TAKKT AG (TTK) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome, and thank you for joining TAKKT's earnings call for the first quarter of 2023. [Operator Instructions] I would now like to turn the conference over to Maria Zesch. Please go ahead.

Welcome to our earnings call for the first quarter 2023. I'm here together with Lars Bolscho, our CFO. And I will start the call with an overview about the main developments and the key topics. Lars will then give you more insights into our financials. And before the Q&A, I will provide an update on what we are currently seeing and what we expect from the rest of the year. So let me start with an overall summary. And overall, the development in the first 3 months was very much in line with our expectations. The weaker economy in our markets was already visible in Q4, and that has continued now in Q1. Sales decreased by 2% year-on-year, considering currency adjustments, the group declined 3% compared to prior year. First quarter '22 was still a very good quarter with double-digit organic growth, so also a more challenging comparison base that were are running against. So we have expected this, a more challenging environment, and we prepared ourselves and our business accordingly. We focused on gross profit margin, focused on cost management, and on cash. And by renegotiation of purchasing conditions with our suppliers, but also managing customer discounts and continuing to pass on price increases, we improved our gross margin to 39.7% -- to 40% compared to 39.7% from last year. Compared to Q4 '22, it is even a stronger increase. So looking at cost positions, we adjusted our marketing spend to the lower demand, and we continue with the implementation of our more integrated structure. So there were some cost increases in personnel and other costs due to the combination of our transformation, but also due to inflation. So from a cash perspective, we continue to reduce our inventory, which helped increase free cash flow substantially from EUR 10 million to EUR 18 million. Last but not least, with our strategy, we made further progress in implementing Growth, OneTAKKT, and Caring in Q1. The main topics here were the integration of second tranches in FoodService. And of course, we continue the rollout cross-selling in Industrial & Packaging and in FoodService, which is [indiscernible]. We see very promising results in both divisions. We also made good progress with our smart pricing initiatives where we have developed differentiated pricing targets for different product categories in I&P, Industrial & Packaging. That delivered very promising results in Q1 with a positive impact on sales as well as in gross margin. In '23, we will further work on automation of price adjustments to scale with more advanced pricing across the whole assortment. And last but not least, we have increased our enkelfahig share in order intake. Last year, December, we ended up with 20%. Now in March, we see the 24% revenues are coming from enkelfahig. With that, we continue to make our assortment more climate-friendly and offer more sustainable product options to our customer. Let me give you another update. As you know, we are continuously working on bringing our brands in Europe, [indiscernible] and integrating the organization product. As part of this, we have decided to discontinue on sales brand Certeo. The business did not meet our growth and earnings conditions. Last year, Certeo generated around EUR 20 million in sales but was not profitable. So these decisions allow us now to focus our marketing efforts on less spend and become more efficient. That was a short overview from my side, and I will hand over to Lars now for the details on financials.

