Cewe Stiftung & Co KGaA

XETRA:CWC

Earnings Call Transcript 2023-Q2

[Olaf Holzkamper, executive]

Welcome to everybody in the call to today's Q2 call of CEWE Q2 results and H1 results in 2023. We are sitting here, and as always, we're looking to the weather outside because the weather, as you know, is important for 2 things: to take pictures and to order. Today, there is nice pictures -- there's nice weather, and that means it's a day to take pictures. But nevertheless we can't tell you right now, but we will tell you later when we present Q3 that customers actually did order as well in Q3.

But for now, we are going to talk about Q2. Before I go through the agenda, I'd like to highlight what Axel asked me to mention, which is we are recording the presentation right now until we are opening it for questions. So just for your information.

As always, looking at Q2, we are going through a typical agenda that some of you or most of you are familiar with, which is corporate development along the different business segments and group results, which Yvonne is going to present. Then I'm walking through a couple of financial details, and we are finalizing it with the outlook and opening up for questions.

Having said that, Yvonne, the stage is yours.

[Yvonne Rostock, executive]

Thank you very much. It's my great pleasure to welcome you on our analyst call. I hope you had as well the chance to enjoy this summer to travel and, of course, to take some photos. We are looking forward to your orders. We have 1 hour together. So let's, in fact, go forward, and let's dive in straight into the business.

First of all, I'm very happy that I can announce and confirm that CEWE is continuing its growth path. We landed a strong first half of the year with a turnover increased by EUR 29 million versus last year, and this means a plus 11% in percentage. The group EBIT almost is at breakeven, and EUR 2.2 million better than last year. This is a good position and a good starting position for us into the year '23. And that means as well, it makes us confident to confirm our targets for '23.

If we look to Photofinishing and to Commercial Online-Print drove this especially in top and bottom line. The retail goals is forced, and others is increasing in top line, but impacted in bottom line. We will come to this in detail.

If we go further, looking at the quarter, in the quarter, the group turnover increased by 7.8%. We are now reaching EUR 142.3 million, and there is a watch out in EBIT because with our business model, traditionally, it is negative due to the seasonality. In '23, the operational profit -- operational EBIT stands at minus EUR 4 million, and this is better than in '22. The figure you see on the graph shows a minus EUR 5.2 million. And this deviation is due to an extraordinary provision of EUR 1.3 million integrated or containing writing-off of a production machine at futalis and writing-off of a software license, which is no longer required. The contribution of the segments is similar, structurally similar as in half year 1.

CEWE business is built on the 3 main segments and more than 10 brands. With this, we are positioned diversified and future-oriented. Commercial Online-Print and Retail contribute now 29% in the first half of the year to the total business. And our focus stays clearly Photofinishing with 79% of our business to date.

Let me start with Photofinishing. This is the lion's share. And before we enter into business facts, let me share some latest updates. We remember a base of success for us is innovation. And CEWE is innovative, and this is not my saying, but it's confirmed by TIPA. So I'm very happy that I can confirm we won 3 TIPA awards in '23: first for CEWE on the recycled paper building on our sustainability roadmap; and second, for 2 awards for WhiteWall, reflecting the creativity and the technological innovation. The design frames, it's more the creativity; and the technology is the wall configurator, which is convincing as well very demanding photographers. So this is an investment in customer journey, and this is as professional as the products.

Further important for our success and continuous growth are new products. So let me highlight 3 of them. You have a choice here, a couple of things we have innovated or we have launched in Q2. Let me take 3 of them to explain a little bit better. On the right, you see the Photo Streetmap. It's a premium poster and integrating the map where you took your best photos. And this you can print on digital. And it targets young consumer and mainly is communicating on social media. Second, the fine art print on Alu-Dibond with WhiteWall. So we'll continue to develop here our edginess and our quality approach and formats up to 2 meter [ 4D ] and with 100 framing options. The third is you see on the left bottom, it's Dein Design organic case, and this is built from renewable raw materials such as corn or sugarcane. In addition, there are some other things you see like a new cooperation with Zwilling and new blankets as a selection of the launches in '23.

