Takkt AG

XETRA:TTK

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Earnings Call for the Q1 Results 2019 of TAKKT AG, hosted by CEO, Felix Zimmermann and CFO, Claude Tomaszewski. [Operator Instructions] Let me now turn the floor over to your host, Felix Zimmerman.

[Felix A. Zimmermann, Chairman of the Management Board & CEO]

Yes, thank you very much for your introduction. Also, welcome from our site here, Claude, Benjamin, and myself here in Stuttgart. And as usual, I would like to start with a kind of a quick summary of what we have seen in the first quarter, then handing over to Claude, who is giving you more insights into the numbers and the financials. And then at the very end, I take over again and we'll talk about the outlook for the full year 2019.So let me start with a kind of a report in a nutshell. I think we had a good start into the year 2019 with a good topline growth, organic growth of 5%. I think that's the third quarter in a row with that robust and good organic growth. So we think that is good news.And on top of that, we had tailwinds coming from acquisitions, as well as a strong U.S. dollar and leading overall to a solid double-digit topline growth for the first quarter. And I think that is a good start. As in Q4 2018, I think TAKKT America showed slightly stronger organic growth than TAKKT Europe. That was in line with our expectations given the current circumstances in those economies and I think it's also worth to note that we have seen a positive organic growth rate at all 7 divisions. So that is I think a good result and also we have seen at Hubert, comparable solid growth, even if they have lost the Aramark contract, as announced effective already with the effect of 1st of March 2019. So topline wise, I think all going in the right direction and was a good start into the year. Now, looking at the profitability, we have reported a strong increase in the EBITDA, up to a margin of 12.7%, but I think you are aware of that and we have hopefully made you aware of that, that part of that increase is coming from the first time application of the new rule IFRS 16. Therefore, part of that increase is the technical results and I think Claude will give you further details later on. But I think overall, the EBITDA is, and the margin is still on a good and high level. Now, talking about the digital initiatives, we have started and we have implemented in 2018. They are also leading continuously to good results, and especially to good growth of our ecommerce business. So overall, the ecommerce share of the total business is now close to 55%, which we believe is a very good result, indicating that the online business is growing very nicely.In Q1 2019, we have also continued to invest into our TAKKT Italian [indiscernible], namely made an investment there into a company called [ Proviso ]. [ Proviso ] is a very successful online player in the area of industry equipment, business equipment, as well as office furniture, and some maintenance equipment. So far here in Germany was very attractive, I think, appealing business model, good growth rate, and I think a good business model. And therefore, we have decided to invest into that company and support the founders by taking the next steps in their strategy.Last but not least, I would like to highlight that at the end of Q1 2019, we still have a very solid duration with an equity ratio that is close to 60% and I think that's giving us enough headroom for doing both, A, paying a dividend as we have proposed that to our supervisory board and would propose that to our shareholders at our annual shareholder meeting the middle of May. But also, investing into acquisitions.So solid balance sheet at the end of Q1 2019 is I think also worth to note. With that, I would like to hand over to Claude who will give you a little bit more insights. Thank you.

[Claude Tomaszewski, CFO & Member of Management Board]

