Tarkett S.A. (TKTT) Earnings Call Transcript & Summary

Good day and thank you for standing by. Welcome to the Tarkett Half Year Results 2021. [Operator Instructions] I would now like to hand over the call to your first speaker today, Mr. Fabrice Barthélemy. Thank you, please go ahead.

Good morning, and thank you for joining our H1 Results Call. I'm Fabrice Barthélemy, I'm CEO of Tarkett. And this morning, I will share the call with Raphaël Bauer, our CFO. Before we get into the Q2 and H1 numbers, I'd like to say a word on the results of the simplified tender offer that was launched by Tarkett participation on Tarkett shares. The offer is closed since the 9th of July. Following some further share purchases last week, the holding company owned by Deconinck family and by Wendel, now owns 88.7% of the share capital and 87.8% of the voting rights of Tarkett. Moving on to our H1 results. On Slide 2, you see that our Q2 sales showed a strong rebound compared to Q2 2020 with an organic growth of 16%. However, the level of activity is still below the activity of Q2 2019. And this is due mainly to our exposure to some segments, like Workplace and Hospitality, that are still depressed worldwide. In addition, I want to mention that the start of the year was slow in the Sports segment despite now a very strong order book for the remainder of the year. Residential and Healthcare segments have rebounded strongly, and our new collections of LVT have been very well received, especially in Europe. Our EBITDA margin has improved and is above that of Q2 2019, thanks to a strong cost reduction program. Meanwhile, as you know, we have posted several waves of price increases in all segments and geographies in order to offset the sharp price of raw material and freight costs. On Slide 3. Over H1, the organic change is plus 6.3%, and the EBITDA margin is within 10 basis points of the level of 2019 despite the very strong negative impact of raw material and freight costs. On Slide 4, the free cash flow is negative in H1 due to the seasonality of working capital. But you see that in spite of that, the cash flow has been actually stronger than usual seasonality would normally suggest due to -- mainly to lower inventories. Therefore, following that result, our leverage is only slightly above the leverage of December 2020, which is actually much lower than the normal seasonality would suggest. And the leverage is now down to 1.8x EBITDA compared to 2.8x EBITDA at the end of June 2020. Some references as a transition towards Raphaël's part. You see that we continue to gain very interesting projects, including large projects in Commercial segment, 70,000 square meters for a clinical center in Belgrade is really a large project in Europe in the Healthcare segment. With that, I'd like to hand over to Raphaël, who is going to guide us in a bit more detail into the financials.