Thank you Maria for the introduction to our call and for the overview and hello, everybody. So let's have a look at our financial numbers for the first quarter 2023, starting with overall TAKKT Group. Let me start with sales development. We have seen the expected headwinds out of economic environments, but all pretty much within our expectations. You might remember that we already indicated a soft start into 2023 in our last 2 calls, and this was now confirmed also by weak market indicators such as the Purchasing Managers Index and also the GDP growth updates. So overall, our sales declined slightly from EUR 328.4 million to EUR 321.8 million, a decline of minus 2.0%. In the first quarter, we still benefited from currency exchange, especially the U.S. dollar, with plus 1.3 percentage points. So our organic growth was at minus 3.3% for the first quarter. Looking at our key divisions, we saw some differences in the organic sales development, showing our diversification in terms of regions and also in terms of the worth of work we are focused on. On FoodService, we continue to grow 2.5%, a nice development after having been already our strongest division, continuing growth in the fourth quarter of 2022. Market circumstances in the other 2 divisions were more challenging, and we were facing negative growth with minus 4% at Industrial & Packaging, and then minus 6% in Office Furniture & Displays. Let's continue on the right-hand side of this slide with our profit development. We generated in the first quarter '23 an EBITDA of EUR 30.2 million, which was below our EBITDA in the first quarter 2022 that was EUR 32.7 million. Our profitability in percentage of sales decreased from 10.0% to 9.4%. As Maria has already mentioned, we focus on this economically challenging environment, especially on our gross margin development on managing our costs and our cash flow. On gross margin, I am happy to report a 40.0% margin for the first quarter, which is, as you know, back on our target level of 40%. And this, despite the fact that we were suffering some negative impact out of the mix of our business. Last year, in the first quarter, we have been below this level of gross margin with 39.7%. And also, in the fourth quarter '22, we have been clearly below the 30% level. So good improvement and success here. A bit more detail to follow regarding gross margin on the next slide. On the cost side, we significantly adjusted our marketing spend to the slower demand, especially in the online marketing area, where we continuously adjust to the market service prices. Hence, we were swift on managing our FTEs, where we are below where we were last year for the first quarter. Anyhow, on other costs and personnel costs, we saw slight increases. First of all, we will see inflationary pressure on our costs, as already expected. We also continue to invest into the transformation with increased spending on technology and growth projects and, for example, the integration of the FoodService division. In addition to these 2 topics, there is also some impact of nonrecurring operational items in the first quarter. The onetime expenses for transformation were in both quarters. So in the first quarter 2022, but also in the first quarter '23 on moderate levels with EUR 1 million this quarter, and EUR 2 million in Q1 of last year. This year, so in 2023, those onetime expenses were mainly due to a regulation change related to the integration of our division, FoodService. So in total, a slight increase in profit, driven mainly by the lower top line and [indiscernible] infrastructure. We expect our profitability to improve compared to this first quarter 2023, in the course of the year due to better scaling, in line with the expected sales growth as well we expect for the second half of this year. The second quarter still could be softer sales development, and there's also a bit more challenging in terms of profit. And important to us, we have to be quick to switch to even more restrictive approach with cost management since the top line development should relatively be below our expectations. Let's look a bit into the details of our gross margin development. As I already mentioned, the development from first quarter 2022, 39.7% to the first quarter of 2023 with a 40.0%. If [indiscernible] from our businesses, what we call structural effect with a negative impact of minus 0.4 percentage points. So our business with structurally lower margin is growing stronger. Looking at the development within our divisions, we focused a lot on managing all components of our gross margin, such as our purchasing costs, our [indiscernible], our discounts with larger customers and also our freight costs. And we continued as last year to pass on cost increases to our customers. With this, we achieved improvements in gross margin, in I&P plus 0.8 percentage points and OF&D, plus 1.7 percentage points. As related to FoodService, the gross margin decreased by minus 1.3 percentage points. The reason for this is that we are still managing the reduction of our significant overstock at Central, which leads to more aggressive pricing, but of course, all still in profitable areas. As mentioned before, this is a temporary impact until we have adjusted our inventories et cetera, we still expect growth for this year. But on the other side, this also of course helps in reducing inventories and thereby improving cash flow. Furthermore, on the gross margin of FoodService, at Hubert we had a negative impact out of the mix of our business, doing more business with larger projects and lower margins, causing our margin in percentage of sales, but helping on the gross profit side in terms of absolute U.S. dollars. So overall, some challenges for FoodService, but overall, with the increases at I&P and also a very nice development compared to the first quarter of 2022, but also to the fourth quarter of 2022, where we were at a level of 39.3%. Let's then look at the division I&P now. On sales, we had a decrease of sales from EUR 189.7 million to EUR 180.1 million, which is a decrease of minus 5.1%, or organically a decrease of minus 4.2%. Within our activities in I&P, we saw some differences in growth rates. Our strongest activities in the first quarter were at I&P North West, so Western Europe and our Scandinavian business and also at IPE East, which is Austria and Eastern Europe, with increases in sales compared to prior year. Our main catalyst of our sales development within I&P, we had Certeo and also our U.K. business with more challenging markets, but also with some internal challenges. Maria's already talked about our deficiency at Certeo. On the other hand side, on the positive side, many of the other regions within I&P, for example, our core market I&P in Germany were more towards the prior year level in sales or close to it. On the profit side, we were able to keep EBITDA stable at EUR 26.9 million versus EUR 27 million last year, with an