Takkt AG

XETRA:TTK

Earnings Call Transcript 2018-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the earnings call for the Q1 2018 results for TAKKT AG, hosted by CEO Felix Zimmermann and CFO Claude Tomaszewski. [Operator Instructions] Let me now transfer over to your host, Felix Zimmermann.

[Felix A. Zimmermann]

Yes, good afternoon everybody, and thank you very much for the brief introduction. And as always, also a warm welcome from our side to our conference call about the Q1 numbers, 2018. And I would like to start with kind of a quick summary, and then I would like to hand over to Claude, who will give us more details about the financials. And later on, I will give you an update on our outlook, and then as already mentioned, we are more than happy to answer your questions.So as you have seen this morning in our press release, we had confirmed a slow start into the year 2018, and I think the top line is representing a kind of a mixed picture. So we have seen very positive impacts from acquisitions, and especially from the acquisition of OfficeFurnitureOnline.co.uk, a company we have acquired with the effective end of January, 2018. More than happy to talk about that later on.But on the other hand, we had to digest significant negative currency effects, especially from the weaker U.S. Dollar, and together with the confirmable slow organic growth, in comparison to prior year, that impacted our top line.The confirmable low organic sales number is a result of A, less working days in comparison to the previous year Q1, and in addition to that, TAKKT America. So it's again, a decline in organic since primarily here because of the performance at Hubert, and here we are more than happy also to give you later on more details.Besides that slow start, top-line-wise, we also had to digest a decline in the EBITDA, and Claude will give you much more details about the reasons for that and what we are expecting for the full year later on.Now let me talk a little bit about the operations and the things we have done in Q1 for our portfolio. And I had mentioned already, the acquisition of OfficeFurnitureOnline at the end of January, which is now part of the new-formed division, Newport. And I think that was a good opportunity for us to get a footprint in the UK market for office furniture, as OfficeFurnitureOnline.co.uk is the leading online player in that market environment, generating nice growth rates and at the same time a nice EBITDA margin. And with that, it's a perfect addition to our Newport strategy, and that is very encouraging for the Newport Group but also for the TAKKT Group, because that is helping us to build and to develop the Newport Group to be the leading online player for business equipment in Europe.Also, due to the acquisition of Office Furniture Online, we achieved the first time an order intake that is representing more than 50% of our total order intake via e-commerce, and that is also kind of a milestone for us and for our strategy where we have said we would like to double the online sales, until the year 2020, within our digital agenda. Now having already 50% of our total sales coming in via online, I think, is a very nice milestone we have achieved here.Talking about Hubert, as we have discussed last time, the extension of a contract with a large customer was a key topic in Q1 2018, and we are happy to be clear here and explain that we have been able to expand that contract and sign the contract with that large account. And that is, on the one hand, certainly good news because that's generating business for us. But on the other hand, it's having an impact on the profitability as we have indicated it already in our outlook for the full year, and I will give you more details later on, on that.Besides that, we haven't seen any request for proposals here according to the blanket purchase agreement, so therefore, that is still a situation where the government is obviously not asking for extending the contract, and so we're expecting that the business will then come in without any kind of a contract and condition there.Last but not least, I think it's worth it to mention that we have made really good progress here with the implementation of our digital agenda. So far, we have hired 85 employees now, for the specific digital tasks like website programming, like online marketing as well as data analytics. And so we are on a very good way, and it's very encouraging to see what those new employees are already contributing to the implementation of our digital initiative. That is really good news.Also good news is that we have been able to make another investment within our TAKKT investment company, or TAKKT Beteiligungsgsellschaft, now having 7 investments under their, let me say, roof. The latest addition here was an investment into the company called Odoscope. That's something we have done in February, and Odoscope is actually an expert in providing a software solution for a real-time and fully-automated personalized content management for web shops. So they are really cutting-edge here, and offering solutions for companies that is allowing those companies to provide and to display really personalized content, real-time, based on -- we have pretty simple data, and that is certainly leading to higher conversion rates and making web shops even more attractive. And so we are very excited about that opportunity.And I think overall it's fair to say that the digital change in our company is really gaining momentum, and that was also supported by our new fourth board member, Heiko Hegwein, who is onboard now since the 1st of February. And I think he had a pretty decent and intensive onboarding process, and now step-by-step he is contributing to the digital agenda, and that is I think creating even more momentum and therefore, we are pretty optimistic that the whole digital agenda will deliver good results within the year 2018.With that, I would like to hand over to Claude, who will give us more insight into the Q1 financials, and then later on I'll kick over again and talk a little bit about the outlook. Thank you very much, so far.

