TAKKT AG (TTK) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining TAKKT's earnings call for the preliminary results 2022. [Operator Instructions] I would now like to turn the conference over to Maria Zesch. Please go ahead.

Welcome. Welcome to our earnings call for the preliminary results 2022. This is the very first call for our new CFO, Lars Bolscho. And I'm very happy that we found an internal successor for the CFO position. So happy to have you onboard, Lars. And maybe you give us a short intro.

Thank you. Thank you, Maria. It's a pleasure for me to welcome all of you, first time in my new role, to our call. My name is Lars Bolscho. Since January this year, I am the CFO of TAKKT Group. So quite new in this role but not new to the company, I am with TAKKT for 14 years already, first part of those 14 years in TAKKT Group positions leading M&A and then also corporate controlling. And in the last 5 years, I was leading the finance organization for our European business for KAISER+KRAFT group; and then [ fully at that time really built ] division Industrial & Packaging, so I know the company quite well. Looking forward to our call today and also to future exchanges with you. And with that, back to you, Maria.

Thank you, Lars. So in this call, I will start with an overview about our achievements in 2022 and an update on the key topics. I will then hand over to Lars for further details on our financials. Before the Q&A, I will close with a quick first glance into what we expect for 2023. So let me give you a short recap what we wanted to achieve in 2022 and what we finally delivered. Remember -- so we not only had financial ambitions in terms of sales growth and earnings, but we also presented to you beginning of this -- of last year our new strategy with Growth, OneTAKKT and Caring. So let me start with the financials, first. We all know that 2022 was quite challenging, but what I can tell you is that we have achieved our financial goals last year. So Growth is a fundamental part of our new strategy, and we have set ourselves an ambitious target for 2022. It was quite a volatile and a challenging year with the impacts from the war in Ukraine, from the inflation, from the energy crisis, but still we managed; and we achieved our target of high single-digit organic growth. We ended up with 7.5% growth for the full year, so I will say check mark here. Second, in terms of earnings in absolute terms, we slightly surpassed our own EBITDA guidance for 2022, so I will also say, with EUR 132 million, check mark here as well. And last but not least, especially in these times, it's very important that we also deliver on cash. As you know, TAKKT has always been a very cash-generative business model. At the same time, we had substantial investments last year and also the year before in order to improve product availability, so as you might remember, free cash flow was slightly negative after the first 6 months. We then really, really focused on inventory management in half year 2. And we were able to substantially release working capital and increase our free cash flow to EUR 70 million, so I will say another check mark. Altogether, I will say very successful financial year for TAKKT. And I would now come to the strategic topics we also have achieved last year. So as you remember, we have 3 -- a 3-pillar strategy: Growth, OneTAKKT and Caring. Let me just name a few out of them. So last year, we set up our I&P division. We started with the integration, are in full swing now. We started cross-selling in Germany and Austria and Switzerland and see very good progress in the countries. We also, and we mentioned that in several calls last year, had a very specific focus on inflation management, so a key topic of our pricing initiatives was definitely to get inflation under control. So on the second pillar, on the OneTAKKT pillar. We set up our 4 new group functions. We started in Europe. We have -- we successfully established them. We did, first, tech platform harmonizations. And we did a global study and network study for our future logistic footprint. Last but not least, our Caring pillar. On Caring, it's important for us to have happy customers. Happy customers only come with happy employees, but we also need to focus on our environment. Therefore, I'm very proud that we achieved already a 20% order intake with enkelfähig products. So 20% of our orders are coming from enkelfähig products. Customers still rate us very high in terms of customer satisfaction. And I'm also proud of one KPI: We also promised and then -- to you is that we will make sure that our diversity will increase. So we already see here that we have some good progress also in terms of female leadership positions. So I will say, next to the financial topics, also very good progress on the 3 pillars, on topics in these 3 pillars which we executed. Now let me come to cash because I think cash is really important. And we have seen good cash generation in '22, and the equity ratio is above the target corridor of 60%. We have started and are still continuing a buyback, a share buyback, program. So far, we have spent around EUR 7 million. At the same time, we also said it's very important to us to increase also our focus on M&A in '23. We have enough financial resources to do some deals from now on. Therefore, I'm also glad to present to you our dividend proposal. Most of you have seen it from Tuesday's announcement. And I have just talked about the cash generation and the solid balance sheet. This allows us to propose a special dividend of EUR 0.40 in addition to the base dividend of EUR 0.60, so I will say, quite an attractive dividend yield for shareholders. That's it for me at the moment. Now I will hand over to Lars, who will give you more details on our financials.