On top of the products, it is important for us we continue to develop our technologies. And here we cannot disclose everything, as you know. But what we can confirm in Q3, we have relaunched parts of our mobile application with new editors. And we work on the long term improvements with our MAIC team. This is a dedicated mobile artificial intelligence team. They are testing new technologies and develop for us. And this means with 2 main goals: improving our products, to assist the consumers, to assist you when you are going to build your memories into products and improving the customer journey. So an example as well on the internal side is, for instance, the chatbot for our customer service.

Next to the expert teams, it's important for us to level up our knowledge of these technologies, including [indiscernible] and defining the opportunities as well as the limitations. So here are examples of workshops we are doing throughout the group.

Yes. If we go for the next one, next to the innovation and innovation strengths. We are a market leader. And our market leadership is a strength, but as well an obligation. We have reported about the CEWE Photo Award, and we have closed the award for the -- handing in of the photographs for this year. And we can confirm that we have -- we can confirm that we are the world's biggest photo award. And we have more than 500,000 hand ins of photographies. And we have to stay a little bit queue. There are amazing works in between. The winners are selected, and they will be published in September this year.

Let's come to the KPIs and the figures. One of the important KPIs for us is the turnover -- the prints and the turnover of Photofinishing. So here, what we can see that the total prints as well as the value per photo are increasing. The trend is intact. What you see on the middle part, there's a special peak specialty during the Corona time, where the product mix was, I would say, more due to high-value products especially the wall decoration. This was the momentum being in home office and being so much time at home to redecorate your home. And that means as well, we are now getting back to a more normal product portfolio and a product mix with lots of photos in it as well. So we are confident with this one.

And if we go on the next one, the same picture confirms as well for the first half of the year. So the trend's confirmed, and we are going in the right direction.

Our most important product, CEWE PHOTOBOOK. Here, we can say that we are growing. And on the top and a little above this, you can see the growth rate we have so far. And you can say we are above target with plus 4.5% on Q2 and plus 7.3% on half year 1. So the PHOTOBOOK is an important benchmark for us. How does this built into the results, and our turn over in EBIT figures. How does this translate? Photofinishing is increasing significantly by 9%. 7% out of this come from price increase and 2% from demand increase. So we were able to mitigate the price increase without a decline in volume. Please be aware that in terms of EBIT as well the Photofinishing is typically a negative one. So the reported EBIT was improved by 0.2 versus the previous year. If we would see it without the impact of the extraordinary provision for software, it would be even higher.

In half year 1, the turnover increases 10.6%. Here, a split is around 5% coming from the price increase and 6% coming from the demand increase. So the demand increase has a higher -- become -- gets a higher share. The Photofinishing EBIT so improved by EUR 2.9 million and -- due to the volume and prices. Also here is a special effect, the operational business would be even EUR 3.4 million.

If we go to compare ourselves versus our targets, let's have a look on the quarterly development. And what we can see here if we compare the turnover versus the targets, we are happy to confirm that the turnover as well as the EBIT are ahead of the target. And if we look the same on the EBIT side. On the EBIT side, we can say that we are [Technical Difficulty] and in the height of the year, and we are on target on to Q2.

Let's come to our second strategic pillar, to our business segment, Commercial Online-Print. Commercial Online-Print stands for products like flyers, promotional items, which are dealt in a B2B business model. CEWE is strongly positioned with 3 brands: SAXOPRINT, viaprinto and LASERLINE. SAXOPRINT, our biggest contributor here, focus on offset print in Germany and beyond. It's the best price strategy. viaprinto is more dedicated to high-quality print products and small editions. And LASERLINE, very regional approach around Berlin.

Let's look at the results. And on the results, we can say that the turnover is growing by 4.7%, achieving now EUR 21.8 million. This growth rate is -- we had a higher growth rate in Q1. This is softening now. Please remember that the Q2 last year was a very strong one with a plus 50% growth after the Corona return. So we have now a high bench. And on this bench, we can still set another percentage of increase.

And the EBIT is improving and up -- going up to EUR 0.4 million. And this is as well more than last year. And this is clearly driven by the efficiency in production, which enables our best price strategy. And as you can see in the historical line, it is as well very unique that we are having at Q2, which is positive in Commercial Online-Print.

If you look at the half year 1, the sales and the EBIT increased well. It's plus 14%. Our EBIT increases by EUR 0.8 million, again, thanks to the cost management, and it's the first time positive as well on the historical.