[Claude Tomaszewski]

Thank you, Felix. This is Claude speaking, good afternoon to everybody. I would like to give you some more details about the results we have published this morning on quarter 1, 2018. Let's start with the TAKKT Group. As you might have seen, sales decreased by 4.4%, mainly due to negative currency impacts coming from the U.S. Dollar, but also a little bit from the Swiss Franc. And on the opposite, there is the addition from our 2 acquisitions, one from July last year, Mydisplays, and the one Felix was talking about, OfficeFurnitureOnline, from January or more precisely, beginning of February this year onwards.Organic sales have been in decline of minus 1%. This is of course again a quite strong quarter 2017. To give you a bit more color to that development, this might not be a figure which we are extremely happy about, but if we compare it to our internal plan we are only very slightly below our internal budget figures here for Q1 when it comes to the top line. And that is due to the fact that we were expecting against that strong quarter '17 that we might not grow substantially against that figure.Now in addition of course, we had to digest less working days, especially in Europe, 2 less working days. And for the group, they've had a negative impact of around 1.5 percentage points, so in order to assess that growth figure a bit more, we internally would add the 1.5% on a working-day-adjusted figure that we have grown slightly the business, but fair to say only slightly in the first quarter 2018. I will come back to a few more details on the divisions when we talk about TAKKT Europe and TAKKT America.Now what did this top line do to our profit line? Our profit went down quite substantially in the first quarter 2018, and half of that decline is due to the weaker U.S. Dollar, to the 2 less working days in Europe as well as some nonrecurring costs at Hubert. So half of that quite substantial reduction is something either coming from the foreign exchange impact, or something we are not expecting going forward.The other half, then, is a lack of sales growth. If we are only growing very slightly, working-day-adjusted or even to be more precise, have a decline in organic growth of minus 1%, the costs for the cause are still inflationary increasing as well as we have additional expenses for the digital transformation phase yet which had been an addition of EUR 1.1 million in the first quarter '18 compared to '17, the additional expenses for the digital transformation. So this overall has lapsed to the figure you have seen this morning when we disclosed EUR 33.4 million EBITDA for the first quarter 2018.Now when you look at our gross margin, that's possibly something to mention. You see there we have a decline of 1.2 percentage points in gross margin, and this is mainly coming from less freight margin. 2/3 of that decline is coming from less freight margin, which means we had to digest higher freight costs, or the other way around, we had less freight revenue coming from the customers so that we can conclude on [ progress ] of course, that the fact that the acquisition of OfficeFurnitureOnline comes in with a gross margin which is below the average we have seen so far in the TAKKT Group. That product margin was more or less okay for the first quarter '18, and the drop of gross margin is coming from mainly the freight margin and on top of that, the technical impact from the acquisition of OfficeFurnitureOnline.Going forward, we would have a look at TAKKT Europe. TAKKT Europe had an organic growth of 0.6%, that's only slight growth. Considering that we had the 2 less working days with an impact of 2.5%, we could conclude that Europe is growing at the moment, working-day-adjusted, with roughly 3%. This has come from KAISER+KRAFT, which has grown the business with a slight organic growth rate, whereas Ratioform was growing the business with a mid-single-digit organic growth rate. And again, considering the working day impact, we could conclude that KAISER+KRAFT has a solid growth rate whereas Ratioform at the moment is growing clearly above 5%. If we add that 2.5 percentage points to these divisional numbers, this doesn't look too bad.Now what did this do to our profit line? Here again, the less 2 working days have led to that impact that we had, of course, less profit for these 2 days, and on top of that the digital costs increasing, overall our EBITDA has gone down by EUR 3 million in the first quarter '18 compared to previous years, comparable figures.If we move on to TAKKT America, we can see here that organic sales have been in decline by 2.8%. Reportedly, even [ the sales decreases ] more than 15% of course, here, a huge negative impact from the U.S. Dollar weakening, and that was almost 13% negatively impacting the top line.Now looking a bit more into the sales decline organically in TAKKT America, we can conclude that we have 2 divisions with a good, even, up to a mid-single-digit increase of growth rate. This is the Central Division as well as 4Displays2Go group, whereas NBF and Hubert have been [ incline ] with a completely different story, because NBF had a very, very high comparison figure in the previous year figure, where they were growing the business with more than 10%, and they are now in slight decline for the first quarter which didn't come unexpected. If we look at April at NBF, they have returned again to very good growth, so this is developing according to our plan. And so we feel this is a good story and we would possibly see more here at NBF for the next month to come.Hubert is in a different shape. Hubert has had another double-digit percentage decline in the first quarter 2018, and here I'm sure we're going to have more questions about this development later on in the Q&A. But I can already report that one element of that decline is not just product sales being in decline, but also due to a test we have done here on the freight. We had a free freight program for the first quarter '18 at Hubert, and this has not been very successful. And so we have here some sales decline due to less freight revenue because it was free freight, but then the volume hasn't come in as a compensating factor, and hence why we have stopped that, cashed in that program. And we're going to speak about that, I'm sure, later on possibly in the Q&A.Now talking about the profit line, we can see here that profits have also gone down quite substantially due to the weaker U.S. Dollar, of course, due to the weak organic sales growth rate, but also due to some nonrecurring costs at Hubert, one I've already mentioned. There was the free freight program, which we have stopped then beginning of April; and secondly, we had more printing costs here for Hubert, which was more timing impact in that quarter compared to the comparable quarter previous year. And also this will not happen a second time this year, this was a time issue on printing cost.Now having said this, I think we can move on to the TAKKT cash flow on the next slide, where we see that our decline in EBITDA of EUR 11.5 million have not come through completely to the figure of TAKKT cash flow. Why is that the case? We had less interest cost, and also we have now considerably less current tax this year in that table. The reason why we have less current taxes is first of all, we have made less profit of course, but also due to the fact that in America, we have now a considerably lower tax rate as you all know. And the overall current tax rate coming in for current taxes just to be clear, is 25%, and including the deferred tax impact our overall tax rate has come in for the group with a figure of 27%. And that might be a good proxy at the moment, a good forecast, 27% to 28% going forward for the group tax rate.Now if we move on we can see that TAKKT cash flow was in decline by a little more than EUR 6 million. The cash from operating activities has only been declined by EUR 2.4 million, and the reason here is that we have a positive development in net working capital, and other adjustments which is in the green. And so cash from operating activities has come in only shortly below first quarter '17. We had a similar figure being invested into CapEx, mainly of course also due to the digital agenda this has gone up. But it was a quite similar figure here being invested, and so we had a free TAKKT cash flow for the quarter of a bit more than EUR 22 million which only came in short EUR 2.7 million below Q1 '17, which shows again that despite the fact that we had rather a really weak first quarter, '18 compared to '17, that cash figures here have shown quite a robustness. Or actually, again demonstrated robustness for our business model.What did we do with the EUR 22 million free cash flow? Well, in the first quarter '18 we have invested into the acquisition OfficeFurnitureOnline as well as we had the latest or the last payment for the acquisition of Post-Up Stand, which we did in the year 2015. And so of course, that figure of EUR 41 million in total exceeded the EUR 22 million. Why? Our net financial abilities have gone up, where it's now to a figure of EUR 151 million, and with that net financial liability and the balance sheet figure the equity ratio now stands at almost 60%, precisely 59.7%.Well, before I hand over back to Felix, talking about organic sales growth for the first quarter, especially for the first quarter '17, you can see here that the group has been in decline as of now, a few times mentioned was minus 1%, and that came compared to a 4.1% first quarter '17. If we add the first 3 weeks of April, so that would be year-to-date figures per last Friday, which is the 20th of April 2018, this would give us a quite good feel for where the group stands at the moment. Why? Because that would cover the Easter period on both periods, so that would cover Easter period in '18 as well as the Easter period in '17. And if you look at these figures, working-day-adjusted on an organic basis, we can report that Europe is growing the business with roughly 4% whereas America comes in with a flattish development.So if you look at Q1 here and add the next 3 weeks, you would be with a solid growth rate and America would come in flattish, and that would leave to a TAKKT Group figure growth rate with more than 2% and which would fall into the guidance of 2% to 4% which we were giving at the beginning of the year when it comes to the top line.And if you look further at Q2, Q3, quarter 3 and quarter 4, lastly you can see that there is possibly some potential to hit our figures for the full year, and why we are still confident going forward. And with that statement, I am happy to hand over to Felix to talk a bit more about our guidance and our outlook.