Thank you, Felix. Good afternoon, everybody. Would like to give you a bit more insight on the figures we published this morning. If we start with the TAKKT Group, quarter one 2019 has shown that double-digit sales growth of course helped by acquisition impacts as well as some favorable currency impact here.Organic sales growth 5%. Felix was mentioning that and this has come to reality even with half a day of less working days, which predominantly comes from the U.S. because they have had 1 day less working day in the first quarter '19 compared to previous year's quarter.Now, if we look at the profitability, we can note here that the EBITDA margin has come in with 12.7 and was helped by 1 percentage point due to the first time application of IFRS 16. So the fact that we are now showing [ renters ] buildings as a method of [indiscernible] liability and that the rent has come out of the EBITDA and is shown now as [indiscernible] interest in the P&L.Having said that, if we compare, of course, then the EBITDA margin to the previous year's figure, you could say we started there would be a 13.1 and a 12.1 and we note that our EBITDA margin has come in slightly below previous year's figure. And this is due to the fact that we had a lower gross profit margin -- I will come back to that -- as well as some structure adjustments at Hubert and at Ratioform. Without these structure adjustments at Hubert and Ratioform, we would have generated a very similar operational margin compared to the previous year's quarter. Talking about the lower gross profit margin, we can note that half is due to the structural impact from acquisitions. So as you know, we bought 2 companies last year where the gross margin is below the TAKKT Group -- below the average of the TAKKT Group and so this has a dilutive impact. And then also worth noting when you talk about gross margins, last year in the first quarter 2019, Hubert was still able to go with Sodexo on more favorable terms and the new contract kicked in, in March 2018. So here also for the first quarter of '19, we had a dilutive impact for the gross margin. And this of course is now done after the first quarter and this is also led to a slightly lower gross margin on TAKKT Group level.Worth noting that our gross margin for the first quarter '19 is higher than the 3 previous quarters. So higher than the second, third, as well as the fourth quarter '18 and there, you can show that we are managing our gross margin and that we have started, as I said last summer, of calls to have countermeasures in place in order to stabilize our gross margin.Now, having talked about the gross margin, let's briefly talk about what we mean here by saying structural adjustment at Hubert and at Ratioform. This structural adjustment at Hubert is the fact that we have lost the Aramark contract. We have reported on that and of course, now, we are taking the opportunity in the first quarter 2019 to start what we might call -- to size Hubert down to the new volume. And of course, a few people had to leave the building and we have had to pay severance payments in the first quarter here at Hubert.At Ratioform, it's a different story. Ratioform is the first division in our portfolio who has started a structure adjustment due to our digital transformation. So they are the first ones to be able, with new digital technology, to make a reorganize in their sales team. And this also has then had an impact that we had to pay severance payments, which of course then come with the benefit later on to a reduction of FTE and a higher productivity. And so here we had also a one-off payment here in the first quarter. Having all said that, as I said, if we adjust for these one-off payments at Hubert and Ratioform, we would have generated a very similar operational margin compared to the first quarter of '18. Let's move onto TAKKT Europe. If we look at TAKKT Europe, the organic sales growth came in with a 4.5% and then of course, in addition, helped by the contributions of acquisitions, more than 5 percentage points, 5.5, and then currency impacts have been very marginal. So this has brought the sales increase to a more than 10% figure.If we look into the different divisions, KAISER+KRAFT came in with a slight single digit growth . Ratioform was a high single digit growth as well as our newly created Newport division, which were created in the beginning of 2018. Now it's the first quarter, which we can compare. They show really a double-digit growth rate, as we would have envisioned it when we were starting that activity.If we go into the - if we look into the EBITDA margin, we see here that this comes in with the exact same figure, 17.0%. Of course, this was helped by 1 percentage point. So you could conclude here that we might have lost 1 percentage point in profitability. Having said that, I think it's worth nothing that there are 2 major impacts here. The first one is a structural impact from last year's acquisition and then the other one was what I just explained regarding Ratioform. If we were to adjust for these 2, again, we can conclude that we have came in with a very similar operational EBITDA margin compared to the previously quarter also in Europe.At TAKKT America, we had a sales increase reported, which came in with a figure of 12.7%. Organic sales growth was a very satisfying number, was at 5.8%, especially if we consider that there was 1 working day less in the U.S., which would even bring that figure working adjusted to a more than 7% growth rate. At the same time, we had seen, of course, the dilutive impact from discontinuing the Hubert European business we stopped on the 1st of October, 2018, which has had a negative impact of 1.6%. Currency helped a lot [indiscernible] euro due to the stronger U.S. dollar and you see here a plus 8.5%. Now, if we go into the different divisions, Hubert, Central, and Displays2Go