Takkt AG

XETRA:TTK

Earnings Call Analysis

Challenges Met With Strong Free Cash Flow Growth

In a difficult economic climate marked by a sharp order intake decline and a 7% drop in organic sales growth, the company showcased its resilience. Despite headwinds such as pessimistic GDP forecasts, German recession signals, and U.S. government shutdown concerns affecting demand, the firm achieved a commendable gross profit margin of 39.9% and improved cost management. Onetime expenses for Q3 2023 were negligible, significantly lower than the EUR 2 million in the previous year, and the company implemented strict cost controls, resulting in a nearly double-digit EBITDA margin. The focus on cash generation has paid off, with a confirmed substantial increase in free cash flow for 2023.

Challenging Times Amidst Economic Headwinds

The company experienced a challenging third quarter, as signs of optimism earlier in the fiscal year were contradicted by deteriorating economic and market conditions, particularly from mid-August onwards. The European economy showed signs of a recession, notably in Germany, and US business confidence was unsettled by discussions of a potential government shutdown. As a result, there was a sharp decline in order intake which heavily impacted sales, most notably in the office furniture sector within the company's National Business Furniture (NBF) division.

Confronting a Decline in Organic Growth

Organic sales growth in the third quarter fell by 7%, significantly underperforming relative to company expectations. This decline prompted intensified measures to boost gross profit margins and maintain firm control on costs and cash generation. Despite the challenging circumstances, these efforts led to improved gross profit margins and a substantial rise in free cash flow. Accordingly, the company's financial guidance was revised, projecting EBITDA and sales to fall below initial expectations for the year, though confirming a robust increase in free cash flow for 2023.

Steady Strategy Amidst Unsteady Market

Despite the turbulent market environment, the company remains committed to its strategic framework, which is centered on three pillars: growth, integration under the OneTAKKT initiative, and a focus on caring and sustainable practices. Leadership reaffirmed their dedication to steering the company through a transformation towards integration, growth orientation, and sustainability, even as they navigate through economic challenges.

Q3 Financial Highlights: Cost Management and Cash Flow

Amidst the bleak economic landscape, the company's third-quarter performance showcased rigorous cost management and a significant emphasis on cash generation. The gross profit margin reached 39.9%, an increment from the previous year. The decrease in sales was met with reductions in marketing, personnel costs through a reduction in FTEs, and controlled one-time expenses. While the overall situation led to weaker sales, the company was close to achieving a double-digit EBITDA margin, underscoring their ability to navigate through recessions competently.

Performance by Division: Resilience and Challenges

The Industrial Packaging division encountered a decrease in organic sales growth, partly due to shutting down certain activities, while managing to maintain its EBITDA margin above 12%. The Office Furniture & Displays division experienced a substantial decline in sales, particularly due to reduced government orders amidst the threat of a U.S. government shutdown. However, they still managed to improve their EBITDA margin year-over-year by effectively balancing freight profits against freight costs. The FoodService division reported nearly stable sales, adjusting for currency impacts, and showcased an improvement in EBITDA margin compared to the second quarter, despite lower gross margin influenced by inventory sell-downs and a higher share of project business.

Year-To-Date Overview: Endurance in Adversity

Looking at the first nine months of the year, overall sales were down 5.3%, and the FoodService division stood out with positive organic growth. The company demonstrated adept handling of its gross profit margin, achieving stability at 39.7% and actively reducing marketing and personnel costs. However, EBITDA margins saw a slight decrease, with the largest division, Industrial Packaging, facing organic declines in line with the broader market, and the Office Furniture & Displays division managing to maintain a relatively steady EBITDA margin due to a strong gross profit margin. The company continued its disciplined approach to cost and cash management, adjusting net working capital and reducing inventories, yielding free cash flow that surpassed the previous year's figures despite a softer business environment.

Focusing on Cash Flow and Strengthened Balance Sheet

In response to the challenges faced, the company's focus on cash generation was particularly successful, with a decrease in inventories contributing to cash flow improvement. Investments in digital platforms and startups indicate a forward-looking approach to growth and innovation. Despite a more modest outlook for the fourth quarter compared to the exceptional performance at the end of the previous year, the company anticipates continued strong cash flow generation and expects to conclude the year with cash growth compared to last year.

Earnings Call Transcript 2023-Q3

[Operator]

[Audio Gap] Pleased to remind that throughout today's recorded presentation, all participants will be in a listen-only mode. As always, the presentation will be followed by a Q&A session in which you will be allowed to place your questions directly to the management. I would now like to turn the conference over to the CEO of TAKKT, Maria Zesch. Stage is yours. Please go ahead.

[Maria Zesch, executive]

Welcome to our Q3 earnings call and I'm hosting together with our CFO, Lars Bolscho. Sorry for my voice today, and the [ coughing ] because hopefully it's not distracting from the key messages we will give you today. As you are all aware, these are challenging times, and we face several headwinds. Still, we know how to steer our business through difficult times and you can see that when you look at how we manage our gross profit margin, our cash generation and also the cost positions in Q3. Before we go into the financials, I want to give you a quick overview about the developments in the market we saw since end of July, and I want to give you a short update on our strategy execution.