Let us turn to Retail. On Retail, let me explain upfront that the retail -- the Photofinishing figures is already included in the Photofinishing business segment, which we have just seen. So in Retail remains the revenue and the EBIT of the photo hardware business as cameras and photo accessories. If we look, CEWE is focusing more and more to retail on Photofinishing. And this is for our consumer sort of opportunity to discover the brand and the products in store. Our network stretches across Poland, Czech, Norway, Sweden. And we have a multichannel retailing with 100 -- more than 100 stores -- in stores and online.

If we look on the results, starting with the Q2. The hardware retail continues to perform well and generate EUR 7.8 million, which is almost on a level with the previous year. The EBIT we saw is improving slightly. So we would overall say Retail holds its force.

If we look on the half year 1 as well, we confirm its holding its force. The Retail sector is slightly increasing by 1.1%. And the EBIT is improving by EUR 0.1 million, not yet completely breakeven, but we are confident for the total year.

And this brings us to the last segment, if you can call it like this. We summarized in Others. And in Others, we saw structure -- we showed structural and corporate costs, and profits arising from real estate property and company investments. So if you look what we are -- what we have achieved here, we can see that in the Q2, the top line is increasing with 9.2%. But the EBIT is challenged, and the EBIT is landing at minus EUR 1.4 million. And the decline is explained by EUR 1.2 million decrease in EBIT of futalis, which also includes a necessary machine write-off of EUR 0.8 million. So these are the special effects, which are hitting on the EBIT in Q2. And the impairment was necessary due to an update on the futalis planning for the full year '23, which was initiated for a sales process of futalis.

So if we look on the half year 1, here we show the same trend. So the bookings and the EBIT development of Q2 is impacting as well the half of the year.

So far to each of the segments, and we come to the overall picture summing up, to be precise. And here we can see the -- you can find back to Q2 landing, which is a plus 7.8%, landing at EUR 142 million, with the split of the different segments, which we have just discussed. So we are confident with this growth.

And if you look on the next one, same picture compiles for the half year 1 even with a stronger growth of plus 10.7%. We still benefit as well from the very strong start into the year with Q1. This is a bigger growth on the half of the year.

So with this, we have a check on the EBIT. Also the EBIT in half year 1 is significantly better than in the previous year and also clearly stronger than in the last pre-Corona year, 2019, and this despite the EUR 1.3 million special effect in Q2.

And with this, I'm very happy to hand over for the financial details to Olaf.

[Olaf Holzkamper, executive]

Thank you very much, Yvonne, which means financial details means that we are looking in a bit more detail in the P&L. First, you have seen already the revenue development in Q2, plus EUR 10.3 million. And I think you have seen that is pretty much divided from a lot of Photofinishing, somewhat from Commercial Online-Print and a slight decline in Retail, as well as a positive contribution from Others, obviously. So on revenue side, positive development.

Then looking at the next lines, where are the important differences compared to last year Q2. In other operating income, you see that we have a minus EUR 3.2 million there in terms of the effects. And if we go in there, it's always, as you know, [ kind of worms ] that's in there. It's nitty-gritty details. If you want to dig something out, there is like the reversal of provisions we had done last year because there were many invoices that we stood at in the booking, which were apparently not to come anymore, so we could take it out, fine. That helped last year quite a bit.

And another one is, for instance, the valuation allowances that we had also decreased last year. So it's mainly effects last year that we had decreased last year, which is again, if you want a back to normal effect last year, leaving the Corona phase because in Corona, we had quite some accounts receivable that we saw on fire, that we saw in danger. And that's why we had booked some provisions in the year before. So we are talking '21, basically. Now in '22, last year, we saw that we were moving back to normal so we could take them out again. We had a positive effect here. And now we are comparing ourselves obviously to this positive one-off effect of last year there. So that is like the last steps of back to normal that we can see here in the P&L sheet as well. We are going to talk through 1 and 2 other details on the next pages in cash flow, in balance sheet where we are seeing also this last back-to-normal effects. And hopefully, that's it then regarding the Corona effects. So let's call it back to normal, minus EUR 3.2 million, and that is a visible effect here.