Thank you, Fabrice, and good morning, everyone. We are now moving on to Slide 7, which is the second quarter revenues, as Harris commented, up 16% compared to 2020. All of our divisions are strongly up besides Sports, but let's remind ourselves that Sports has done still a solid quarter in 2020. In spite of the pandemic, we were able to make installations. So the basis of comparison in Sports is still strong last year. You see also that there is a negative foreign currency effect of EUR 25 million, mostly owing to the U.S. dollar effect year-on-year. Over the first half, on Page 8. Organic change is up 6.3%, again, driven by the 3 flooring divisions. It's owing to a softer first quarter with acceleration of growth in the second quarter. So on Page 9, we have summarized the main driver that explains the EBITDA evolution between the second quarter of last year, EUR 64 million; and the second quarter of this year, EUR 78 million. You have seen already those comments in the trading update release last week. Unsurprisingly, the main driver is the strong contribution of higher volumes, EUR 38 million. But also, a solid level of cost reductions, structural cost reduction actions, that we have initiated since 2019 are still being deployed and are delivering solid results, EUR 25 million over the quarter. Now as expected, the EBITDA and the EBITDA margin is under pressure in the quarter, owing to inflation. EUR 32 million on the quarter only of cost increase coming mainly from raw materials, but also from freight cost increases. We have offset almost 50% of that through selling price increases in all geographies. In some instances, as we speak in July, we are deploying a third wave of selling price increases. On Page 10, you see the evolution of EBITDA for the first half. And the message is actually the same than in the second quarter. You see that the significant cost increase in raw materials and freight is leading to EUR 38 million negative impact on EBITDA. What it tells us is that most of that comes from the second quarter. And actually, a significant share of what we've seen in the second quarter comes from June. Ahead of us, we have a third quarter with very significant inflation. And that's why we have updated our full year estimate for the inflation impact, both raw material and freight. And we estimate now that it's going to be around EUR 130 million on a full year basis in '21 compared to 2020. Let's move to the view division-by-division on Page 11, starting with EMEA, to give a bit more color on the business in our main geographies. In EMEA, in the second quarter, we still seeing a solid level of activity in Residential and also better activity trends in Commercial, Healthcare and Education. And that's mostly for our vinyl products. Unsurprisingly, and as expected, we still see a softer level of activity in Workplace, in Hospitality also. And that's still penalizing the activity in commercial carpet. Worth of notice is some countries that are doing very well and even above 2019 levels, significantly so, France, Italy, Portugal, for instance, but it's not the only one. As you can see, the EBITDA margin has significantly improved compared to H1 2020, driven by a solid level of cost reduction, but also the first benefits of selling price increases, combined with the benefit of operating leverage due to higher level of activity. In North America, on Page 12, as you well know, we have a much higher share of commercial activity. And Workplace is an important segment for our North American business and activity, as in Europe, is still soft also in Workplace North America. We see still very dynamic activity in Residential; and also as in Europe, improvement in vinyl flooring and in vinyl accessories used in Education and Healthcare mainly. Margin is under pressure in North America as the level of activity, in particular in commercial carpet, one of the most profitable segments, is still slow. So it's a poor mix compared to last year. And inflation has also impacted significantly in North America. We are deploying additional wave of selling price increase in July in North America as we speak. Solid quarter for CIS, Asia Pacific and Latin America, owing to still very good volumes, not only in the CIS, by the way, but also in Latin America, in Brazil, for instance. And in all those geographies, volumes have contributed to the organic growth, but also significant level of selling price increases to offset both currency weakness, be it in Russia and Brazil, but also the inflation impact. In Russia, we have announced for July, the third wave of selling price increases to offset further inflation impact to come. As you can see, margin has improved nicely, and that's owing to better volumes and still a solid level of savings coming from the operations on the factories. And to conclude the zoom on our businesses, Sports, which is down significantly so compared to last year. Again, I want to remind that Sports has not been significantly impacted by the pandemic last year. In the first half, we were still able to install and recognize revenue. This year, the first half is softer owing to less project end of last year and beginning of this year. However, as Fabrice has indicated, we end up the semester with a solid order book that gives a better perspective than anticipated initially for the second half of this year. Unsurprisingly, margin are lower than last year, mostly owing to lower volumes and cost inflation. Now we've published yesterday night, further information in addition to the trading update, and that's the EBIT and the net result. EBIT is EUR 30 million for the first half. It compares to an EBITDA loss last year, EUR 43.6 million. Last year was impacted by a significant asset impairment charge of EUR 54 million, mostly related to assets in North America. This year, as you can see in adjustment to EBITDA, which are -- to EBIT, which are relatively limited, EUR 7.7 million. Most of the charge is coming from restructuring provisions related to our cost savings programs, be it in manufacturing or G&A. The net income of the group, Page 16, is breakeven, slightly positive, again, compared to a loss last year driven by the impairment booked in June 2020. Financial charges are slightly higher than last year, owing to the refinancing of our Schuldschein private placement and some make-whole costs that were recognized in the first half of this year. Taxes are above last year, owing to a higher profit before tax. Last year, income tax charge was also reduced by the fact that the asset impairment in North America is [ tax dilutive. ] In his introduction, Fabrice also mentioned cash flow, much lower consumption than the usual pattern. EUR 44 million cash flow consumption in the first half compared to EUR 76 million last year, for instance. This is owing both to the lower level of activity in the first quarter, but also to a low level of inventory, a historically low level of inventory, in some instances, lower than what we would want due to some raw material shortages and supply difficulties for some of our factories. Inventory is lower than what we expected earlier. This means also that the seasonality of our cash flow will be different. The pattern will be different this year. And we expect a less strong level of positive cash flow for H2. Net-net, however, we still target positive cash flow for the full year. And at Tarkett perimeter, reduction of net debt over the full year basis. And a quick word on financing. To conclude, you can see here on Slide 18, liquidity at the end of June. Actually, in July, we have reimbursed most of our Schuldschein. And we are now financed, at Tarkett level, mostly through Tarkett loans from Tarkett participation. Tarkett participation being financed with a term loan B. There is also a new RCF that has been set up, and Tarkett is able to access that new RCF. I will now hand over to Fabrice for the outlook.

Thank you, Raphaël. So we expect the recovery to be still very progressive in the segments. The commercial segments that are the most affected by the pandemic, and those segments clearly Workplace and Hospitality. Most -- many of our corporate customers have delayed their renovation projects and are still delaying their renovation projects. Occupancy rates in hotels are improving month after month, but are still well below what we could call a normalized level, a pre-COVID level. We expect to have a sustained level of activity in Residential, even if we see signs of slowdown in some markets. And as I mentioned earlier, in Sports, our order book is very strong, and we anticipate a strong H2. We now estimate the purchasing and freight cost inflation to reach EUR 130 million over the full year, following further force majeures at chemical plants, the increase of the crude oil price and also renewed tensions on freight and transportation with some shortages of drivers in some regions like the U.K. or the U.S. Our selling price increases will only offset half of that additional cost this year. Despite, I would like to say again, a unprecedented level of price increase since the beginning of the year in all regions and in all segments. Our structural cost savings will reach EUR 50 million, and that's well above our initial target for the year, but we are very doing -- we are doing very well on that front in all geographies. As a consequence, we expect in 2001 (sic) [ 2021 ], the EBITDA margin to be below 2020, which was helped by very low raw material prices in H2 and during the whole year last year. As for our midterm objectives, there's no change compared to our last publication. We have achieved our target of financial leverage between 1.6x and 2.6x. We have stated earlier also in April that our EBITDA margin objective is delayed by at least 1 year due to the COVID crisis and to the tensions on raw materials. And further on, our growth targets will certainly depend on the situation on some specific segments, such as Workplace and Hospitality. With that, I'd like to thank you very much for your attention and move on with the session of questions and answers. So back -- operator, this is back to you.

[Operator Instructions] Okay. So looks like no one will be asking questions. Please continue.

I would like to thank you very much for your attendance to this call. Again, we are pleased with the rebound of activity in Q2 and to -- with the margins that we've delivered in Q2. I wish you a very nice rest of the day, and thank you for your attendance. Thank you.

So that does conclude our conference for today. Thank you all for participating. You may all disconnect.