So going into the second half, we were cautiously optimistic. We expected a slight improvement in organic growth compared to the first half of '23. I want to emphasize this was not wishful thinking on our part but supported by a very positive trend in the order intake in July where we had the best month of the year-to-date.

And as we [Technical Difficulty] coming from an already weak environment in the first half, we saw a further deterioration of economic and general conditions in Q3. GDP forecast for Europe became more pessimistic with clear recession environment in Germany and the lowest PMI since Spring 2020.

In the U.S., we were additionally affected by the discussion about the government shutdown. Against this background, we saw a sharp decline in order intake from mid August on. This affected all 3 divisions being listed Industrial & Packaging business in Europe and office furniture in the U.S., running significantly below expectations. Orders for office furniture in NBF were especially affected in September, when we normally record very high order index from government customers. With the expectation of a government shutdown, this business was clearly below prior year.

All in all, organic sales growth in Q3 was minus 7%, so significantly below [Technical Difficulty] As we saw softer order intake, we intensified our measures on improving our profit margin executing strict cost management and focus on cost and cash generation. So this is paying off already in Q3 with an increase in gross profit margin and good cost management and a substantial increase in free cash flow. So based on the Q3 development and the continuous weakness, we have adjusted our guidance for '23. We saw that most probably last week. On sales, EBITDA will come in below our initial expectations. At the same time, our focus on cash generation is paying off, and we confirm a substantial increase in free cash flow for 2023. We'll talk about it towards the end of the call when we talk about the outlook.

While we are currently operating in a very, very challenging environment, we stick to our strategy. We are progressing in all of our strategic pillars, Growth, OneTAKKT and Caring [indiscernible] some more details. So when I started as a CEO a bit more than 2 years ago [Technical Difficulty] indication on the top targets to make that a more integrated, growth-oriented profitable and sustainable company. A month ago, we have reviewed and discussed our progress and our way head is also provided us and confirmed our approach with the 3 pillars, Growth, OneTAKKT and Caring.

I'm very clear, and I have the opportunity to meeting you driving tax transformation product. [Technical Difficulty] the opportunity and express my gratitude both to the Supervisory Board for their support and trust but also to my team and each and every colleague at TAKKT who is doing a great, great job in pushing for growth and for a change of the organization.

And let me share some examples of what we get achieved so far this year with our strategic planning levers. Let me start with the Growth pillar. So year-to-date, we generated more than EUR 10 million in additional sales from cross-selling with a very positive trend from quarter-to-quarter, [Technical Difficulty] service. We expect this volume to continue growing in the upcoming quarters.

Another topic is and it's contrary with all our weakness, we see very less growth with our E-procurement business. We received our offering directly to the ERP systems of larger corporate customers. [Technical Difficulty] we see a lot of additional potential here.

So coming to the second pillar. We are growing closer together as an organization in a lot of aspects. So this is going to hold for [indiscernible]. And I want to share some examples of what we are doing here. Our [Technical Difficulty] have done a respending job this year to organize, coordinate of the various businesses to offer substantial inventory reduction. This allowed us to realize cash flow of more than additionally EUR 25 million in the first 9 months. And it will not have been possible in the all set up where every business was managing inventory on its own, there was a lot of knowledge sharing, loss of coordination and their recent reporting on key figures implemented to achieve this success.

The second example is about our logistics network. We have got a big [Technical Difficulty] on the target picture of our future logistics and warehousing footprint both in the U.S. and in Europe. We will now start with implementation with the focus on the US in 2024, merged spaces and open new ones, where we want to increase our presence and improve delivery times. This will allow us to realize cost savings and, of course, also improve scalability in the coming years. And with that half, we improved profitability of the group. You know that we are not only going for an improvement in our financial performance but also do it in a more sustainable way. And I'm quite proud that our efforts in this piece of sustainability are recognized. TAKKT is a finalist for the prestigious German Sustainability Award.

The winner will be announced soon. So please keep fingers crossed for us and we'll see where we are. In August, we started to market our enkelfähig products in our Industrial Packaging divisions. These are products that are rated as being more sustainable to leverage. We see a higher gross profit margin with these products and also better [ OI ] development. So for us, this is a good sign and a positive feedback for further rollout towards the U.S. divisions. That was a short overview from myself on the strategic topics we have achieved and then I'll hand over now to Lars for the financials.

[Lars Bolscho, executive]

Thank you, Maria. Welcome, everybody, also from my side on today's call. Let us start with a look at key financial topics of the third quarter of this year. Maria has already mentioned the challenging conditions and the negative trends we saw in the economic environment, over the last month.

All our indicators remained on a very low level or even decreased. For example, the Purchasing Manager Index for manufacturing, the PMI our relevant indicator for our European business. We made [indiscernible] points for Europe and even decreased further from 40.6 to 39.6 points for Germany in the last September, [indiscernible] shrinking demand and we are now quite significantly below 50 at the moment, so very low levels.