with a slight organic growth. Of course, if we stress that again and Felix already mentioned that this is the first time Hubert has seen growth again after, as most of you know, several quarters of this negative growth. So Hubert has started again to turn into positive growth mode.At National Business Furniture, which is still [ externally ] [indiscernible] and being able to show a double-digit growth here also in the first quarter 2019. EBITDA margin came in at almost 10%, 9.9% compared to 9.1% previous year. Also here, 1 percentage point was helped by the first time application of IFRS 16 and also here worth mentioning that we have seen that what we call [indiscernible] of Hubert, which means a structure adjustment I was just explaining about Hubert. But also that, for example, for March, we have now the Aramark business not in the books anymore. So also, we had a slightly negative impact from the sector. We haven't seen the profit from Aramark in the month of March. And so this also has led, of course, then here to some negative impacts on the earnings figure. But overall, TAKKT America in very good shape, a very good start, and also on our planned budget when it comes to profitability.Now, having said that, leaving profits, going to cash flow. If we look into the TAKKT cash flow, again, here, 2 technical remarks. The first one is we have taken the opportunity also now with the beginning of 2019 to adjust our definition of the TAKKT cash flow, which means we can see this year on Slide 5, in the fourth line, that the other non-cash expense income has come into that definition with a plus EUR 1.1 million in both periods. So it doesn't here change the development from one year to another. But we have taken the opportunity to also include in that definition [ fee site ], depreciation and deferred tax expense, and other non-cash expense and income items from the P&L to be corrected here in order to arrive and define the TAKKT cash flow.The second technical remark is that also our TAKKT cash flow has a similar impact from the new lease accounting IFRS 16, similar to what we see in the EBITDA figures. Also here, TAKKT cash flow is helped by roughly TAKKT cash flow margins had by roughly 1 percentage point if you compare one year to the other. Talking about absolute figures, TAKKT cash flow came in with a figure of EUR 30.9 million. You can see here that our financial results have increased a bit and the main reason here is, again, due to IFRS 16 because now the rent we pay, especially for warehouses and office buildings, is now shown at depreciation as well as interest costs in our P&L. And so the major deviation here, the major addition to the financial result is coming from that additional interest cost now out of IFRS 16 lease account.Current taxes is coming in with a very similar figure and all in all, we [indiscernible] then less to that figure of EUR 31 million TAKKT cash flow. If we move onto the cash flow generation, you can see here that we had a change in net working capital in the first quarter. 2019, we had an outflow of EUR 3 million. This is mainly due to a higher increase in trade receivables at the end of the first quarter '19 compared to the previous year quarter. And this was slightly offset by a reduction in inventory, which we have seen in the first quarter '19, not so surprisingly. Because as we have reported, we have some significant inventory increase at the end of '18, especially in the States, where we then have imported more stock essentially from China to all these tariff conditions that you all can follow in the press. CapEx has come in as a slightly lower figure compared to previous year's quarter, mainly due to the fact that we have done less investment into startups in our TAKKT investment vehicle. I can report here that -- we can report here that the investments into [indiscernible] have continued on a similar level. And so this is not the reason here for us to take EUR 2 million less CapEx compared to the first quarter 2018. So free TAKKT cash flow came in with a figure of almost EUR 24 million and we have used that EUR 24 million fully to reduce our financial debt. At the same time, our financial debt, our net financial liability increasing by almost EUR 40 million. And it of course, comes in at a surprise if you hear that we have fully used the EUR 24 million free TAKKT cash flow to reduce our financial debt. Here again, the impact comes from the first time application of IFRS 16, which has resulted in an increase of around EUR 56 million in net financial liability. So we can assume that a similar figure has gone into the balance sheet as an asset item. And at the same time, we have here the plus EUR 56 million in net financial debt on the other side of the balance sheet. And then reducing the EUR 24 million then you can - you will end up with a more similar figure to what we see here of EUR 189.6 million [ less ] financial debt. The remainder, the residual would be currency impacts due to the fact that the dollar became stronger.Equity ratio, as Felix just said, almost 60% also after the first quarter and a very solid balance sheet. If we then take a very quick look at the different dynamics from the last 5 quarters, you can see here our first quarter '18, which definitely wasn't the greatest and a bad start to the year, which then has been followed by 4 quarters with a very solid 5% growth rate organically for the group. In addition, we shouldn't forget the contribution from acquisition and of course, the fluctuations from the currency impact. Worth noting and Felix said that already, it's now a second quarter in a row that we have seen America growing stronger and that is a very good, I think, bridge for the outlook. Because that definitely we are focusing also for the future that America might be stronger. But I guess Felix can give you more insights on the outlook.