[Felix A. Zimmermann]

Very good, Claude, thank you very much for your explanations here. And let me go to, I think it's Slide 9, and give you an update on our outlook for 2018. And I think the slides are more or less unchanged, and therefore nothing really to comment here in addition. But maybe a quick update here on how we see the situation. And at TAKKT Europe, from Slide 9, the organic sales growth will be certainly impacted by the consolidation of the Gaerner brand with the KAISER+KRAFT brand. The other situation is unchanged, and I think we are happy with what we are seeing there. It makes sense what we are doing here, and the result is a I think overall a good one.At TAKKT America, we have said that we are expecting negative impacts on the organic growth because of the phase-out of that Dallas Midwest within the NBF group. That is also performing according to plan, and so no surprises there. And the new contract with the major Hubert customer, I've said that we have signed that contract, that is now in place. That is good news, and the bad news is certainly that this is having as expected, an impact on our profitability.So overall, I think it's fair to say that the assumptions we have made here at the beginning of the year are unchanged for all organic sales development, and therefore we are expecting for the full group an impact of the measures I've mentioned of minus 1 percentage point on the organic sales growth as well as an impact because of the major Hubert customer here on the EBITDA margin of half a percentage point.Now looking at the expected organic growth for the full group, I think it's fair to say what Claude's mentioned already. The outlook here is unchanged, so we are expecting an organic sales growth coming in at 2% to 4% and at the same time expecting an EBITDA margin coming in somewhere between 13% and 14%. And therefore, we are with that, confirming our outlook for the year 2018.Besides the organic growth outlook, we have also mentioned that I think we should keep in mind that we have a positive impact here from an acquisition we have made, that is, OfficeFurnitureOnline.co.uk, or [ a group for work ]. That is certainly creating a positive impact on our reported number for the year 2018 as well as a little impact also coming from the acquisition of Mydisplays, a company we have acquired in July 2017, therefore impacting 2018 only with a positive impact for 6 months.Besides that, we have seen that already in the -- if you want numbers for 2018, the currency impact from the U.S. Dollar is important to keep in mind, because that is [ seven grade ], a significant impact on the group key figures as we report them in Euros. And there we have made our assumptions in the annual report. You'll see that there's a sector outlook that a softer U.S. Dollar, for example by 5% against the previous year, will add a negative impact on the reported sales number by about 2.5%. And if you compare now the year-to-date average exchange rate of Euro versus the U.S. Dollar, it's currently 9% weaker than the average rate of the full year 2017 to see what the leverage is, and what the impact is on reported numbers. We just want to make you aware of that.With that, I think we are more than happy to answer your questions, and open the Q&A round. Thank you very much for your attention and your interest.