In those conditions, our organic sales growth was at minus 7%, clearly below the minus 2.5% of the first half after a quite significant slowdown from mid of August onwards. So we clearly see the impact of the challenging economic conditions in our weak top line development. What's now our reaction to this development? We continue to focus on gross margin and cost management and on cash generation. And we did a good job in all the areas with clear improvement on gross profit margin to 39.9% with a reduction in marketing and other costs and also an adjustment in FTE numbers. And we had a very good quarter in terms of cash generation again with a free cash flow of EUR 29 million, an increase of EUR 4 million compared to last year.

Looking at a bit more detailed numbers for the third quarter now, let's start with the development for TAKKT Group. On sales, top line was below expectations, as we've already said with sales of EUR 313.4 million and a decline of 10.6%. The weaker U.S. dollar contributed minus 3.5 percentage points to that. So organic growth was at minus 7.1%.

Looking at our 3 divisions. We have seen some differences in their performance. We are in the third quarter pretty much stable with our food service activities, and we are, at the same time, clearly below prior year in Industrial Packaging and especially Office Furniture & Displays.

Let's continue with the profit development in the third quarter on the right-hand side of that chart. EBITDA was EUR 30.2 million with a margin of 9.7% after 10.8% prior year in the same quarter. So a lower profitability year-on-year, but a clear improvement compared to our second quarter, which was at the profitability margin of 8.4% despite the slowdown in our top line. And this is both due to the improvement in our gross profit margin and due to our intensified cost management.

In gross margin, we have managed down our cost of goods sold and freight costs and we have also increased prices further, bringing us to the already mentioned 39.9%, 70 basis points above last year's margin in the same quarter. In addition, we reduced marketing and other costs in line with our lower top line. And in personnel, we decreased our FTE numbers. But at the same time, we were also impacted by some wage increases. Our onetime expenses for Q3 2023 netted out at almost 0.

In 2022, we had EUR 2 million onetime expenses for early termination of employment contracts. Overall, still, despite the weaker top line, we almost achieved a double-digit margin, which shows that we know how to manage our profit in a recession.

Let's have a look at the division INP now for the third quarter as well on sales. Sales were at EUR 159.8 million and down 7.8% compared to last year. Hardly any currency impact here, so organic growth was very similar at minus 7.5%. This weakening of sales development was visible in all our regions. And the decrease versus prior year was also impacted by the closure of our Certeo activities, which we have done in May.

On profit, EBITDA at Industrial Packaging was at EUR 19.4 million. EBITDA margin came in at 12.1%. The lower profit is mostly due to the weak top line development this quarter. On cost management, we also here reduced advertising and other costs in line with sales. Personnel costs were also down year-on-year due to very restrictive management of our resources.

Now let's have a look at the U.S. and our Office Furniture & Displays division. Let's start with the top line development again. The third quarter, as you might know, is the most important quarter for our NBF business, because end of September is the cutoff date for the U.S. budget year, and we then get a lot of orders from government customers in those weeks and days. This year, we saw overall a weakening demand and especially the volume from government accounts was significantly below prior year due to the uncertainties about a possible government shutdown in the U.S. So sales overall for the division were at EUR 75.5 million, down 18.5%. Organic development or adjusted for currency impact was minus 12.2%. Besides the already described challenges at our brand NBF, we also saw a clear decrease with D2G with our mainly e-commerce business for displays, also here performing at double-digit organic decline in the third quarter.

Profit development was more positive, at least given the circumstances we just saw and talked about on the top line. We generated EUR 10.0 million in EBITDA. And with that, even saw an improvement in our EBITDA margin compared to last year. 13.3% this quarter versus 12.2% in the third quarter of last year. While cost ratios were clearly above prior year, we more than made up for that with a very strong improvement in gross profit margin. Because in fact, here at Office Furniture & Displays was freight profit, while our freight costs were lower. We were still able to charge our customers on a comparatively high level.

Let's continue with our third division, FoodService and also here with the sales development, even though sales decreased reported by 7.5% to EUR 78.1 million, we continue to achieve the best sales performance of our group at FoodService. Because adjusting for the negative currency impact, our sales development was almost stable with minus 0.6% compared to prior year which is a good performance in our current economic circumstances, even if we have seen higher growth also here in the first half.

We generated EUR 6.5 million in EBITDA this year after EUR 7.3 million in the third quarter last year.

In terms of profitability, we see with 8.4% an improvement compared to the second quarter this year. There, we had an EBITDA profitability of 5.0%. And we almost achieved the prior year margin of 8.6%. The gross margin is still comparatively low with 29.4% and impacted by the sell-down of our inventories and the higher share of project business. Anyhow, we have seen an improvement in gross margin, supporting the increased profitability compared to the second quarter I talked about.

So after having looked in some detail in the third quarter, let me give an overview concerning the first 9 months. So year-to-date numbers. Since there are also similar developments as already talked about, for the third quarter, I will keep it a bit shorter here.

