the absolute number here moves up as well. A little bit of inflation obviously can be added there, too.

Moving on to personnel expenses. There is no comment here. But might say, okay, there is a decrease in personnel expenses. How can it be given that you are always increasing the personnel slightly throughout the whole year because you got to have more and more and better and better Christmas business?

Yes, it's true. And it's actually what happened here -- as well. The reason why a slightly smaller number in terms of personnel cost is shown here is that the stock option plan that is redeemed right now is slightly cheaper than last year due to the decrease in stock price. And that's the reason. Otherwise, it's development, as always, into the same direction, to put the truth forward here.

In terms of other operating expenses, you do see a slight decrease, the absolute numbers. The main driver behind there is that we have lower cost of distribution just because there is less revenue to be sent around in terms of products. And that's the reason why this has -- why this is deeply stable. So these are the drivers regarding the P&L structure.

If we move on to the balance sheet, as always. First of all, let's look at the asset side, and we do see -- in terms of total volume of assets, we do see a slight decrease of EUR 24.3 million in terms of the sort of balance sheet length, as it's trained in Germany.

This decrease of the balance sheet is something that obviously is a driving factor of the equity ratio. And that's the number I really want to point out on this chart here. On the very right-hand top, you can see this red 64% of equity ratio there, which is a nice increase compared to last year, 58%, which was already a great number.

The reason for that is, one, the balance sheet is not on the same volume as it was the year before. And two is the -- next to the [Technical Difficulty] We are trying again. It looks perfect. Thanks for that.

So the increase of the equity ratio is due to 2 reasons. One is the reduction of the balance sheet. And the other one is the increase of the equity we are seeing. On the right-hand side, there's a plus EUR 15 million, which is a nice development.

So that's the biggest takeaway from this number we are seeing here. CEWE has a very strong balance sheet and the equity ratio is on a great and very solid level.

So why has the balance sheet being reduced in terms of total volume? Now here, you can see it's not in the noncurrent assets. On the left-hand side, you see that only a change of EUR 1 million. It is in the current assets at the bottom. And it's in the current liabilities on the right-hand side in the liabilities.

And these 2 together, most of those items actually qualify what is called working capital. And that is why it's very worth looking at that development not on the normal balance sheet here but to move over to the margin balance sheet on the next page, where the nonoperating liabilities that qualify -- where the current liabilities that is qualified for working capital are moved over on to the left-hand side, which is now becoming the capital employed. And on the right-hand side remains only the capital invested.

What you see there is, there is hardly any change here because capital employed and capital invested are just slightly increased by EUR 7 million. That's not a big change. And again, the noncurrent assets are the same stable change by EUR 1 billion as on the page before already.

The change that we see here comes from down there at the bottom, especially the net working capital. At the very bottom there, you see a change of plus -- nearly plus EUR 40 million. So that is worth looking at.

And if we look at what is driving this EUR 40 million more in working capital, the driver there is not the net operating working capital. Yes, we do have a slight increase in inventories, which we do actively, very actively from our side. We are building up -- finishing stock. We are building up commercial online print stock because we want to be sure to be able to fill the demand from our customers.

Strategically, we are reducing the retail stock, which makes a lot of sense, wherever we can. But we are increasing other inventories, where we do see the demand coming up.

So there is a slight increase. It's counterbalanced by the trade receivables, where we have a decrease. So they nearly balance being increasing again by trade payables, and decrease, which is obviously an increase in net working capital. So all in all, that adds up to EUR 1.2 million increase in the operating net working capital, not a big change.

The big change that is fueling the EUR 40 million change we just saw in the net working capital overall is down the other net working capital. And the big driver -- the biggest driver in there is the tax prepayments, the tax payments we have done within those 12 months. We are looking at here. That is an increase of nearly EUR 30 million, EUR 28.5 million.

We have also paid taxes and reduced the tax liabilities. So this reduction in liabilities, obviously, is something that increases operating -- that increases working capital. And at the same time, we have increased the working capital by the reduction in other current liabilities especially because we had higher VAT liabilities last year, because of the tremendous success last year. This year, this didn't happen. We didn't have so many cash influx from our customers, which was leading to VAT liabilities.

So those 3 important points at the bottom there, they're adding up to this big change in increase in working capital. And they can be somehow all part corona-related by one way or the other, bet it an effect this year, be it an effect in last year, special effect. Whatever it is, wherever it was happening, it is a corona-driven effect. And that was increasing the operating working capital now to a level of -- the net working capital overall to a level of EUR 23.4 million.

This was paid for by a decrease in cash to a large degree. That's why you see the decrease in cash back to a more normal level but a decrease of EUR 22 million. And the cash obviously paid for the EUR 20 million. You see on the very right-hand top there, we have had a store -- stock buyback program running exactly in these 12 months we are looking here. And that was reducing our cash by EUR 20 million as planned.

So even after that solid cash position, which is very visible here, solid equity ratio, which you've seen on the chart before, CEWE has a very solid balance sheet. These were the last 12 months numbers.

And then we move over into the cash flow. We are looking at the development of the Q1, of the 3 months in very particular. What you see there is that the cash flow overall is similar to what happened last year but actually for a slightly different reason.

Regarding the operating business, you see that we are really on the same level of operating cash flow. But we had changes. In the big box left side, you see we had lower results. You have seen that before. EUR 8.5 million on an EBITDA level plus the noncash effect we are seeing there.