[Operator]

[Operator Instructions] The first question comes from Mr. Letten.

[James Letten]

James Letten from Berenberg. Just with regard to Hubert, I was wondering if you could provide some color on the decline there. I know you've previously mentioned the new contract having a negative impact, but perhaps if we could delve into what's causing this, the extent of this decline? And obviously, Amazon, Whole Foods, Walmart, it's a very difficult, uncertain market at the moment, but I guess most critically do you expect this to change in the medium term or near term, or long term? And on top of that, given the renegotiation you've had, or negotiation with a major customer, what are the long-term implications of that? Is this going to happen again with other large customers, or if there's not a new normal? And finally, last question, are there any new negotiations underway this year to that extent?

[Felix A. Zimmermann]

Thank you very much for that question, that pretty obvious one, and so more than happy to give you a little bit more detail here. Yes, we are happy that we have signed the contract with the one major customer here, and that is having negative impact as we have indicated already, and that is included in our forecasts on the top line as well as on the bottom line. And a couple of reasons for that, is a price reduction cannot be offset by more volume. And if you look at that catering industry in the U.S., and you look at the research about listed companies in that segment, you see that they're all struggling. They're struggling to find new locations, so they have no major new openings, and with that, no larger orders they can give us. And they're also competing in a very competitive market there, to keep locations or to gain existing locations. And therefore, we are not expecting from the food service industry, any organic growth coming from the market. It's more a competitive environment out there, where especially the large players are competing and trying at the same time to reduce their costs. So that's the reason why that contract is on the one hand giving us some volume, but on the other hand is, let me say, at the very lower end of what we are ready to accept. Now the next question we have had, is are there any other negotiations right now on the horizon. Nothing we are aware of, but certainly we cannot exclude that, and it would be not fair to say that this is all safe for the year 2018. But I will also say that it is business as usual. We had that also in the past. But we have now reached the point where we would be ready to also reject a contract, and say this is not attractive for us, we are not ready to sign a contract and to move on, on conditions which are not attractive for us. And we should keep in mind that Hubert, besides that, is a difficult top-line environment, still generating double-digit EBITDA margin with their core business. And if we cannot generate attractive margins with those larger accounts, and manage the big accounts, we would be also ready to reject that business and maybe say that we are not interested in that. So therefore, there are options for us. We are not somehow prisoners of that situation. Now looking at the Hubert business beside the top 2 or 3 accounts and customers, I think we are making progress here. We called those accounts, managed accounts, whether it's in the food retail area or in the food service area. We have generated, in comparison to last year, more leads. We are more active out there to gain more new customers, and that is showing already [ first and ] positive signs. We also are pretty active from the online side, here, on that part of the business. It's also showing first positive signs, and some of you might know that we are also active with one activity within Hubert in the nonfood retail area, and that is generating very nice growth. So the whole retail sector outside the food area is obviously looking for merchandising stuff for solutions, for display solutions. So that is helping us, but still too small to compensate for the larger accounts where we are suffering from. And besides that, Canada is performing year-to-date pretty good. And so to put it in a nutshell, we are still suffering from those larger accounts and that's something where we need to be careful that we are not investing too much money into those markets, and at the same time we are seeing first any encouraging results that the underlying business is recovering. But for the year 2018, I don't want to create too much optimism here. It will be still a difficult environment for Hubert, that's I think fair to say.

[Operator]

The next question comes from Mr. Salis.