Looking at TAKKT Group, again, first, our sales are 5.3% below prior year, with a negative currency impact of around 1% so organic growth was minus 4.1% in this challenging environment. Looking at our 3 divisions also here. So for the first 9 months, we see FoodService performing well in this environment and achieving good growth. Both Industrial Packaging and Office Rent and Displays are clearly negative for us.

On EBITDA, we generated EUR 87.3 million year-to-date with a margin of 9.1% after a 10.4% last year. On gross profit margin, we are managing that well and have achieved a stable development at 39.7% despite significant negative structural impacts due to our sales mix with FoodService, lowest margin and highest growth. And we are also managing cost intensively and have significantly reduced our marketing spend and also have adjusted the number of FTEs, which is down approximately 3% versus prior year. Personnel and other costs in the first 9 months were impacted by the continued implementation of our strategy and also by inflationary pressures.

Onetime expenses for the first 9 months were slightly below prior year, a bit less than EUR 3 million so far. Looking at our largest division, I&P for the first 9 months, our top line came in with sales of EUR 510.2 million, and an organic decline of around 5%. The closing down of Certeo also here had a slight negative impact on organic growth.

In this challenging environment, overall, we also see good developments with positive growth. For example, in our East region and also Germany as the market is holding up well given the especially weak GDP development and indicators of our home market. On EBITDA, we generated EUR 67.5 million year-to-date and a margin of 13.2%. Our cost ratios were obviously impacted by the lack of growth as well as the transformation inflation pressures. Also here, we were quite active to manage costs towards low levels. Onetime expenses for the first 9 months were on a very similar level as in prior year.

Over to the U.S. with our Office Furniture & Displays activities, as already mentioned, both businesses here are operating in a challenging environment. Sales came in at EUR 220.2 million, down 9.7% when adjusted for currency impact. In the first 9 months, Displays2go performed slightly better with a single-digit decline while NBF was done more than -- slightly more than 10%.

On profit, we see a similar picture as in the first quarter due to the weak top line EBITDA was below prior year with EUR 21.4 million. The EBITDA margin, however, is relatively stable with 9.7% after 10.3% last year. And this is also for the first 9 months due to a strong development in gross profit margin, which mostly offset higher cost ratios. And with that, over to FoodService and the year-to-date development, good top line performance here in the first 9 months with sales of EUR 224.1 million and an organic growth of 5.2%. Hubert was performing even slightly better here than Central.

And on EBITDA, we are the low prior year at EUR 13.0 million. Our EBITDA margin is at 5.8% compared to 7.0% last year. Our biggest impact here is still the gross profit margin, which was below prior year due to the impact from sales mix and also selling off discounted inventories. Cost ratios are stable overall when we adjust for higher onetime costs associated with the integration about the positive trends in profitability I've talked when we looked at the third quarter.

Now coming to cash flow. As we've already mentioned, especially in terms of difficult economic conditions and weaker top line, we are putting a lot of focus on our cash generation. And you can see here that we continue to perform successfully on our cash flow -- our TAKKT cash flows down compared to last year due to EBITDA being weaker, but we overcompensated in net working capital development. While we have invested last year in net working capital, we were able this year to reduce working capital. We are working on the whole cash conversion cycle and the biggest impact was achieved by reducing our inventories by almost EUR 26 million in the first 9 months. Capital expenditure was a bit higher compared to last year, due to some investments that, for example, FoodService for the integrated webshop platform and also due to some investments into startups made by our TAKKT Beteiligungsgesellschaft. Overall, our free TAKKT cash flow is despite the overall slow business ran above prior year with EUR 60.4 million.

You might remember that we had a very cash strong end of the year last year in 2022. So in the fourth quarter this year, we might not overachieve last year again, but with still good cash flow generation, we expect to end up the year with peer growth in cash flow compared to last year. So we will continue our success on cash flow.

And finally, for the financial performance, let me look at our balance sheet. As you will probably not be surprised that our balance sheet continues to be very strong and healthy. Our net financial liabilities have increased compared to end of 2022 due to our dividend payment in May to now the new level of EUR 138.2 million, whereof EUR 66 million are lease liabilities.

Due to the strong cash flow generation, I just talked about that, our net financial liabilities are expected to decrease further until end of this year unless we would be able to pursue an attractive M&A opportunity. The equity ratio is at 61.7%, and with that still above our target corridor. So we have a strong position, allowing us to continue our share buyback program, allowing us to look for attractive M&A and also allowing us to continue our dividend strategy.

In a minute, I'll hand back to Maria for our outlook. Before this, let me please summarize our third quarter. We have to report an unexpected weak third quarter due to the softness in our markets and there with our sales decrease. Good rules on the other hand side is that we saw a positive impact in our focus areas gross margin almost being at 40% on cost management, with the profitability despite lower sales higher than last quarter and especially cash generation clearly above last year. And with that, over to you, Maria, for our updated outlook for 2023.