We had lower cash outs in Q1 of EUR 12.5 million in net operating working capital because we didn't have these huge payments to our retail partners, which we had to do in Q1 last year, so 2021 Q1, because 2020 Q4, Christmas business 2020 Q4 first lockdown year was tremendously successful.

So many -- due to that many payments we had to deliver in Q1 '21 to our retail partners to pay out their fair share to them, which was a big cash out. This didn't happen again in Q1 2020. And that's the reason why we didn't see so much cash out there from net operating working capital.

But in other net working capital, at the bottom, 1 step further, you do see a higher cash out but is due to the increased VAT. You all know that we had a decreased VAT level in percent in 2020. Now it was back to normal in '21. And that's why we had to pay a higher amount of VAT to the state authorities there.

And this was decreased a little bit by a one-off effect in import VAT, but that couldn't quite balance it.

So there's an increase in payout there plus slightly higher income tax payments. All in all, it adds up to 0, and we are back to where we were last year in terms of operating cash flow.

The same is true for the one in the middle here, the investment cash flow. Last year, we had the cash out for the remaining share of Cheerz. This year, we had an acquisition of a headquarter building just next to our core building here. Basically very, very much next door. And those were pretty much on the same level.

So we are on the same level of investment activities there overall, which obviously leads to the fact that adding the 2 numbers up on the right-hand side, also the free cash flow in '21 and '22, were pretty much on the same level.

Now one might argue looking at cash flow from operating business, why is cash flow from operating business not fully getting back to where it was obviously the years before? We did look into that. It's a valid question to ask.

And what we saw is there is a general trend in our seasonality. You know -- you all know that we moved away from success in EBIT in Q3, in particular. A lot of success in EBIT happening in Q4 now in terms of EBIT, in terms of P&L.

But also in cash flow, we have kind of cash flow change due to seasonality, which more and more leads to the fact that we have more and more cash flow in Q4 and not so much cash flow in Q1. And the reasons are described in the box in the very top here.

We have a VAT effects due to all the Christmas turnover. We need to pay out the VAT. We have -- due to the increasing success year after year after year over a long period of time, we are continuously paying higher tax prepayments, which is also a cash out for Q1 because that spread evenly throughout the year. That's also an important driver.

And we have other payments like salary payments and other things also spread evenly across the year, although the big success that those people are working for, for instance, is happening in Q4.

So that is something that is driving the changed picture here. A bit more cash out in Q and a bit more cash even in Q4. And that is what actually drives the cash flow in 2021 here -- sorry, in 2020 here. And it's not getting back to the pre-corona times. That's why 2022 cash flow is back on the same level as last year again.

So there were some explanations around the cash flow. Moving to the last chart, ROCE. We just need to divide the numbers. You've seen the EBIT numbers already in terms of 12 months. That means EUR 66 million roughly in terms of EBIT. In terms of working capital, we are nearly on the same level, a slight increase here, looking at the average of the last 4 quarters. which all in all means ROCE, 15.9%. It's a nice ROCE level clearly value creating back to normal, more or less.

And with that, we are coming to the outlook. And you can see the very, very much beloved, long-term development from analog photofinishing to digital photofinishing to our commercial online print, spanning a time of now 32 years, including the expected results for 2022. We are aiming at a turnover of EUR 680 million to EUR 740 million. And with that, we wanted to generate an EBIT of EUR 65 million to EUR 80 million.

Now I'll point it out to you in our annual press -- analyst conference in March that we've actually widened the bracket here and why did we do that? Because there is still uncertainty from corona or COVID. There is also uncertainty from inflation that obviously is hitting us in terms of increasing cost on the cost side. And there is obviously the assumption built in here that the company will not be deftly affected by the war in the Ukraine, neither on the procurement or on the sales side. which today is the case. I had pointed out, I believe, to new -- in March that we have no sales activities and have never had sales activities, neither in Russia nor in the Ukraine.

We're also not significantly procuring from those areas. But obviously, prices are in big disorder. Supply chains are in big disorder. And this may or may not affect us. At this point in time, it does not affect us. So we confirm our targets here.

And we're also seeing -- and I pointed out this example, a key example for us of tourism. We're also not, at this point in time, seeing changes in the consumer behavior that would affect us. But again, the caveat has to be -- that was the case, obviously or the war in Ukraine was extended to other European countries, et cetera, et cetera. Then obviously, this expectation would be -- would have to be changed.

While on assets, we are dealing with these effects as far as inflation is concerned. And what I am very pleased to say is that our long-term and sustainable approach also in working with our suppliers actually contributing to us not only to be fairly dealt with but also to be able to get our hands on those supplies that we need in order to serve our customers.

And at this point in time, we're expecting that shortages in supply will, at this point in time, not impact negatively on our ability to deliver to our customers. And it's interesting that I have to say at this phase, we will never have come up with the idea of -- this last year, 2 years or 3 years or 4 years ago. But times are changing.

So we are confirming wholeheartedly our targets for 2022. We've highlighted here for you. And again, those 2 key targets of the revenue, EUR 680 million to EUR 740 million, EBIT of EUR 65 million to EUR 80 million. EBT, earnings after tax earnings per share, et cetera, all of that derived from that whilst the revenue is obviously derived from our assumption as far as the CEWE PHOTOBOOK is concerned and the number of photos is construct. And with that

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