[Hans Christian Salis, Equity Analyst]

Christian Salis from H&A, I've got 3 questions. First of all, on the U.S. business, so in Q1 organic growth declined by almost 3%, which is basically the highest decline for years, despite a softer comparable base. So what's your strategy here going forward to improve the situation at Hubert? Or, do you already consider a divestment of Hubert here, and if yes, is this likely to happen already in 2018? The second question, on your full year guidance, so on the EBITDA guidance, basically -- EBITDA declined by 25% now in Q1, last year by 12%. So you would really need a significant pick up here in earnings growth going forward. So what's your strategy here? I know the comparable base is going to be easier going forward, but are you also reducing digital investments, for example, to achieve the low end of your EBITDA margin guidance? And the last one, what's the margin impact of OfficeFurnitureOnline on gross and EBITDA margins? And you mentioned the free freight program in the U.S. at Hubert, which was not successful. What's the margin impact here in Q1?

[Felix A. Zimmermann]

So thank you very much for those 3 questions. Let me start to answer the first one, I think the 2 other ones will be answered by Claude. Talking about the organic growth, TAKKT America in Q1, we have said that's disappointing. Yes, on the one hand I think you're right to just look at the reported numbers. It's disappointing. But if you look under the hood you know there have been 2 major reasons for that. One is the performance of Hubert, and the other one is the phasing out of Dallas Midwest. So if you take those 2 effects out, I think the organic growth of TAKKT America wasn't that bad. NBF, the core brand of the NBF group is performing very nicely, and even if they had a very strong quarter last year in the first quarter, I think they have showed a good performance and I'm pretty optimistic that they will continue to do so in the year 2018. And Displays2Go as well as Central shows I think a good performance, and so I'm pretty optimistic that they will also contribute in the full year 2018 to solid organic growth. But you're right, the impact at Hubert and their negative organic growth, and double-digit negative organic growth, is certainly with their weight impacting the TAKKT America numbers. That's nothing where we could argue, there. That's a matter of fact. But we are working on that, and as Claude has indicated already, we are seeing they're good for signs of a slight recovery but I don't want to create any wrong expectations. On the other hand, you have asked whether we would consider a sale of that business or whether we would explore options to find a new partner or go into an M&A process. That is not something we are considering right now. We are in good talks with the management. I think they are doing a great job in generating leads with our managed accounts, with sticking to the core business, and the impact of those 2 major customers is something where we have to make a decision whether we want to move on with those, or whether we say that doesn't make sense, that is not our business anymore. So those are the questions we are discussing. Besides that, I think the management is doing really a good job there in steering that business through rough water, and that's something we should keep in mind there that even under given circumstances, as I've mentioned already, they are generating a good profitability and good cash flow. So to put it in a nutshell right now, we are not considering or we are not in talks in selling that business. Now with that, I want to hand over to Claude.

[Claude Tomaszewski]

The 2 questions I understood was, what's the gross margin and EBITDA margin of OfficeFurnitureOnline and how that could impact the group; and the second was, what has been the impact from the free freight program from Hubert on the gross margin decline. OfficeFurnitureOnline has come in with a sales figure of GBP 40 million at the time, if I remember correctly, and they are running the business with a gross margin which is a bit more than 30%. And the EBITDA margin is double-digit, around 12%, 11%, so that gives you a feel if you run the numbers for group, how gross margin and EBITDA margin is impacting the group figures. All things equal, I think we've said that OfficeFurnitureOnline coming into the group might have a drop in EBITDA margin for the group of roughly 20 basis points. The impact from the free freight program from Hubert, for the overall gross margin decline in the first quarter, has been -- the free freight program has accounted for half of that decline. So if we are going down by 1.2 percentage points in gross margin in Q1 '18 compared to '17, and the free freight program from Huber has already accounted for half of that decline. I do hope that this answers your questions.

[Hans Christian Salis, Equity Analyst]

Yes, but you didn't answer my second question related to the full year guidance.

[Claude Tomaszewski]

We are not at the moment, if I understand your correctly, is there any measurements in place, on top of, let me say, operational management of earnings which we are undertaking to kind of achieve our profitability figure. And you were mentioning whether we are possibly reducing our digital spend. I think we can confirm that we would not touch our digital initiative, and the OpEx which come with that because that's quite sort-term minded. So we have our internal plan to fully go for our digital agenda and still be able to manage our earnings figure.

[Hans Christian Salis, Equity Analyst]

Okay, and is it still set to assume some EUR 10 million OpEx related to digital investments in 2018?

[Claude Tomaszewski]

That would still be the forecasted figure, for our internal figures, yes.

[Operator]

The next question comes from Mr. Kleibauer.