[Maria Zesch, executive]

Thank you, Lars, for the view on Q3 and the first 9 months. So as said, it's a challenging situation. And based on the Q3 developments and the continued weakness, we expect for Q4, we have adjusted our guidance for '23. So what do we now expect from the last quarter.

Looking at the environment, we think that Q4 will most likely look somewhat similar to Q3. So overall, very challenging conditions for the remainder of the year to slow or negative GDP growth in our markets and negative [indiscernible] from relevant indicators. That means we don't expect to see an uptick in demand from our customers in Q4. What is different in Q3 is that the overall risk situation has become even more volatile with increased geopolitical tension and the war in MiddleEast. So I would say that we currently see more downside twists than upside potential for Q4. So how do we position ourselves now in this environment. We have a clear strategy. We want to grow, become a more integrated company and get impacted by our Caring pillar and also in this challenging environment, for me, it remains a top priority to serve our customers to repeat the existing demand, and we continue to sell strategic growth initiatives of cross-selling those smart pricing on the e-commerce. But it's clear that at the same time, we need to increase, and we have increased already our effort on managing cost profitability and cash.

The main topic [ cost ] relates our gross profit margin. We are continuing to push measures to get our gross margin towards 40% and to compensate for the negative structural impact of the sales mix. In regards to the cost, we were already quite cautious heading into Q3, the managed cost cutting strictly. With the softer top line from August onwards, we have intensified the cost management measures postponed or even canceled projects that were not a top priority to us. And this approach also includes adjusting FTE numbers to the current environment. We will also continue with our focus on managing net working capital and want to build on the success we have achieved there so far.

So our focus will be on further inventory management, but also improving sales and payables outstanding. So let me come to our guidance for the full year. With the adjusted outlook, we now expect mid-single-digit organic sales decline for '23. For EBITDA, our new quarter is between EUR 107 million and EUR 117 million, and this implies an EBITDA between [ EUR 20 million and EUR 30 million ] for Q4.

So I can hear already some of you asked if this corridor should not be more narrow, given that we only have 3 months to go. My response to these questions is there is a lot of uncertainty out there as we have seen in the recent weeks. So this is a range where we'd be comfortable in the current environment. And finally, even more important than profit in this environment is cash, cash generation. Here, despite the difficult environment, we see the positive outcome of our cash focus and confirm our initial guidance to earn significantly more cash flow than last year.

To achieve this, we're working intensively to improve our net working capital management on receivables, payables and inventory levels. So now after having looked at our near-term expectations, more than [indiscernible] midterm. We see increased economic and geopolitical uncertainty out there. We're also reviewing and reworking on it and planning on financial targets. I remain convinced that there is a lot of unrealized growth potential for us in our markets, but still in the current environment, we will increase our focus on profitability and on cash.

We are currently working on what that needs in detail for our midterm financial ambition and we'll give you an update that with the annual report 2023. So please note all the potential changes in our midterm planning, [indiscernible] increase in interest rates could lead to an increase in payment risk [indiscernible] other cash generating units. Before I now go to the [indiscernible] days, let me give you reminder about the investment thesis.

We have huge growth potential in a very large and fragmented market with a very diversified position with our activities both in Europe and the U.S. These have helped us in the past, and I'm sure this will help us in the future. We have a clear vision and strategy to bring new worlds of work to life together with our customers, with growth financial track record and execution. We know how to adapt and to adjust with challenging environment. And this shows that we will take the necessary measures to safeguard our financial performance. We just [indiscernible] our cost management and the stock cash generation with it so far already in -- and last, given the current uncertainty, we have the advantage to operate from a position of financial strength and stability. With a strong balance sheet, we generate substantial free cash flow, and we have committed to pay dividends to shareholders in addition to our ongoing share buyback program.

So with that, I'm very happy to take your questions. Over to the operator for the Q&A.

[Operator]

Yes, Ms. Zesch and Mr. Bolscho. Thank you very much for the detailed presentation and especially the explanation of the guidance adjustments due to the current market environment. As already mentioned, we will now move on to the Q&A session. [Operator Instructions] We have already received the first raise hand by my colleague, Christian Bruns. The line should be open in a second.

[Christian Bruns, analyst]

Thanks for the presentation and congratulations Maria to your prolonged management contracts. I have a question on your [indiscernible] prevention because you continued after your progress here in the current year, there's still one of your priorities to improve net working capital management. And I'm just wondering, is there a lot of room for further improvement given your improvement in the quarter already.

[Lars Bolscho, executive]

Yes. Thank you for your question. So first of all, what we have seen in the second half or let's say, the end of 2022 and now also 2023 in part, if there is a correction of being overstocked after the situation where supply chains were disturbed. But we also see and are already working on further, I would say, more structural improvements in the cash conversion cycle, where we just did have a [Technical Difficulty] past. And let me give you a few examples like on DPO, like the time we pay to our suppliers you see room to improve there to get that balanced out better than we had in the past. And also, for example, on the DSO and receivables by getting better negotiating payment terms with large customers, for example, also by getting better and balancing out the payment methods we use in our transactional business we see room for improvement.