[Felix A. Zimmermann, Chairman of the Management Board & CEO]

Thank you very much. Thank you, Claude, for giving us here more background information, yes, certain reasons to understand the numbers we have published this morning. Now, talking about the outlook for the rest of the year. I think we have published our outlook with our annual report in March and said that we are expecting, for the full year, slightly positive organic growth and an EBITDA margin within our target corridor, to 16%, and we would like to confirm that today.And some of you might say, wait a minute, after such a good start into the year, 2019, with that good organic growth rate as well as a good reported growth rate and a nice profitability, why are you so careful with the outlook?And there, I would like to give you a little bit more background information how we look at the current circumstances out there to current economic situation in Europe, as well as in America and what we draw as a kind of a conclusion for us.So let me start with Europe and with TAKKT Europe. You know that the GDP growth rates are an important indicator for us and giving us a good feeling about what we can expect from the growth rate or in terms of growth rate on the relative markets for us, as well as the PMI giving us a good indication. And it's the PMI, most of you might know that is currently under 50 for the main European economies as well as for Europe in total, and is on the way down in a couple of months. And we are seeing a kind of trend that is indicating that the market might become a little bit more tougher out there and that we should be prepared for that.So overall, in comparison to last year, we think that the market conditions in the second half of the year 2019 might be or will be less favorable and therefore, we should be prepared for that. Now, talking about TAKKT America and the U.S. economy, different picture. Good growth rate. Good GDP growth rate even if they are being forecasted on a lower level than the numbers, the growth rate they have achieved in 2018. It's still on a high level. It's about 2.5% GDP growth in comparison to, for example, a 0.8% the government and Germany is expecting for Germany. So there is kind of a difference in the level and overall, the indicators are showing a good market environment and so therefore, we are, in comparison to Europe, a little bit more optimistic for the market environment and the circumstances in America. But we have to keep in mind that the repositioning of Hubert, and Claude mentioned it already, will have a negative impact on our organic growth rates of up to 2% on the TAKKT level. So that's something we have to keep in mind when we look at the growth rate in the coming quarters. Now, again, we confirm even under those circumstances that I've described here that we expect a slightly positive organic sales growth for the TAKKT Group for the full year 2019 and so we also expect that we deliver an EBITDA margin in the range of [indiscernible] close to 16%.Now, we have also developed a couple of scenarios and you'll find them in our presentation here. In the scenario I have described, we are not expecting any additional major negative impact coming from economic risks, such as the Brexit discussion or any trade conflicts between China or Asia and the U.S. So they are not being reflected in our scenarios here, or let me say, a moderate impact has been reflected and considered in here.So if those activities or those discussions around Brexit and the trade conflict will become a really serious topic, we cannot exclude that this might have more negative impact on the outlook of TAKKT. And then we cannot exclude that we might be only deliver 0 organic growth rate or an even slightly negative organic growth rate. But that's, again, the scenario for -- or under the assumption that the Brexit and the trade conflict will really create major economic, let me say, challenges.Now, the gross profit margin we expect will be similar to prior year in the U.S., while we are expecting structural impact from the acquisitions, and Claude mentioned that already, here in Europe. So they have a slightly negative impact in Europe. So for U.S., stable. For Europe, a slight decrease might lead to a slight decrease also on group level.And as mentioned now several times, the application of the IFRS 16 will have a positive impact of around 1 percentage point on our EBITDA margin, as well as on the TAKKT cash flow margin. So we should keep that in mind.Now, keeping in mind that we are a little bit careful in our outlook here and that we are maybe a little bit careful in reading the economic indicators out there, we have decided as a Board that we need to be prepared for a slowdown and that's the reason why we have developed already with our subsidiaries, with our business units a kind of game plan, what we need to do. We're going to see that the negative trends we are seeing in some markets out there will lead also to a negative business development. Then we can react pretty quickly and that is something we would like to mention here as well. Because I think under the given circumstances, it's important that we keep the flexibility in our cost structure and our cost positions, and there, you can count on us that we as a board take that as a serious challenge and also as a kind of a key task for us onboard to react as soon as it is necessary.So with that, I would like to hand over back to the moderator and invite you to our Q&A session. Thank you very much.