increase of profitability of 0.7 percentage points to now 14.9%. The increase in gross margin of 0.8 percentage points, I already mentioned, helped significantly here. And of course, the high focus topic for us, especially in the challenging environment we are in right now. The marketing costs, of course we were able to adjust our cost to the lower level of demand and activities. Concerning onetime expenses, this year, we had no onetime expenses when last year, we still had approximately EUR 1 million in I&P. At one time, this was included in exit of the Russian markets. So overall, at I&P, solid profit development despite a slightly decrease in top line. Let's look at the development of the first quarter of our division, OF&D now, starting with sales. Our sales declined slightly from EUR 74.4 million to EUR 73.2 million, a decrease of minus 1.6%. The U.S. dollar currency relation to the euro still helped with positive impact of 4.2 percentage points. So our organic development was at a profit, with minus 5.8%. Looking into our businesses of OF&D, [ the sales of both brand are ] stronger, especially towards the beginning of the year 2023, leading to a slight growth for the first quarter there. NBF for the period had more difficult market circumstances from the beginning of the first quarter already. Important to say for NBF, that we are also benefiting last year from good conversion of open orders into sales. So this is helping our sales compared to the prior year, a bit low in the first quarter. Let's look at the profit then for OF&D, right-hand side of the slide. As you can see the EBITDA declined from EUR 6.4 million to EUR 5.4 million, which leads to an EBITDA profitability of 7.4%. OF&D, was stable, as already explained, to manage its gross margin upwards again by 1.7 percentage points. A nice development, making benefits from some positive cost development and costs. On marketing costs, we adjusted to the weaker market conditions and kept our marketing cost ratio almost stable. And in spite of personnel costs and other costs, we have, as expected, an increase of cost. The increase was due to inflationary cost increases, and we also have some costs that are impacting the first quarter '23, which we would not expect to return in the next quarters. Overall, this leads to a lower profitability with OF&D in the first quarter '23 compared to last year. As for the whole group, we expect the sales volume to pick up and with it that are scalable and increase the profitability compared to this first quarter. Let's continue with our Foods division, FS and with the sales development. As mentioned already in the TAKKT overview, we were able to increase our sales despite the challenging economic environment through this division, making sales from EUR 64.3 million to EUR 68.5 million, which leads to a sales growth of 6.5%. Given the currency impact of a stronger U.S. dollar, the value growth is positive with 2.5% for FS. We benefited from a reduction of orders in hand, especially at the Central business, while our Central activities were still slightly below last year. Our Hubert brand is developing quite strongly with a high single-digit growth rate and nice development, especially larger footprints to our customers. On the profit side, we have to report following EBITDA reduction from EUR 4.3 million to EUR 2.6 million in terms of profitability, a decrease to 3.8% profit margin. One reason for the lower profitability is the gross margin. I've talked about this earlier, the decrease in gross margin by 1.3 percentage points due to the slowdown of overstocks and the negative mix in terms of [indiscernible] product business. On the cost side, also we were able to manage our advertising costs. Our advertising cost ratio was a bit better than prior year. On personnel costs and other costs, we were higher than prior year, especially at FoodService, where we are investing into the transformation of our business, the integration of the business into one division. Besides buildup costs, this also led to some onetime effects, onetime impact on FoodService out of organizational changes has been due to almost EUR 1 million impact this year. Also here, with the expected upswing in volume and to better scale, we expect to improve the profit margin again over the course of the year. Let's look at cash flow for TAKKT Group now, as you know, one of our priorities for this year. Starting with a TAKKT cash flow, there is nothing special to report on it. Our TAKKT cash flow is following mainly our EBITDA development. In addition, the financial results was a bit more negative due to increased interest rates with our U.S. dollar debt. So overall, a decrease of TAKKT cash flow from EUR 28.9 million to EUR 24.1 million. In net working capital, you can then see the focus with the group for this year. While last year, we've been investing into our working capital, EUR 15.5 million, we have now invested only EUR 4.3 million. And this is mainly to the fact that we have been very successful to further decrease our inventories by more than EUR 9 million in the first quarter '23, an activity, which is highly prioritized in our businesses and which will also continue over the course of 2023. With CapEx growing similar level as last year, with development then leads to free cash flow being at EUR 17.8 million and with this to a realized increase of plus EUR 8 million, right above the prior year level. We continue with a short look on the balance sheet. No big news or surprises here, as I can still present a very strong balance sheet. Our net financial liabilities has decreased due to the already presented strong cash flow by EUR 60 million to EUR 100.6 million or EUR 60.4 million on lease liabilities. Our equity ratio was further increased to 64.2% and with this is still above our interim target of 40% to 50%, showing the potential. We have the dividend payments as well as for investment. I will mention dividends, just a quick reminder about our dividend policy and our share buyback. The share buyback program continues as planned out of the maximum potential of EUR 25 million as to approximate EUR 7 million. And our strong cash generation allows us in addition to propose a dividend payment of EUR 1 per share in total, EUR 0.60 dividend and EUR 0.40 special dividends. Before I hand over back to Maria for the outlook, let me summarize the first quarter from the financial perspective. As expected, we have been in a challenging economic environment. And with this, we have to accept a slight decrease of our top line. Tough, economically challenging times was important for us to focus and to succeed on our gross margin, showing the health of our commercial position and on our profit and especially our free cash flow, which is the strength of our business model and a clear focus for 2023. Overall, so far, we developed well within our expectations, and Maria will now comment on outlook for the rest of this year.