Will it be as an improvement as strong as pronounced as in end of '22 and in '23, now but we are convinced that we can improve this conversion satisfactorily also in the upcoming years.

[Operator]

Do you have any further questions or...

[Christian Bruns, analyst]

Yes, I have a further question because in the press release, you hinted that adjusting the medium-term outlook could have an impact also on your annual impairment test. And if I look at your balance sheet, I see that goodwill is a dominant position more than EUR 600 million, I think, nearly 90% of your equity base. And so any large impairment could change the balance sheet substantially. And as you look in your categories or in your divisions, it strikes to me that I think FoodService, although it seems to stabilize in the current year. There is still EUR 144 million in FoodService, so Hubert and Central. And I'm also a little bit worried about EUR 88 billion in this space to go D2G. Could you give any hint on what might be the impact or where we could worry or where there could be an impairment. And especially, will this have some impact on your dividend? Or do you say it's noncash and will not have any impact.

[Lars Bolscho, executive]

Thanks for that question. And also for mentioning some of the important numbers to know. And let me start a bit more general and then I will try to make it a bit clearer. As you know, we already mentioned that we do impairment tests for all our what we call cash generating units is now to keep it simple. There are 2 main input factors on the results of these tests. The first one is the discount rate, which is linked to current interest rates, and the second one is sell our mid- and long-term planning for these cash generating units. And going into the impairment test, testing this year, we are now facing headwinds from both impacts, right? So we are seeing increasing interest rates with impact on our cost of capital. And as we stated, we are reviewing our midterm planning due to the lower base of '23 to the economic challenges we have in. So generally, this means there is risk for impairment and that has increased.

Now coming bit closer to your concrete question, most of our cash generating units, we don't see any risks. So there might be exceptions, could be small activities that we acquired more recently and it could also be businesses that have struggled to recover from the COVID impact.

For example, the business you mentioned, which is Displays2go or D2G business. Now the magnitude of a potential impairment charge is also difficult now to estimate in advance, but for what I'm expecting today is could be a double-digit euro million amount, but most likely will be below the level of EUR 40 million to EUR 50 million, so below EUR 40 million to EUR 50 million but probably double digit. And just to remind you, you also refer to that, it wouldn't have any cash impact, that would only report or would only affect our reported numbers, and there would be no impact from our perspective to dividend payments. I hope that I made it bit more concrete what the risk is upon.

[Christian Bruns, analyst]

So from the EUR 88 million D2G, that could be some -- I reached this from what you are saying that this might be the most likely impairment.

[Lars Bolscho, executive]

So yes, that's what you can hear out of my words, of course, we are -- we have not done those impairment tests now for the year-end process that we need to do, but D2G has been last year, the cash generating unit with the lowest positive delta. So I see highest risk there.

[Operator]

I would like to move on to the next raised hand, and I see it at Thilo Kleibauer. Please go ahead. You should be unmuted. [Operator Instructions]

[Thilo Kleibauer, analyst]

I have one question regarding the gross margin. I mean, you highlighted an increase by 70 basis points in Q3. But I assume that also a technical effect due to lower business volume from NBF, which I think low by gross margin point of view especially on the orders from the public sector. So maybe you can give us kind of gross margin trends for the 3 different segments that would be helpful. And my [indiscernible] yes, maybe to give some insight into current grade -- in current order [ behavior ]. And you highlighted that you have some areas, for example, the e-procurement business at I&P, which is performing well or that we can achieve additional sales versus spot selling activities. So maybe some insight on current order behavior and do the same number of customers order less than the average [indiscernible] smaller? Or do you see left one-time customers, or what is behind these current trading numbers and also the positive development in your improved performance. That would be helpful.

[Maria Zesch, executive]

Thilo, thanks for your question. So let me start with your second one, and then I'll hand over to Lars also for a bit more on gross margin. So what you asked is like what we see currently on the top line side, right? And so what we see and also how we see what the current trading is but also the channels and the customer behavior. Correct?

So what I can say, and let me start also with first [indiscernible] and then go ahead because it's a bit a mixed picture. So I would say, in I&P, we saw [indiscernible] good order intake in July. And so compared to that the rest of the Q3 was a bit -- a weaker quarter. Still remember, also what we did that was out of the [indiscernible] business.

And also what we see when it compared to [indiscernible] and the GDP forecast, I think it's still better what we delivered that compared to these also indices. And also what we now do with the rebranding, which we did in August and they integrated also sending more goods to customers. I think also that's not hard for us to show even a better outperformance.

So overall, for I&P, we see that we weakened the -- in the e-commerce business. So that's where we overall and I think [indiscernible] share as globally and trend we see is that this e-comm is more aligns over sales development but still below average. So I think overall, we see the e-com, e-proc so e-procurement with bigger customers than [indiscernible] significantly better.