Thank you, Maria. Let's start looking into some details around our financial performance. And we'll start with a single quarter, for quarter 4 of 2022, before we then look at the full year '22. Starting with TAKKT Group numbers for the fourth quarter '22 and first looking at sales. We have seen some economic headwinds in the fourth quarter and, with this, a slowing down of the customer demand. This impact was coming in as expected. We have talked about having softer months ahead, concerning the economic environment, in our last call already. Reported, we increased in sales by 3.7% to EUR 329.2 million. We benefited from currency exchange rates, especially the strong U.S. dollar, by 4.7 percentage points, so organically our growth rate was slightly negative at minus 1%, mainly coming, as you will see in a minute, from our European business, our division Industrial & Packaging. Overall, and that's important to state, we came in as expected for sales in quarter 4. Looking at our profit and EBITDA next. In EBITDA, we generated EUR 27 million, which is a profit margin of 8.2%, versus quarter 4 '21, a EUR 30.5 million, 9.6% profit margin. Currency impact of translation of our U.S. dollar business into euro helped on EBITDA level with approximately EUR 1.5 million for the quarter. As Maria has already mentioned, we continued to pass the cost increases, but we also had some negative temporary effects on gross margin, with impact on our [ shown ] profitability for this quarter. The main reason for this is our inventory valuation. While we decreased the underlying interest rate assumption last year, we increased this year due to the higher interest rate level. Comparing now the 2 years, the quarter 4 those 2 years, this had an impact of approximately 0.6 percentage points in a negative way. Second, a more temporary aspect is that we have some cost increases and freight costs in the U.S., which then from end of December we passed on to our customers. And thirdly, we have generated more sales in the fourth quarter out of bigger projects, especially in our Central business which comes with [ lower ] margins. And those impacts mentioned are not expected to remain in this magnitude. Regarding our onetime expenses and gains. In Q4 of '22, we had a gain, so a positive impact net, of around EUR 1 million. And it was net positive mainly from releasing an accrual for sales tax risks in the U.S. In the same quarter the year before, so quarter 4 '21, we had costs of around EUR 3 million, at that time mainly coming from organizational changes at I&P. And besides those onetime expenses and gains, we have also invested in Q4 '22 into our transformation. You might remember we have talked about recurring buildup costs in our transformation, and this added up to approximately EUR 4 million for the quarter 4. Some of those investments can be seen in our personnel costs for adding new competencies to the group, others -- and other costs for driving our change projects. Now looking into the divisions, let's look at the division Industrial & Packaging first, again starting with sales. Sales in Q4 decreased by 5.1%, in this case both reported and organically. And we saw the economic environment weaker in Europe versus U.S. And we saw the weakness in our U.K. business to continue, while other regions in the division Industrial & Packaging were more stable. On the right-hand side of this slide, you can see the profit development in I&P. And despite the decrease in sales I mentioned, we were able to increase our EBITDA margin. We ended up with EUR 23.4 million and a profit margin of 12.8%. The year before, in the fourth quarter, our profit margin was at 12.5%. Our gross margin was close to the 2021 margin, which is definitely good success in the difficult inflation environment we are still in. And looking at onetime costs also for I&P: There was no significant amount in '22. In the fourth quarter of '21, we had costs of around EUR 2 million. Turning to the division Office Furniture & Displays, first again looking at sales. In the U.S., we saw a better economic environment in Q4 compared to Europe. Sales increase for this division came in at 12.3%. Organically the division ended up with a very slight increase in sales, 0.5%, because also here we had quite a high currency impact in a positive way. Our development here was better of our brand Displays2go, while our activities with NBF were slightly declining in sales. On the profit side, on EBITDA, we finalized Q4 with EUR 5.6 million, a 7.4% profit margin. In 2021, our profit margin was at 9.2%. And the main reason for this lower profitability is gross margin being lower Q4 '22 versus Q4 '21. And this applies especially to our activities at Displays2go, where we had the already mentioned freight cost increases in Q4 and also the impact of the inventory valuation I have explained. We also had some onetime effects here, in this case gains in Q4 '22. Out of the also already mentioned release of sales tax accrual, we generated approximately EUR 2 million positive impact. Now coming to our third division, FoodService. We saw sales in Q4 the strongest development of our 3 divisions. Reported growth was at 23.5%, and our organic growth in this division was clearly positive with 11.3%. Both brands in the U.S., Hubert and Central, have been strong with double-digit organic growth. Looking at EBITDA. We generated in Q4 EUR 4.5 million EBITDA and profit margin of 6.5% versus a profit margin of 10.9% in Q4 '21. Also here the development of the gross margin was the main reason for the lower profitability, to a high degree again driven by the updated assumptions in our inventory valuation, so from our perspective a temporary impact. We also saw some onetime costs, approximately EUR 1 million, generated due to the organizational realignment in '22, main parts due to the integration into the division FoodService. Now let's turn to -- the perspective to the full year, as Maria already said, a successful year '22 for TAKKT. On sales, we increased sales reported by 13.5% to EUR 1.337 billion. We benefited also full year from currency exchange rates, especially from a stronger U.S. dollar. On TAKKT Group, for the full year, this was an impact of 6 percentage points, so organically we were able to generate a 7.5% growth for the sales for TAKKT Group. We grew, you will see that in a minute, in all our 3 divisions; and