Thank you, Lars. So it seems economic uncertainty seems here to stay. At least currently, we don't see a clear trend but instead a volatile environment. And this is also reflected in a sentiment indicator which fluctuates from month to month currently. So overall, we expect to be close in our targeted markets. We expect that inflation remains an important topic. We also believe that the labor market will continue to be tight. So that's what we expect in some of the downside rate materialize, we could also see a deeper recession for TAKKT situation where we have to wait longer for the economy to pick up speed, but that is not currently our assumption. So for us, what that means now is TAKKT priorities. We have to stay flexible. We have to reach out according to the changing demand. We have founded in Q1, and we will continue to do so. So we will focus on the strict cost management and also we will be prepared for a better environment in the second half. We will focus on gross profit margin and cash, so that will remain our key priorities in '23. And we will be as we want to build on the success we saw in the first quarter and definitely we would like to continue on these parts. So that means on the forecast for the key financials, no change in the full year forecast for our key financials. And I am so much driven by strong focus on our customers and unlocking our growth potential. So rest assured, we are pushing ourselves and the organization to realize any additional potential that are out there, and deliver on the top line. The same goes for EBITDA, where we are keeping the balance between cost management, permanently adjusting for the inflation environment but also not letting speed with the transformation. I think we are on track here after Q1. Cash flow already saw a good increase in Q1. Still, I'm very sure that we can realize additional potential for us and further improve our net working capital management. So that's the outlook from our side. But let me remind you of our investment basis. So we have a huge growth potential because we operate in a large and very fragmented market. We have a very diversified position within our activities in Europe and the U.S. This has helped us in the past, but it will also be important in the future. We have a clear vision and strategy to bring new work to life together with our customers. We have a very good financial track record we executed. And we deliver on our financial goals over the difficult trends. Last but not least, living in the current uncertain times, we have the advantage to operate from a position of financial strength and stability with a strong balance sheet, which generate substantial free cash flow, and we are committed to pay dividends to our shareholders. So I hope that we are completely clear about Q1, we're looking now forward to your questions.