Let me then go to Office Furniture. I would say here, what we have seen so far is as mentioned that the government business and indeed to see also very important to low. So we are developing final digital products [indiscernible] with getting back towards both peak and [indiscernible] levels in the [indiscernible] and our businesses. So we still have some challenges in here.

So in FoodService, I would say we are more stable than in the other activities. So here, what we are seeing is that we see a bit of a slowdown in October, but so far was quite good. Another dimension is so I've discussed that the 3 divisions or maybe going from a or seeing it from a regional perspective, also for what we currently season out really much difference. U.S. seemed a bit stronger over summer. Now we see more negative news there. And most uncertainty about potential government shutdowns again in November. And in Europe, what we see originally here, [indiscernible] sounds a bit more stable than in Europe average. So that was regionally that was on -- and also on divisions. So you also asked about average order value. Here, I would say we are still quite happy with the development of the average order value, so also due to the implication, the [Technical Difficulty] developments are [indiscernible] So there's no concern on the deal. [Technical Difficulty] in total?

[Thilo Kleibauer, analyst]

Maybe one follow up on the government business. If I remember correctly, that's especially a topic for Q3? Or do you expect also had an impact in the Q4 due to the missing orders from the [Technical Difficulty].

[Maria Zesch, executive]

So you're right. In Q3, we see special effect. So I would say, like I said more than we normal see, but also we have normal deferred business throughout the year, but Q3, it's special as is a big one...

[Lars Bolscho, executive]

Then I would take your question on the gross profit margin for the third quarter. And your question was the increase from 39.2% to 39.9%. How is that split up in divisions and also kind of structural impact on the sales mix. If I start with the strong effect, you are right that less government business is a positive structural impact for us. Some of that in third quarter than some of the orders we made with government in the third quarter also come into sales in the fourth quarter. But the bigger structural impact is still that we are growing or being stable in the third quarter with our food service business with the lowest gross margin in our group. So the overall structural impact is still a negative one with minus 0.3 percentage points.

Going through our 3 divisions. The gross margin -- gross profit margin at I&P was slightly below prior year. So there, we need to get back a bit, but it was still clearly above the 40% where we wanted to be. FoodService, we talked about that a lot. It was now a more same development to prior year. So we improved significantly compared to the second quarter, more than 2% cost and still the different sales mix within FoodService, with more contract business and still the impact of selling down inventory, the discount is impacting the margin, but we are improving.

And very good development on Office Furniture and Display. We continue to see a very strong improvement there where we benefit what I've mentioned that especially freight costs are going down. We are able to manage them down, but we can keep high charge for freight in the market. So there, our gross margin is probably at record level for Office Furniture and Display of NBF, especially in history. So we are there also way above the 40% towards, let's say, 4 to 5 percentage points better than we have been last year.

Thus, overall, still a slight negative structural impact and good developments in the divisions, especially in Office Furniture and Displays.

[Operator]

That sounds great. Then we still have 2 raised hands. The first one, I think, was Craig Abbott. Please go ahead.

[Craig Abbott, analyst]

Yes. I just wanted to come back. You showed us that the cross-selling is despite the difficult market conditions have been developing well. I think you said $10 million year-to-date. I'd like to just know 2 things, please. One is how exactly do you measure that KPI, i.e., is it literally new customers that introduced from one business unit to another unit and then they execute a transaction? That will be the first question. And the second question is I just -- I don't expect any kind of precise estimate here, of course. But if you could just kind of give us like kind of a ballpark figure, what kind of growth dimension you think you could potentially achieve from these cross-selling initiatives over the next, I don't know, let's say, 2 years or so.

[Maria Zesch, executive]

Very good. Thanks for your question. So cross-selling. So how we do it? And also what do you expect in years to come, right? So we -- to the example of an operation from my [ NPS ] customers. So we indicated who is the [indiscernible] customers [indiscernible] who is a former [indiscernible] top customer. So then when we see what we have seen in the [indiscernible] and see that they are selling [indiscernible] also buying our packaging or goods from the portfolio of [indiscernible], we see that the cross-selling is working. And so it's an additional capital [indiscernible]. And so we do strict monitoring on it and have got monitoring setup developed and they are happy how the team in Germany, Australia, and Switzerland are working on this one. And we do the same in Hubert and Central. So also selecting the product categories and see like how the cross-selling growth -- growth state on the categories sold previously from other companies.

[Craig Abbott, analyst]

So I would say it's driving up your AOV, average order value?

[Maria Zesch, executive]

Over the average order frequency because they are also getting that more frequently, so not only a week but also from the customers. As you know, our growth, you have so far defined 3 big topics, e-commerce, that the cross-selling fees, and the surprising -- and the margin management. So these are our 3 big revenue levers. We still believing even thinking or above another, of course, one about product for next year. And this will be the ones where we believe that the growth for the next year should come from. So cost earnings based also on the integration [ digit ] is definitely one of the key priorities for our company to be continued.

[Craig Abbott, analyst]

But I mean just $10 million, I mean I don't know because this one day become a 3-digit euro million figure?