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

I'll start with 2 please. The first one is you mentioned that in Ratioform, it was your first business line to undergo the full digitalization translation, which led to some restructuring costs in the first quarter. And I just wondered as we go forward, should we expect a similar process on a business line by business line basis in the coming quarters? And here, I'm thinking in particular about KAISER+KRAFT.And secondly, you just mentioned now that you have prepared, together with your business line, for a potential slowdown. And I just wondered just structurally, when you look at the flexibility of your cost structures, would the focus in such a scenario be more on your marketing costs? I.e. now that ecommerce is now a [indiscernible] in your business, a similar share applies to your marketing spend, and which presumably could be cut much, much quicker than historically when you had to reduce your catalog print costs. If you could shed some light here that would be helpful.

[Felix A. Zimmermann, Chairman of the Management Board & CEO]

So Craig, thank you very much for those I think basically 2 questions. Let me start with the first one, Ratioform. And yes, I think as a consequence of our digital transformation efforts, we are now in a position to also reorganize our, let me say, mainly sales team within the Ratioform according to the, yes, let me say, customer needs and with that being more customer centric.And within the Ratioform business model, we do distinguish between 2, let me say, main customer groups or personas if you want. The one is the customer was expecting a kind of a personal relationship kind of opportunity to talk to someone and get advice and find a professional consultant on the Ratioform side. And the other customer group is more the, let me say, digital customer that is expecting a proper website, good prices, and with that and more, let me say transactional type of customer. And now we have reorganized our sales group within Ratioform according to those needs. On the one hand, we have strengthened and centralized the activities for the consultant activities and for the people who want to call us and want to talk to someone. And on the other hand, we have more automated the activities and the processes for the more walk-in customers, the more interested in a transactional business relationship. And that led at the very end to the decision that we have reduced the workforce at Ratioform, have talked to the people there, and have reduced the workforce by about 20 people, and have reorganized to save here predominantly in Germany.And so that was the first step at Ratioform and I think it's a major step, and I think they're the first ones within our organization where we have seen that the investments into the digital transformation also leading to now increases in productivity and that's I think a bridge to the second question you have asked here.When we talk about our activities and our program in order to get a more flexible cost structure, we have developed with our subsidiaries together, A, a plan for kind of earnings management where we try to really go position by position through the cost structure and adapt those cost positions to the current needs, and to the current volume, and to the expected volume. And yet, there, we will also discuss about marketing costs and to see whether the [indiscernible] incremental marketing euro or U.S. dollar must be spent online wise, or whether we could save that money and spend it at a later point in time when we can expect a higher return. That's an ongoing more disciplined exercise and that's something where we are used to. And there, I think we have a better visibility and better flexibility than we have in the past.And the second area is all about, let me say, increasing the productivity and expecting and demanding for returns to the investments we have made into the digital transformation of our business units. And as Ratioform [indiscernible] example, and you can expect other examples in the foreseeable future. And the question is absolutely valid, can you then expect more severance payments. And I think on the one hand, yes, there might be some severance payments. But on the other hand, the payment period are pretty soft. And therefore, I think that a good investment is absolutely necessary to streamline the organization and to restructure the organization where it's appropriate. And there, I think it's our duty and our job here as a management to push that and to make sure that we are seeing the paybacks for the investments we have made into the digital transformation. I hope that answers your questions.