our growth was stronger in the divisions with focus on U.S. markets. So nice overall growth. And this also reflects what we have given as a guidance, which was a high single-digit growth rate for the full year. We were also able to translate this into a clear profit increase. EBITDA increased to EUR 132.1 million, which is a 9.9% profit margin. Here our positive currency impact from translating mainly our U.S. dollar business into euro was around 7 million. And in the year before, in 2021, our EBITDA was at EUR 112.6 million, a 9.6% profit margin. Our gross margin ended up for the full year at 39.3%. The year before, we were at 40.2%, so it declined. Now half of this decline was coming out of structural mix of business. Our U.S. businesses with structurally lower gross margins were growing stronger. And we then also had full year the negative temporary effects I had mentioned when talking about the quarter, of course with less impact then on the overall yearly numbers for the full year [ more in the range ] around 0.2 percentage points. Overall, taking out those 2 factors, we were close to our target of 40% for the gross margin for the group. And in addition, we showed a good operational leverage. Our marketing and also our personnel cost ratios were lower in '22 compared to 2021. Looking at our onetime effects. For the full year, we benefited slightly. In 2022, we ended up with EUR 2.4 million onetime effect. Last year, we were at EUR 6.1 million, in both cases expenses in the net number. Also here, as mentioned for the Q4 numbers, we should keep in mind our additional transformation costs for building up competencies and also functions for the year '22 of around EUR 11 million. And with this, in terms of EBITDA already mentioned, we ended up slightly above the upper range of what we had expected for this year and what we had also given as a guidance. Now looking for the full year into the divisions, first again division Industrial & Packaging. On sales, we grew by 4.4%. The organic growth was at 3.7% versus 2021. All our regions were growing organically, except for our U.K. business. And the strongest growth we have seen within I&P, in the region East with a double-digit growth. On profit, we can show a nice increase for this division. EBITDA increased to EUR 102.5 million, which is a profit margin of 14.1%. In 2021, we had generated a profit margin of 13.3%. Good gross margin development helped here, and also some good operational leverage in marketing and personnel. Onetime costs for the division I&P have been similar in both years with around EUR 2 million negative impact. Now at our division Office Furniture & Displays. On sales, we grew by 25% in 2022. The organic growth, so excluding the positive currency impact, was also strong with 11.3%; and both businesses NBF and Displays2go contributed with a double-digit growth. We can also report here on a significant profit increase, EBITDA into EUR 31.3 million, a 9.6% profit margin versus a 7.1% the year before. This was due to the strong sales development, some recovery in the display business and also some onetime effects. Looking at those, we had a positive impact of EUR 2 million this year from the already mentioned release of a tax provision, while we had a negative impact of approximately EUR 3 million last year or the year before. Last but not least, the division FoodService for the full year, on sales, an increase of 28.1%, which then leads to organic growth of 14.9%. And [ that was the ] strongest growth for 2022 in TAKKT Group; also here both brands clearly contributing, Hubert even a bit stronger than Central. Profit also increased, EBITDA to EUR 19.7 million, a 6.9% profit margin. In the year before, we have generated 8.3% profit margin. We had a lower gross margin here for the full year, with some challenges with our inventory level at Central resulting in some negative impact on the margin. We had talked a bit about this in our Q3 call, so no surprise here. Hence, we had some negative impacts or those onetime effects around EUR 1 million. Outside of -- or excluding those 2 impacts mentioned, the profitability would have been increased. Now looking at TAKKT cash flow in 2022, for the group, you see a very similar increase compared to our EBITDA development, with some higher costs and financial results due to higher interest costs and also a bit higher taxes, but no further big news here. So a nice improvement, and this is also reflected in our further cash flow generation. And let's focus here on the full year 2022, first. We generated a free cash flow of EUR 70.4 million. We have invested for the full year in our net working capital by increasing our inventories, especially in the first half of the year, to be able to deliver to our customers despite the disturbed supply chains. And we also have more receivables following the growth we have generated. And our CapEx level for the full year '22 was comparatively low, as you can see. And you can also see in the [ early displayed ] first half and second half figures here that we have generated our free cash flow completely in the second half of the year 2022, and this especially due to the fact that, after investing inventories in the first half, we were able to realize significant improvements in the second half. We managed down our inventories again significantly, with now global supply chains even in better shape again. In total, a again very good cash flow generation for the group and especially a very strong recovery in cash flow in the second half of the year. The continued cash flow strength brings us also to a very solid balance sheet. Net financial debt continues to be at a low level with EUR 117 million; and equity ratio, already mentioned by Maria, above our target corridor of 60%, which then enables us to continue our attractive dividend policy and also gives us room to invest in M&A. Before I hand over back to Maria, my summary on the figures: As expected, we have seen slowing down of demand in Q4 and also a lower profitability with some temporary negative impacts which we do not expect to continue. Secondly, the full year '22 was successful despite the difficult circumstances we were in. And thirdly, we continued to be cash strong, which also allows us then to pursue our attractive dividend policy with a dividend of EUR 1 per share for 2022. And with that, I hand back to you, Maria.