[Maria Zesch, executive]

Yes. So what I would say is we see that it's growing quarter-by-quarter. So the development is a good one. And I hope finally if we get into the [indiscernible], but I would say now let's do step up a step. If it goes with the speed we see, I'm satisfied.

[Operator]

No follow-ups for you, Mr. Abbott, right?.

[Craig Abbott, analyst]

No, I'm fine.

[Operator]

Perfect. Then I see still the raise hand of Christian Bruns. Do you have any follow-ups or...

[Christian Bruns, analyst]

Thank you for having the chance. There's no one, I will take the opportunity, of course. So I was just looking at in the future, trying to -- one of us asked in the last fall, of course and I think for your business, there's no good leading indicator, maybe purchase price managers, not really very an indicator with a strong lead. So I'm just questioning when environment will allow top line growth at your company. Again, and if I look now, you have 4 consecutive quarters of negative organic growth. And if I understand it correctly, you guide for another quarter of negative organic growth.

And I think I don't remember in termed history where TAKKT had more than 6 consecutive quarters of negative organic growth. Maybe can this be an indicator. And which region do you expect maybe to lead the improvement that I would get, it's a U.S. business as FoodService, Office Furniture and Displays. But do you agree?

[Lars Bolscho, executive]

Maybe I can start and Maria if you want to add, please feel free. So first of all, yes, we have good indicators. So it's the question for how many months in advance to those indicators give us like a good impression or a good indication what will happen and we have, as you mentioned, the Purchasing Manager Index for manufacturing, not composite one for the manufacturing world. So on the European business, we have the Restaurant Performance Index for our FoodService Business and we have an order intake estimate for a kind of association for Office Furniture called BIFMA in the U.S. for our OF&D business. And if we look at those indicators, we see in our development for all the quarters you now mentioned is confirming us that this is the market conditions we are in, right? So the PMI, I mentioned that when I planted the numbers [indiscernible] a very low level at the moment, even below 40 in Germany, which is our home market, as you know, which normally indicates an even more negative growth development.

So I think I believe what we see is something we receive in the market, normally the indicators today, the PMI, for example, often shows us what will happen in 3 to 4 months. Looking at the P&L, we see what we will have to expect like for the fourth quarter and possibly also for the start into next year. So that's the market, I think I can now really say when last time is TAKKT been for 4, 5 quarters in a row in such a situation. But I think you could talk about that saying TAKKT in that situation, but also I think the economic uncertainties outside in the world and the geopolitical uncertainties in this intensity have not been like that in the past. So that's my view on that. Are we happy with this? No, of course not. We try to push on sales force, right, to get the market share even in a weak environment and continue on margin, cost management and cash focus.

[Christian Bruns, analyst]

And do you agree that you asked the [indiscernible] markets to overtime a bit?

[Lars Bolscho, executive]

Yes. So looking at macroeconomics, there was, from my perspective, like over the last weeks, there was often that expectation that the recovery in the U.S. could be first. Now to be honest with the political uncertainties, government shutdown the last weeks, we heard it a bit more pessimistic like from the U.S. and we have seen it a bit more pessimistic for the U.S. But I think you're right, generally, there's still the expectation in the market that U.S. might recover before Europe. Now when will this happen? We don't know. We have to stay flexible and then we act to it when to see it, and it's also the beautiful model that it allows to do so.

[Operator]

Question towards the management. There's one raised hand indeed still left. Do you have time for maybe extend the time for 2 or 3 minutes, will it be okay for you?

[Lars Bolscho, executive]

Of course. That's okay.

[Operator]

So I hand over to Roland Konen, stage is yours.

[Roland Könen, analyst]

Most of them are already answered, so we couldn't give us a very short just kind of housekeeping question. I saw that your depreciation was in the third quarter of EUR 7.8 million at average in the first 2 quarters, it was EUR 9.2 million. What are the reasons for this lower number? And is this number from the third quarter, also the number for the next quarters going forward?

[Lars Bolscho, executive]

So there are no bigger deltas in there. You're right, it's a bit lower because some of the normal depreciation has gone down, and we have some special impact, like nonrecurring impact in the depreciation in a kind of a positive way.

I think important if you compare that to last year, please keep in mind that we have some impairment on a trading market for the last few [Technical Difficulty] brands that we are now merging with KAISER+KRAFT, so last year, third quarter was ordinary high -- sorry, second quarter, last year second quarter was high. Now we are more normal. So it will be a bit higher again than probably in the fourth quarter compared to the third.

[Operator]

Thank you very much for all of your questions. Due to the fact that in the meantime, we haven't received any further questions, we come to an end of today's earnings call. And therefore, I would like to hand over to you, Maria Zesch for some closing words. And as you wish during the presentation, of course, we keep our fingers crossed for the sustainability award and as well the Q4.

[Maria Zesch, executive]

So many thanks from my side, thank you for your questions. Thank you for your interest, and see you and speak to you on the next call. Alright.