[Operator Instructions]. The first question comes from the line of Roland Konen from Value-Holdings.

Yes. Congrats to the Q1 results. I have 2 questions. The first one would be on the depreciation where we saw a decrease of roughly EUR 1 million. Is this only effect of a currencies? Or is this EUR 9.3 million more or less a run rate for the next quarter? And second question would be on the discontinuation of the approval. Could you please elaborate if there are any financial indications, so impairment or something like that, that we have to build in our models for the next quarters?

Yes. Thank you for your questions. Let's start with the impact of Certeo into our numbers. So first of all, no further impact like on our balance sheet. So no amortization of this like that. And of course, like in terms of sales, we then expect negative impact on our growth rate of around 1 percentage points in 2023 for like the rest of the year, possibly on the sales growth impacted by 1.5 percentage points. And then for closing value activities now, we expect also a slight negative EBITDA impact with a low single-digit. Of course, then from 2024 onwards, and beyond the integrated targets, as said, we are not reaching our targets and it was not profitable. So please keep in mind that TAKKT businesses that in terms of the numbers, also rather small part of I&P and especially of TAKKT with minor impact overall on our numbers. And then on the question around the depreciation. So yes, that's more or less the new run rate we have at the moment. We have some special impacts that of PPA depreciation last year and then some other depreciation going away. So what we see right now is more than what we would expect then from the upcoming months. And we've also seen like on the CapEx level, we are also more or less on a normal regular base. So no bigger topics there to be expected for the upcoming months or quarters.

The next question comes from Craig Abbott from Kepler Cheuvreux. [Technical Difficulty] So there are no more questions at this time. We have a question from Christian Bruns from Montega.

Christian Bruns, Montega. I just wanted to ask if you could give us a little bit more color on your M&A strategy and in which markets you see potential in the current environment to increase your existing businesses? Or would it be another…

So if I understood the question correct, so where our M&A activity is and where do we focus on. So as I said already in March, we have increased the focus on our M&A activities. So what we are seeing that there are potential attractive targets in current environment. So no specific news to share, to be honest. But what I can repeat is what I said in March. We have a focus in Europe and U.S. We have a focus for integration of assets into our 3 divisions. And what we're looking for are solid financials, high organic growth potential, so that's the target we're looking for. Hopefully, Chris, it is answering your question.

Yes. And so one priority is maybe of your existing divisions that you are looking at each division and as you have already a shortlist of companies?

So we're looking in Europe and the U.S. And as I said, the product is definitely with the focus on the position to West, North and going for additional relations.

We have a follow-up question from Roland Konen from Value-Holdings.

Again, just a short correction on the share buyback program. It seems that you're buying back some shares at least to the share price of EUR 40 million. So could you assume that after the Annual General Meeting and after the dividend is paid and the share price, we can start again to buy back shares?

So thanks for your question. Yes, you can see that out of our weekly announcement that we have like certain thresholds. We have on what will happen around the Annual General Meeting, it's like the dividends share, which could be the case in like of the share price level with the -- but no guidance or decision on that future share.

The last question comes from [ Tom ].

Only one question left from my side. So on [indiscernible] second quarter of this year. So would it be a realistic assumption to see at least some low single-digit growth in the second quarter of this year and some thoughts on profitability in the second quarter would be helpful as well.

So thank you, Tom. So on the current trading, as I said before, there is some volatility in the market and changes in consumer behavior on a weekly basis. So some markets have improved, like FoodService in the U.S. Other markets are more challenging. But overall, we don't expect a real trend in Q2. So we also don't see it in our numbers now. So from what you here see in currently, Q2 could be similar to Q1 in terms of growth. Hopefully, that answers your question, Tom.

Okay. Perfect. And also the same in terms of the segments or with different service, I mean maybe slightly stronger compared to the I&P segment and of course in the Food segment, or is there anything going to change in the second quarter in terms of momentum for the different segments?

So as I said, what we see is net improved and also figures from FoodService. So that's definitely a strong development so far in April. Other markets, as I said, are more challenging.

The next question comes from Craig Abbott from Kepler Cheuvreux.

Two last questions, sorry. Do you see -- you talked about, I worry about the margin, but do you see like any increase in margin pressure?

So to gross margin or to net profitability or profit margin? So I assume the question is like on gross margin. On gross margin, of course, like pressure on the cost line or on the cost items, but that is again, and as I said before, we are really focusing on all elements of our gross margin to improve that. So no, there is a lot like a big further increase in pressure on that. Of course, it's always the balance for us to balance our gross margin, now these are the targets we have, which is sales flow, which is also like the cash flow. So we feel very comfortably good with the 40%, which is like our target for the TAKKT Group, and that's what we are heading for and what we also expect for the upcoming quarters.

There are no further questions at this time. I hand back to Maria Zesch, for closing comments. Please go ahead.

So thanks a lot for your interest in our Q1 results. So we will publish our half-year results on the 27th of July. And we're looking forward to talking to you again. So see you soon in July.

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