[Thilo Kleibauer, Research Analyst]

Firstly, one follow-up question on this free freight program, and maybe you can give us the intention of this program. Was it a target to gain new customers, or maybe to get more orders from existing customers? Or what was the approach of this program? And then, I ask a couple of questions for TAKKT Europe. So the EBITDA margin in Europe was down by 300 basis points, and even if I calculate in the [ site ] of the acquisition as a negative calendar effect it's a significant drop we have I think never really seen. And then, Q1 with the slight organic sales growth. So maybe you can give us a little bit more background on this margin drop, and if there maybe is a higher cost, share of costs, from the digital agenda in Europe? Second question on Europe, you mentioned that the organic growth at Newport was negative, so Newport was the weak performer in terms of organic growth. So what is the reason behind the weaker organic growth at Newport? And one last question, the EBITDA contribution from your holding segment was rather high, it was more than EUR 4 million holding cost in Q1. Is this the level we should also expect for the coming quarters, or is there a special topic in the holding costs in Q1?

[Felix A. Zimmermann]

Thank you very much for those detailed and specific questions, and I'm more than happy to answer the first one about the freight contract and the freight tests we have made in the U.S., and I think the other questions are questions for Claude. So let me start with the freight tests. You might know that in the U.S., freight is being charged in a different way than in Europe. It's pretty common that you display a merchandise price, and then charge on top of that, a freight price. That freight price is dependent certainly on the distance you have to ship the product to. I mean, if you have been located in Boston, you have to ship it to California, that is creating more freight costs than whatever, from Boston to New York. That's, I think, pretty obvious. But since the distances are so long in the U.S., that is pretty common and I think also, well-understood and accepted from the customers. Nevertheless, the customer was always complaining about the additional freight costs on that merchandise price, is their number one pain point when they talk about pain points. So in a kind of customer survey, and within our net promoter score measurements, the Hubert guys figured out and said, our customers are complaining about the freight costs, and therefore, we should test whether they have the kind of sensitivity in what you have mentioned, a, generate more new customers by more aggressive with the freight cost part of the price; or b, generate more business from existing customers, or maybe higher average order values. So they have designed a freight test there with the different [ hurdle ] rates, and different price packages, and yes -- one program was for a couple of weeks, just for new customers on the web. And at the very end, based on the different tests, we came to the conclusion that the impact, the positive impact we have seen is not justifying the investments into that freight test and therefore, we have said we should stop that test. It's not delivering what we thought it could deliver, and therefore, we have stopped that test, and therefore are not expecting that negative impact on the gross profit margin we have seen in Q1 to be again there in our numbers for Q2, Q3, and so on. So to put it in a nutshell, I think it was worth the test to do that because the customers complained about that, but obviously they are not ready to react with A, more business; or B, or become a new customer. And therefore, we have stopped that test.

[Claude Tomaszewski]

Okay, let me continue with the 3 other questions, which had to do with the organic growth rate at Newport, the holding costs as well as overall the drop in EBITDA margin at TAKKT Europe. Let me start with Newport. Newport is a division which was newly-created now in February. I think it's fair to say that at the moment with the onboarding of our fourth board member, our colleague Heiko Hegwein, that this is a period where we try to get the new start of that business model and kind of make sure that there's clarity of how to proceed. So what I try to say is, of course we have possibly quite consciously looked at what is the business model for that division, and at the same time with a little ERP program going on at Certeo, this has led to less speed compared to the previous year period. On top of that, at our business in the U.K. with BiGDUG also being in that division organically because of essential [ on lines ] of positive moment in [ equity ] and an impact which comes from acquisition, that business at the moment also has a review of how to continue, and so also there is less speed at the moment also from some conscious decisions, and to look at exactly how that all fits into the new division. Overall, we feel comfortable that we're going to see some nice growth rates here in the second half of the year 2018 in that Newport division, once this has all settled down and we know clearly how the direction will be. So that's something which is not -- [ nies and apps ] of course to the decline in TAKKT Europe's profit is one of the reasons, but it's nothing which we would be at the moment highly concerned about. Talking about, and just to mention OfficeFurnitureOnline, which is in gross mode but at the moment also themselves, but of course it's not adding to the organic growth figure because it's still seen as an impact from acquisition, and the same also the other acquisition, Mydisplays is in strong growth mode here and we're going to see that later on in the year when of course then it will be considered as an organic growth rate from the first of July. So overall, to put it in a nutshell, Newport is in a clarification of strategic direction, and this has possibly led to that [ slowerish ] growth or [ slowish rates of growth ] in that division organically. Having said that, continuing just shortly with Ratioform because that's the second element to explain the significant drop in EBITDA margin at TAKKT Europe, Ratioform is growing nicely at the moment especially when we look at March figures and also the first 3 weeks of April, where they are clearly in high single-digit growth rate, which is good news. At the same time, when it comes to the costs they had at the beginning of the year to digest increasing freight costs, and at the same time increasing product cost increase from the vendors, which they have started to compensate on the customer end only I think from mid-March onwards. So of course, this has led to a gap in the first quarter, which is not compensated, and the compensation on the customer side has not led to a shrinkage of growth rate, it's still continuing. So this is an impact we had to digest in the first quarter from vendor prices going upwards as well as freight prices going up. Having said that, I think as a third element to mention is your assumption about digital agenda costs. It is fair to say that there are more digital agenda costs in TAKKT Europe in the first quarter increase compared to TAKKT America, and that's possibly a third element, which adds to the equation. So overall, yes, you're right. The decline in EBITDA margin and especially the decline also in millions on the profit line at TAKKT Europe is something which is not great, but also to give here a bit of color, this was as expected. So our internal plan have come in on EBITDA very close to what we were expecting, and we were expecting -- especially in the next weeks, and the months and the quarters to come in Europe that this will be different, and that will be the other way around when we see different growth rates and then also hopefully different EBITDA margins. The last element of your -- the third part of your detailed question has been on holding costs for the first quarter, and here I think there are 2 major impacts to mention. In the first quarter 2018, at so-called holding level, it's the [ segment others ], there are -- the acquisition costs from the acquisition of OfficeFurnitureOnline accounted for. So the legal costs, the financial diligence costs, and so on, is in total EUR 0.5 million which has come in here in the first quarter '18, which is of course then a nonrecurring cost item. And the other element of the increasing costs is of course additional people at TAKKT AG, which first is what we call the digital entrepreneurs which have accounted here, which are counted on holding level, and that's from that program. And the other one is of course enlarging the board, so these have been increasing costs here, add personnel which is the other item to be mentioned here when it comes to increase of costs at TAKKT AG. Does that answer your questions?