Moving to cost of materials. You see that we have the absolute increase there, which is completely in line with turnover. If you look at percent of revenue, although you see the reduction from 29.6% to 28.8%, and that is due to the change in revenue mix. You know that Commercial Online-Print always has a very high material cost or comparably high material costs, [ we're sort of ] finishing at a lower material cost. But as we have more value added in there, more cost in terms of personnel expenses and other operating expenses. And that's why the shift over to more -- a higher share of Photofinishing revenue actually decreases the percent of revenue in terms of cost of materials. So that is a business mix shift, but we quite appreciate that we can lower the cost of materials in terms of percent of revenue.

Moving on to the personnel expenses. Yes, obviously, we have increased the personnel expenses here in terms of -- in absolute terms. And the reason for that is that we do more business. So in terms of personnel related to production, there's a slight increase there. But also, we have increased personnel on the white-collar level in order to -- as always, in order to prepare for Christmas. There is increases on the white collar side in Photofinishing as well in order to cope with the Christmas business, in order to have the right marketing, in order to have the right software up and running when we are running into the season, which is visibly here obviously in the personnel cost. But nevertheless, moving from the absolute terms of personnel costs over to the relative terms in terms of percent of revenue, and we see a decrease in personnel cost here as well. So also there, it's a development into the right direction.

Next line, other operating expenses. You can see the increase there in absolute terms to EUR 48.1 million. And the reason for that is also operational preparation of business also leading towards or ramping up towards the year-end already. So we have increased marketing costs, and we're quite successful if you look at what happened on the overall revenue side. So that is moving into the right direction. And we have increased the IT costs with the ERP special effect there that Yvonne has mentioned already. Nevertheless, also there in terms of the operating cost, you can see that percent of revenue, we see [ a decrease there ].

Finishing up with the amortization and depreciation, we do see a limited negative effect there, although the depreciation due to the impairment depreciation of futalis is already included. So if you take out the impairment depreciation, also there, we would see a lower depreciation number in Q2 this year compared to last year Q2.

So this is the development. And after all that, obviously, we draw the bottom line looking at the EBIT. And we do see a decrease from EUR 4.4 million now to minus EUR 5.2 million. So when we looked at that, we said, okay, first time. It's an okay development given that we are looking at Q2, and Yvonne has explained that the seasonality in Q2 is what it is, what it has been in the last years. It was always a negative number, and it was decreasing in the last year. So the overall -- included all special effects fits into the long-term development, point one. Then if we take out these special effects, we can say, okay, that is an interesting improvement even we are seeing here in Q2 on the operational side. But nevertheless, it's still a negative number, but it is an improvement.

Then if we look deeper into the numbers and the way we have done it right now and look at the operational lines in terms of material, personnel, other operating expenses and depreciation, we can see that at least in percent of revenue, we are seeing a reduction there. And that is in absolute terms. That is even true if you take out the special effects for most of those lines, even in absolute terms. So we are seeing a development there in terms of operational strength that we are really enjoying. And I wanted to mention this that it's important to look at these numbers, which are good bottom line anyway. But if you take out special effects in these things, we do see that we are even in a very good development -- on a very good -- in a very good shape here exactly as we would like to.

And if you look at the numbers, then you might ask yourself, so where is the difference then? Why do we still see a decrease in terms of EBIT or a negative EBIT there? I think the important line actually is other operating income where you see a EUR 3 million in absolute terms, less than 3% rounding in relative terms, in terms of percent of revenue, less of an impact there compared to last year, and that makes quite a difference.

So it means, if we take out this, which is also special effects because it's the famous kind of worms, I alluded to already. We take out the special effects, it means that we are on the operational lines of the P&L. We really have a nice development here into the right direction. And that makes us quite comfortable if we are looking into the next 2 quarters of this year. CEWE is in a very strong position also cost-wise here. We quite appreciate our numbers regarding this effect.

Looking at the balance sheet just very quickly. Yes, you do see there's a slight increase by EUR 6.2 million, which on the asset side is mainly driven by noncurrent assets. I'm going to talk about that a bit more on the next page. And that's pretty much it in terms of balance sheet length. But the obviously important number, which we quite enjoy is the equity ratio, which again has increased from 60% to 66%, which at least underlined our balance sheet is rock solid. So no worries about the stability of the company balance sheet-wise. Also balance sheet-wise, the company, it's rock solid. And obviously, it puts us into the position to take any strategic moves if there's opportunities out there. And we quite enjoy this situation we have built.