Thank you, Lars. So we get to have a first glance into 2023. And let's start with our interpretation or how we see the economic environment. So we see a high degree of uncertainty. We see a lot of moving parts. The economic forecasts are currently quite volatile. And we all have seen that in the recent weeks, so currently, when we look ahead, these are our main assumptions: We might have seen peak inflation, but we believe it will remain an important topic also in '23. The economies in both Europe and the U.S. are facing a lot of headwinds. We see that, despite the economic slowdown, labor markets will continue to be tight. And one positive news, product availability is no longer an issue, so we see no restrictions from that field. So that's our view of the overall economy. What does it mean for us? The certain -- or this uncertain environment means we have to stay flexible. We have to adjust our budgets and our spendings accordingly to the changing demand and to the changing conditions throughout the year. We are prepared for that, so what we expect is a slow start into the year in sales and then an improvement in the second half. We think that product prices will continue to rise and that pressure for wage adjustments will also be there, so our focus definitely is: First item on the list and one of the top priorities is gross margin, so gross profit. We will continue with inflation management and pass on price increases, but we will also manage sourcing for both -- not only for products but also for freight. We'll make sure that on the pricing and discounting we have a tight approach. And therefore, out of these measures, we expect positive contributions. In this environment, we will be very conscious, conscious about our cost base. And [ we will ] manage spendings and hirings tightly. If the environment improves, we are flexible and we will adjust accordingly. We will continue with a clear focus on cash and cash generation, and we will further work on reducing our inventories. All in all, we don't expect an easy year ahead of us, but I am very optimistic that we can show, as we did last year, that we deliver a good performance. We will also keep focused on our strategy on the transformation of TAKKT. And I would love to give you a more detailed update on that in our analysts call on March 28. So let me summarize now what you have heard today, 4 key messages. First, we had a successful 2022. We delivered on our goals. Second, we have a clear vision and the strategy, which we will continue to execute in '23. Third, for '23, we have clear priorities, which we will -- detailed also in our call on March 28, but as I said, gross margins and cash management are key issues for us. Finally, number four, you can be sure we remain committed to deliver shareholder value as you have seen it with our dividend proposal. So that's it from our side. And I think we are ready for Q&A.