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

Yes, I think it's very decent. Thank you very much. But just to be sure on that point, could we expect over the next couple of quarters that you would phase in these adaptations of your sales force, say, for KAISER+KRAFT and then for each of your other major businesses over the next couple of quarters? Or is this something that's going to transpire over the next, say, 2 to 3 years?

[Claude Tomaszewski, CFO & Member of Management Board]

Let's be precise on Ratioform. There's a first amount, which has gone into the report figures now in the first quarter. There might be one, which will have to go into the second quarter. So technically already, yes, we're going to see also for Ratioform some additional costs, which need to be accounted for in the second quarter.When it comes to the other business units, I think we speak there about possibly this year but possibly also next year. I think that might be the horizon, whether in '19 or in 2020, where we might be seeing some of these productivity initiatives and reorganizations due to the [indiscernible] transformation. I think it would be a bit too early to say very precisely it's now the next couple of quarters, is it the end of the year or beginning of next year. But I think I would be, let me say, surprised if we are not seeing any major projects coming out of that initiative in the next 12 months.

[Operator]

The next question so far comes from Mr. Christian Bruns, Pareto Securities.

[Christian Bruns, Analyst]

I have 2 questions. One on the Easter effect, how do you expect this to have supported your business? Because customers were not on holiday in the first quarter in Europe, especially. And the second question is more a longer-term idea. You had mentioned how many people you will hire in the course of your digital agenda and you're on track with that. And could you imagine in a long-term view that a similar amount of people will -- can leave the company because of the efficiency gained -- achieved by the digital agenda? Is this maybe a reasonable idea in the magnitude?

[Claude Tomaszewski, CFO & Member of Management Board]

Yes, let me start with the Easter impact, which I think we should possibly conclude which is predominantly the case in Europe. In the U.S. that Easter impact is not that visible compared to Europe due to 2 main reasons. Firstly, they have less bank holidays around Easter compared to Europe. And second, so people would also leave much -- are not so inclined to leave in the Easter period and going for holidays, which then also, even if there's a working day, it might be of a lower quality working day.In Europe, it's always difficult to say but it's not completely wrong to possibly think that the Easter period is leading to, on a quarterly basis, 1 or 2 percentage points. If we look at the 2 weeks, now, we have the comparison that 1 week was Easter period last year, I think, and the other one was, I think, the first week of April wasn't it. So yes, I think possibly but that's just a guess. It could be up to 1 percentage point in growth of income to European figures.

[Felix A. Zimmermann, Chairman of the Management Board & CEO]

And talking about your second question here, the long-term expectation in terms of FTE's development and whether we are seeing or expecting that we can reduce the workforce by a comparable number of people, as we have built it up now with digital talent.I think that's long-term certainly our aim and the vision that we increase the productivity, that we can increase the productivity in the group by investing into the digital transformation, by investing into digital talent. But I think we have to keep in mind that those digital talents are basically a little bit more expensive than the traditional FTEs. So we have to keep that in mind. Therefore, I wouldn't compare your headcount. I would rather prefer to talk here about personnel costs, that is one point there. Yes, you are right. We are now focusing on seeing the [indiscernible] and the payback for the investments we have made into those people. And as the example of Ratioform is showing that, as well as other projects, step by step, that is coming back.And long-term, you're right, we should be able -- will be able to compensate and to reduce the workforce at least the same amount of people as we have built it up now for our digital transformation.

[Operator]

At the moment, there seems to be no further questions. [Operator Instructions] Mr. Zimmerman, Mr. Tomaszewski, there are no further questions left.

[Felix A. Zimmermann, Chairman of the Management Board & CEO]

Okay. That's the way it is. Yes.

[Claude Tomaszewski, CFO & Member of Management Board]

Thank you. We must have explained it very well compared to other calls. Okay. Thank you very much for your participation. We will publish our half-year results on July 25 and please get in touch if you have any further questions.

[Felix A. Zimmermann, Chairman of the Management Board & CEO]

So thank you very much for your ongoing interest here and your time, and have a great day. Take care.