If we move from the balance sheet to the management balance sheet, and you know that obviously we're looking at capital employed and massive capital in that sense, reducing the balance sheet, but all the items that we don't have to pay any interest for, any dividends for and whatsoever, then you can see actually that the overall size is reduced here very slightly. So we are pretty much on the same level of EUR 427 million, which means this is the stable capital employed or capital invested is nice here. And you will see it on the ROCE chart to translate. I think that we had a nice development in terms of ROCE here. And obviously, stability in capital employed while return is increasing is always a good situation. So we quite enjoy that.

If we look in one step down and we think, so where is this stability coming from? Actually, you do see the EUR 7 million increase in noncurrent assets, and that was the number we saw before already. What was driving the EUR 7 million is the operating fixed assets is the main part. And yes, it's investments in Photofinishing production sites where we are especially enlarging our production in Kozle, in Poland, where we have moved over the last years. And we are continuing to move a lot of the production that is a lot of [ an endeavor ] heavy, and that is a strategic move of the company. They continue -- we are continuing on this road, which makes a lot of sense, obviously. So that is driving the largest part of the increase there.

And this plus EUR 7 million is counterbalanced. At the bottom, you can see it by an increase in both cash decrease -- sorry, a decrease in cash and the decrease in net working capital. Cash, obviously, as you can see on the right-hand side was an even more cash was used to pay back debt. So we have reduced our gross financial liabilities quite a bit. And then there is the other kind of worms, net working capital at the bottom reduced by EUR 3.2 million in the last 12 months.

Now we could go through the big box on the left-hand side bottom here. But quite frankly, if you really want to nail it down to what really makes a difference, what effects are not counterbalanced by whatever, I think the one thing to highlight is the EUR 4 million reduction in terms of tax position that is in there. You see EUR 4 million is basically making up the EUR 3.2 million reduction. And what we have there, the biggest part of the EUR 4 million is the reduction of tax receivables by EUR 2.9 million we have had. And also this is a back-to-normal effect because we are looking at an overpayment of taxes, we had to do prepayments.

Prepayments in taxes, we had to do in '21 because 2020, the results due to Corona were so great that the authority said, "Oh, you should pay more advanced payments in taxes." So we paid more in '21. We didn't stick on that level of profitability, obviously, you are very well aware of. So we were getting back to normal profitability now. And we could claim back these taxes, obviously. And we got them paid back in the last 12 months. And that is the reason why there is such a strong reduction in tax receivables here, which looks like this is another end of the phasing out of Corona effects here. Hopefully, we don't have to talk about that again. So we are also here back to normal. That is talking of capital employed.

Capital invested, there's -- the increase in equity, we just looked at already. And the increase in equity allowed us basically on the capital invested side to pay back the gross financial liabilities quite a bit. So this is a nice development. We have there another way to look at our balance sheet strength here.

Moving from the balance sheet over to the cash flow. That's the last word back to normal I think I'd like to mention. Yes, we are starting with a -- for the negative EUR 0.6 million to explain the increase by EUR 6.9 million of the cash flow from operating business there on the left-hand side. So we are starting with the [ reg 0 ], if you want. But then there's 2 effects which can be put into the text box, if you want. The one is at the bottom, we are mentioning the EUR 3.9 million, which are in other net working capital and it's mainly value-added tax. The difference of value-added tax we have paid for purchasing things and value-added tax we are getting in income payments due to the revenue, and there's a positive effect here. So that's purely a timing question.

But then the EUR 3.3 million that is mentioned there on top, EUR 3.3 million is another back to normal because we could reduce our tax payments -- tax prepayments this year compared to last year because we asked for it. And that is the reason why there was less payments in this Q2 compared to Q2 before. So increased EUR 6.9 million in other operating -- in operating business cash flow. Looking at the investment activities, there's a slight increase -- a slight decrease by EUR 1.6 million in the investments. And a large part of that is due to the reason that we don't have special investments like the Hertz acquisition we had last year with EUR 6.2 million.

But we had higher outflows now due to [ Hertz ] interest-only. In this Q2, in operating assets, overall, we don't have higher outflows there, but we had this year in Q2, we had lower inflows from investments compared to last year, respectively, we had higher outflows for financial assets. So all this was counterbalancing the EUR 6.2 million less Hertz acquisition. So we are down to a positive effect of EUR 1.6 million. And adding the 2 up, we obviously have increased our free cash flow, if you want, from minus EUR 18.7 million to minus EUR 10.1 million. So we are completely in line where it should be, given you're looking at Q2, and this looks as it should look like.