[Operator Instructions] The first question is from the line of Craig Abbott with Kepler.

Okay, can you hear me now?

We can hear you now, yes.

Okay, great. Sorry about that, yes. And my first question is actually just [ like a small buttonhole ] of questions on the strategic transition costs. Unfortunately, my line connection during part of the call was not so good. I wanted to confirm that you did say, Lars, that the total strategic-related costs were EUR 11 million. And I wanted to know if you could give us an indication how much roughly of those are like sticky cost, that, i.e., increase in staff or whatever [ it is today ]; and how much may be one-off. And I assume, please confirm, these were fully expensed in the EBITDA. And I was wondering. I know you're going to give us more details in March, but do you have any indication for these costs for '23 and '24? And I just have one quick follow-up on a different topic after that, and then I'll cut off.

Good. So to -- Craig, to the question of the traditional costs. For this year -- and we have 2 buckets there we look at. The first one is the EUR 11 million which I mentioned which is like for building up competencies, [ which is either ] personnel, driving projects. That was the EUR 11 million. We also had onetime costs related to changes of our organization of EUR 5 million, so that was in total then EUR 16 million; and that, earlier last year, we had talked this could be an amount up to EUR 20 million in total. We ended up with EUR 16 million. Now looking at this year, we would expect that in total for both buckets we could end up on a similar level or slightly below that for 2022. It is obviously a bit too early to say that -- probably lower number [ then again ].

Okay. And those costs were all fully reflected in the EBITDA, correct?

Yes, correct.

[ Copy ]. And my second and last questions now is I know you walked us through what you're expecting for this year. And we appreciate there won't be a guidance before March, but I just wondered if you could give us like, at least qualitatively, indications for each business unit of the kind of recent trading trends you've seen, so far, in '23.

So current trading is what you are interested in, so let me formulate my answer to that question like this. So I will say that we expected a slow start to the year. And this is also what we are seeing in current trading, so compared to Q4, it's somehow slower at the moment. This is mainly because the U.S. activities are now more in-line what we see in Europe. And I will say let's feedback here in March.

[Operator Instructions] The next question is from the line of Thilo Kleibauer with Warburg Research.

I've got 2 or 3 questions. The first one is on the gross margin weakness in Q4. And you mentioned that it's mainly due to the valuation impacts, but maybe you can give us a kind of a split-up. You also mentioned the [ expected ] larger orders [ at some places ], and so which effects were behind the significant gross margins decline in Q4? And then should we also expect similar effects in the current quarter, or was it just a Q4 [ issue ]? And secondly, just a question of the integration -- or this stronger footprint and the integration in the U.S. FoodService, maybe you can give us more insights here about the time schedule and what you are planning there concretely. And regarding the integration of KAISER+KRAFT and ratioform, have you now achieved the levels that you wanted that ratioform is a kind of sub-brand of KAISER+KRAFT? Or are there changes which are planned to come up in the course of this year? And my last question would be regarding M&A. And I know it's always difficult to discuss a deal before signing, but I mean -- but maybe you can give us some comments where you see or -- your best possibilities and in which regions, which of your key segments that you are going to do acquisitions.