[Thilo Kleibauer, Research Analyst]

Yes.

[Operator]

We have a question from Mr. Bruns.

[Christian Bruns, Analyst]

It's Christian Bruns from equinet. I have 2 questions. The first one is, do you feel competition from marketplaces, and do you think that you are losing market share in some areas? And maybe you can give us a feeling about the market growth of your main market, and how do you -- if you're happy to increase market shares in some businesses, and where do you lose market shares? And the second kind of question is, their brand consolidation you did. Dallas Midwest and Gaerner, they of course, obviously they have a negative impact on organic growth. On the other hand, you must also have some costs which could be reduced going forward, and could you share with us the positive aspect of this brand consolidation?

[Felix A. Zimmermann]

Sure. So first of all, thank you very much for those 2 questions, one about marketplaces and what we're seeing out there and whether we are losing market share, gaining market share, and what we are seeing as kind of an underlying growth for our markets; and then the question number two about the brand consolidation. You could also call that as our American, calling that cutting out dead wood out of your portfolio, and that is an ongoing exercise. That's part of our portfolio strategy, and I can talk a little bit about the background and Claude can give you some more insight about what kind of impact this is having on our P&L. So let me start with marketplaces. We don't view marketplaces really as a competitor. Marketplaces are, there are several models out there, open marketplaces, closed marketplaces, vendor marketplace, and so on and so on. Wherever it's possible and wherever it makes sense, we are also present on those marketplaces, so we are serving marketplaces here in Germany, in Europe as well as in the U.S. We've also been present with some of our products, selected products, on Amazon, and so we are using marketplaces also for testing things, and testing products, and seeing how customers are performing on marketplaces. And what we are seeing overall, is -- that is certainly a nice opportunity for us to test things. We are seeing also that the type of customer that is using the marketplace for buying the stuff we are selling is a different animal. Its mall is smaller. Customer means a smaller company, more a walk-in customer as we describe them, and therefore the average order value is significantly lower. And therefore, we think we should be careful, and should be pretty selective in what we're offering on marketplaces and what we are -- what kind of customer we are serving there. So to put it in a nutshell, we call them, some are Frenemies, on the one hand, a good friend for us because we can use the platform to test things and get market access to customers where we had no access to before, but on the other hand of course, they are somehow a competitor, but in a customer segment which is not the core focus of our business. That was point number one, about the marketplaces, and talking about the brand consolidation I think cutting out dead wood out of a portfolio is a duty of the management, whether we like that or not. But it's something you have seen in the past also, that we have consolidated brands, we have meltdown businesses. I remember here, the [ topic ] experience where we have said it doesn't make sense to continue to invest into new customer acquisition and customer retention, and therefore we decided to melt down the business and stop prospecting and trying to sell the existing inventory for reasonable prices. And I think that is also taking place now for Dallas Midwest, where we have decided to consolidate the brand onto the NBF brand, and to take the customers onto the NBF customer list. And at the same time, the same exercise here for Gaerner in Europe, in the markets where they have been active outside the DACH region, so outside Germany, Austria, and Switzerland. And so far, those 2 brand consolidations are performing according to plan and what the impact on the P&L is, Claude, maybe you can give us a little bit more insight?