Moving over to the ROCE, and I alluded to that already. The average capital employed, given that we are looking at the average of 4 quarters, we don't have the stability that we had seen in the management balance sheet. But nevertheless, there's not a huge increase in capital employed here, moving to EUR 437.9 million, and the 12-month EBIT is increasing a lot more. And that is the reason why ROCE-wise, we are looking at stellar 17.8%, which is a nice number we enjoy, and we like to be a profitable company. We are clearly generating value.

For the outlook, I'm turning back to you, Yvonne.

[Yvonne Rostock, executive]

Thank you very much. And before we enter into the figures, let's hold a little moment. We have still a market which is challenging in terms of macroeconomics, and we have a business which is going to be decided in Christmas. So, in search, we have a target that we would like to continue to write our growth story, which we continue since so many years. So if we have a look on the next one, this is the story we would like to continue the growth. And this is the target we have set ourselves up to EUR 780 million in sales.

So if we look or if we think of what we have seen today and what we have landed, it makes us confident to confirm this target sort of several reasons. First, there are macroeconomic market challenges. But we have shown in the past that our products -- with our products, we are resilient to this crisis that we are offering gifts and that these are things which has a little treasure, a little luxury for the consumer were they do not cut on. Second, the travel market is increasing well. So people travel. And travel means for us as well occasions, photographies, which then can be built into memories. And the third, which makes us confident is, of course, our landing of the first half of the year with -- in advance on our plan. And all this together, we believe that we are able to do the EUR 780 million by the end of the year.

The same continuation of the success story we plan for the EBIT, and the EBIT is expected to increase up to EUR 82 million. And here as well, the results of the first half of the year make us confident without being too sure of ourselves, always staying very agile and very acute on everything which is happening because the Christmas is in front of us. But we feel very much prepared with all the plannings and all the things we have -- we are preparing right now and we are preparing since the beginning of the year to have in place. And on top of this, the Christmas outlook and the things, of course, we are continuing to build on our strengths -- we can go over this one -- and to build on our strengths to make this happen. We are putting the consumer at the center of everything we do. The Net Promoter Score is our main KPI. And how we do this is surrounding our focus with innovation power, [ approach ] as a couple of news out of the Q2, but there is much more in the pipe.

And second, strong brands. So here, we build on our complementary brand portfolio ranging from tiers attracting young consumers and mobile consumers to WhiteWall targeting professional and artists and photographers with an ultra-premium approach and, of course, CEWE and Pixum. These brands are not building on its own. It is as well, thanks to our creativity and creative ideas and thanks to investment, which we are securing and which we are increasing for the second half as well. Our leading market position, this is a strength and an obligation as well. So this -- we can build on that one as well as on the print awareness.

The third thing is the omnichannel, on the right-hand side, which is a real [ USB ] that CEWE offers. It's free choice for the consumer to order wherever they want and to execute the products with whoever they want as well. And here we build as a very great work on our strong partnerships with our retail partners.

And the fourth part is to togetherness as a team because only behind a strong team -- because behind strong results there is a strong team. And all this is embedded in our sustainability, and of course, we have to stay efficient going forward as well to deliver the bottom line.

If we go further, then this is -- I would like to thank the whole CEWE team for the great landing in half year 1 and for the confidence this gives us for the half year 2. And this is as well not a given one. Great team needs to be treasured. And we announced earlier on that we work this year under WE in CEWE, building our treasure platform through a participation process, creating dialogues, ensuring and building, intensifying the flow of talent and knowledge, feeling this togetherness as a team. And this will enable the team to grow. And if the team grows, we are as well able to grow ourselves.

On this moment, I would like to say thank you. On top of the team, I would like to thank our consumers who are loyal with us, who are choosing products out of one of our brands, who are memorizing their best photographies and their best events with us. And I would like to thank you as well, especially the ones who accompany us for so many years and building behind the scenes. So thank you very much, and this is the closure from our side.

[Olaf Holzkamper, executive]

Thank you very much, Yvonne, and we are opening the call for questions.