Yes. I would start with your question around the gross margin for the fourth quarter. So yes, we have seen a decline compared to the quarter 4 2021. And as I said, 0.6 percentage points was coming out of that really technical impact of inventory valuation because, last year, 2021, we have decreased the interest rate we used at that time, [ adjusting the ] interest rate level. And then end of '22, we have increased that. So 0.6 percentage points coming out of that. The other 2 impacts, I mentioned for freight costs and for kind of project business probably for TAKKT Group level [ than ] in a similar size. And the big question, the important question, of course, is how do we look then at gross margin for 2023. And there we feel comfortable that we can get back to the 40% level we are targeting for. And also we have seen like first, let's say, good development, starting into that year, to get back to that level.

So let me then come to your second question. It was about FoodService; and how you -- where we are in terms of the integration, respectively the time schedule. That's what you asked definite, right? Yes.

Yes.

So we communicated in November that we're going towards the integration. And what I can tell you is that we are already integrated in areas like finance and HR. Also we have integrated teams in some go-to-market functions like marketing and e-com, and the integration of other functions will continue throughout the year. Key topic, what we also did in order to focus on the growth, is cross-selling. We started that in some areas for some specific customer segments and we see first good results. So that was the second question you asked. Then you asked a question about KAISER+KRAFT and ratioform. You might have seen it. We have an endorsed branding, so we, you see on the KAISER+KRAFT home page the partnership with ratioform. Vice versa, on the ratioform page, you see the partnership with KAISER+KRAFT. So that's an [ intermediate ] step towards an even more integrated approach between these 2 brands. So more to come mid of the year, yes.

Okay.

And your third question was about M&A, if I remember correctly. So we want to invest. So key focus here is on Europe and the U.S. So we are looking for targets which can -- which are a good fit and an addition to our existing activities, so we're looking for targets within the [ regional ] setup we are in. So this could be in office furniture in the U.S., but -- and we also want to add companies, quite important, which help us to broaden our range of products or services. I give you one example: So for example, a company which has recurring revenues due to service components, that's what we are interested in.

The next question is from the line of [ Jena Qiu ] with Berenberg.

Just a couple of quick ones from me. I would like to have a bit more clarity and insight on the main reasons for exceeding the EBITDA guidance given earlier this year of between EUR 120 million to EUR 130 million and also a bit more insight into the differences between U.S. and Europe in terms of top line growth in Q4.

I will start with your question on the top line growth in the fourth quarter. So overall at that time, the economic environment in the U.S., especially when we were heading into the fourth quarter, was still stronger, so that was kind of helping then our U.S. business. Of course, that offsets, I mean, some minor topics in there, but that was like the basic or main reason for us in the U.S. to grow stronger. Then on your question around the EBITDA and the comparison to our range: Okay. So first of all, of course, great that we have achieved the sales growth as we had, like, forecasted in this difficult environment. That was like the key success factor. Now 2 a bit more -- 1 more a bit more technical part that helped us -- I mentioned that we were benefiting from translating our U.S. dollar business into euro. That was helping us for the full year by approximately EUR 7 million, yes. So that helped us, of course, in getting like in the upper range of that. And then I've also mentioned that on the onetime effects we came out a bit smaller but less onetime impact from the organizational changes, which was also very good news for us. So that brought us above the EUR 130 million.

And just to follow-up on an earlier question, if I might. How should we understand the FY '23 outlook that you've given us?

So as I said before, we will give you a more detailed outlook in March, so looking forward to get this question again on March 28, at our -- another call there. So I can just say what we see at the moment is that we expect a challenging first half the -- of the year and because of the economic headwinds in our core market, in this environment. And as we [ are excited and yet effective ] business, it looks like that the first half year will be tougher than the second half of the year. That's what we can see at the moment or that's what we expect, and I think we are very well prepared for all options. We remain very flexible and we are prepared for whatever we see in the market.

There are no further questions at this time, and I hand back to Maria Zesch.

So thanks for your interest. Thanks for your interest in TAKKT. And we appreciate that. We would love to invite you to our next call on March 28, where we'll give you more details about the priorities of '23 but also about our guidance. So looking forward hearing you there again, and yes, see you then.

Bye-bye. Thank you.

Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.