[Claude Tomaszewski]

Yes, well, for both Gaerner brands in Benelux, U.K. and France as well as Dallas Midwest in the states, these have been [ smallerish ] businesses which have not been tremendously profitable to say. So at best, they are break-even. Now even with break-even profit, they are contributing to leverage the fixed-cost infrastructure, we shouldn't forget that. And what we try to do is, we try to continue with half of these sales, because these brands are kind of melted down or merged, towards the main brands. So Gaerner is merged in these countries into KAISER-KRAFT and Dallas Midwest is merged into National Business Furniture. What we try to reduce here is complexity for the organization, complexity for the business model. So we are reducing sales because the assumption is that we can only continue with 50% of the sales we used to have by merging the brands, and at the same time the profits will be at least neutral. There might be a very small, let me say, additional profit because we are cutting out dead wood, but at the same time there is less leverage for the infrastructure cost. So the whole exercise is about reducing complexity and being able by this to kind of focus on the main brands and to stimulate growth there, and not being distracted by [ smallerish ] brands and the complexity which comes with that. So it is possibly a bit positive for profit, but not major for the group. We're going to lose a bit of sales, that increases profitability of course, and by this we think by cutting out that dead wood, that will be a benefit for the business we may need to continue. Does that answer your question?

[Christian Bruns, Analyst]

Okay, yes.

[Operator]

[Operator Instructions] Mr. Abbott has a last question.

[Craig Abbott, Head of Mid and Small Cap Research, Germany]

Most of my questions have long since been answered, but I did just have 2 quick follow-ups, more for the gap-type questions. The one was just getting back to your earlier explanation about the Newport performance. I didn't acoustically understand your comment on what you're seeing going on at the Certeo brand, if you could just repeat that, please? And then, turning back to the gross margin, I just want to make sure I understand this correctly. About half of the gross margin decline was due to this free freight program at Hubert. If my understanding is correct, the other half if roughly split between the OfficeFurnitureOnline scope effect, which would be more structural, and the other half, of the half, if you will -- the other quarter, would probably have been related to this [ exact ] at Ratioform, as you explained, where you had higher vendor prices from 1 Jan., but didn't begin to pass these onto the customers until 1 March. So i.e., that effect should probably then roll out starting from Q2, correct?

[Felix A. Zimmermann]

So let me start with Newport and the question about Certeo. Let me give you a little bit more insight here and background. Last year, we have decided to separate Certeo from the K+K or KAISER+KRAFT organization in order to become a part of the Newport organization, and with that we have also decided to develop, or to introduce, a new technology, corporate backbone, for that organization that is now based on [ Sprika ], I think a pretty innovative technology, that was successfully being implemented last year. But nevertheless, an implementation of a new technology is having an impact on the day-to-day business, and therefore I think it's fair to say that they had to do their homework before they are now turning back to solid and good growth, and that was a major impact in Q1. No negative impact, but no growth, and therefore they have now turned the keys on and I think up from now we should see there, positive and nice growth. And at the same time, Claude talked about BiGDUG. BiGDUG had a very strong first half last year, so the comparison to prior year is a little bit difficult. They have decided, last year, to really concentrate on their BiGDUG core brand and get rid of 2 minor activities, minor websites, and so they consolidated it all on BiGDUG and that was I think the right and good decision. And that was the main reason why they have seen slower performance in Q1. Nothing that is, as Claude mentioned, really concerning us. I think Heiko is on board now as a new board member, he is in a very, very good mood right now together with the Newport team and the management teams of BiGDUG and Certeo and OfficeFurnitureOnline to build a group that will certainly deliver nice growth rates and profits for the TAKKT organization. With that, I'll hand over to Claude, who will give us more background about your second question.

[Claude Tomaszewski]

I'll try to clarify and hopefully confirm what you just said, because in principle, you're right. Your assumption is about the gross margin decline, how that was due to the free freight program at Hubert, and then there is an impact from the OfficeFurnitureOnline acquisition coming to the group being below average. And then, there are quite a few impacts from different businesses, and one major one has been the one I was mentioning from Ratioform, which should -- and that's also our plan, again -- to compensate in reverse going forward. There are a few other possibly items to mention. There is also some freight cost increases, to other businesses in America, and they need to compensate that. There is the impact of the cost from the weakening Swiss Franc against Euro, and that is to be compensated. So there are even more aspects here to mention, but it's nothing new to the group. That's something which is operational business for us, and I think your overall conclusion is correct to say we're going to see hopefully a lot of debt across margin gap to go away again, but then still all the other items need to manage and then hopefully we can return back to a gross margin in the second and third and fourth quarter which is closer to previously figured. I do hope that that answers your question?

[Craig Abbott, Head of Mid and Small Cap Research, Germany]

That does indeed.

[Operator]

We have no further questions anymore.

[Felix A. Zimmermann]

Thank you very much for your attention, and for your time and your ongoing interest in TAKKT.

[Claude Tomaszewski]

I would like to inform you that we will publish the 2018 half year financial results on July 26, and thank you very much also from my side. If you have any follow-up questions, then you are always welcome to contact our Investor Relations department.

[Felix A. Zimmermann]

Thank you very much, and have a great day, wherever you are. Take care, bye-bye.