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Edited Transcript of TKTT.PA earnings conference call or presentation 29-Oct-20 10:00am GMT

·25 min read

Q3 2020 Tarkett SA Earnings Call Nanterre Jan 9, 2021 (Thomson StreetEvents) -- Edited Transcript of Tarkett SA earnings conference call or presentation Thursday, October 29, 2020 at 10:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Fabrice Barthélemy Tarkett S.A. - Chairman of Management Board & CEO * Raphaël Bauer Tarkett S.A. - Group CFO & Member of the Management Board ================================================================================ Conference Call Participants ================================================================================ * Charles-Louis Scotti Kepler Cheuvreux, Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to Tarkett Third Quarter 2020 Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today. Mr. Fabrice Barthélemy. Please go ahead, sir. -------------------------------------------------------------------------------- Fabrice Barthélemy, Tarkett S.A. - Chairman of Management Board & CEO [2] -------------------------------------------------------------------------------- Good morning, and thank you to join our call today. On this call, I will be with Raphaël Bauer, our CFO. First, let me introduce the highlights of our results for Q3. We are very pleased by these results that show a sharp sequential improvement over Q2 2020. As expected, our sales are down versus last year, 14% as reported or 10.5% on a like-for-like basis. This was expected, but still represent a very significant improvement compared to Q2 that were -- that was at minus 20%. We are particularly satisfied by our performance in terms of EBITDA and margin, with the EBITDA margin up 250 basis points at 15.2%, and an EBITDA in value slightly above Q3 2019. This was on the back of cost reduction, raw material, cost improvement and slightly better pricing. All our flooring segments improved sequentially compared to Q2. In EMEA with growth in residential and start of a recovery in commercial, albeit slower. In North America as well, even if our exposure to workplace and hospitality is greater and therefore, weighs on the performance in Q3. Residential was growing, but our exposure there is lower than in Europe. It's noticeable that the CIS, APAC and LATAM segment is actually growing compared to last year with a very solid growth in CIS and Latin America and a weaker activity in Asia Pacific, especially in Australia. Sports remain subdued with project delayed mostly in artificial turf with other subsegments and sports actually registering a very strong performance. Over 9 months, our sales are down 13%, 11.8% organically. And the EBITDA margin is up 70 basis points with an EBITDA in value of EUR 224 million compared to EUR 242 million last year. So it's a very resilient performance that we are achieving at the end of September. To achieve this, I would like to remind you what our priorities were. The first priority, of course, was to protect our employees. And of course, we've put in place all safety measures that were necessary, and we are pleased to report that we didn't have any cluster at Tarkett. So business was continued normally in plants in sales networks. We visited customers as much as possible, even if, of course, international traveling are still restricted and remote working is in place everywhere where it is possible. As I said, all manufacturing sites are running. Delivery to customer was very seamless during the summer, and we've also adapted our offer to support our customers also in the way that we interact with them by introducing webinars, phone support and finding new ways to connect the customers with our experts inside the organization. The third priority was to protect profitability, and we've realized over the first 9 months, EUR 84 million of cost reduction, of which EUR 35 million structural. So Raphaël will detail that in a few minutes. But we are well in line with our objective that we actually increased at the end of September to reach EUR 45 million of structural savings by year-end. Of course, we also have the priority to manage cash and liquidity, and we've worked to manage our working capital very tightly. We've delivered a strong free cash flow during the summer, slightly ahead of the normal seasonality of our cash flow. And we are not used to report and disclose net debt at the end of third quarter. But we wanted to do that at this time, just to show that at the end of September, we have both ample headroom, both in terms of leverage and in terms of liquidity with more than EUR 1 billion -- EUR 1.1 billion of liquidity at the end of September. So we manage the short term. We put [some back] some of the high end references that we installed during the summer in all segments. It's noticeable that even if some segments are less dynamic than others, everywhere we continue the sizable installations, but of course, the segment of healthcare and education and residential remain the most dynamic. But even in sports, as you see here with the high-end installations in North America, we recorded a strong activity. Let me remind you also that the reference point of sports Q3 2019 was a record year. So in absolute terms, this Q3 was still very busy for the sports segment. We remain focused also on delivering our change to win initiatives. You will notice that we have maintained our midterm guidance. And we are confident to reach those results. Based on, first, a very solid pipeline of cost reduction. We've continued to execute on the rationalization of our footprints with the closure of Goirle in the Netherlands. And the shift of that facility to a fully automated warehouse, so ensuring better performance, better customer service and better productivity. We have -- we've started to implement an accounting shared service in Europe for all EMEA accounting services. We are reviewing freight and logistics as well. And we have further actions to reduce our SG&A costs overall beyond those that have been implemented this year. We have continued to invest but more selectively, prioritizing safety, automation, productivity. We've just announced a project to modernize one of our sites in France in Sedan to make it more productive, more efficient and keep its specialization on the very high-end commercial products. With all these projects, we are confident that our CapEx will remain within EUR 80 million this year. And around the same level for next year, and that's without actually making any sacrifice, but really managing tightly the CapEx level. We have set a priority to de-leveraging. So the M&A policy will stay selective. Once again, now we have also much more headroom than we had in terms of leverage and liquidity. Let's not forget that as part of our strategy, we want to grow the top line, and there are some opportunities in some segments. COVID-19, of course, has created opportunity in the healthcare and [h care] segments. There will be opportunities related to stimulus plan, government-funded stimulus plans in healthcare, in education, in public buildings, also in housing, even if we have not yet seen the full effect of these plans. There is increased demand in residential across the globe. So all regions have seen that uptick of residential during Q3. And we see also a growing demand for digital platforms and for tools actually or material content to feed those digital platforms, and we are actively working on this. Let's not forget the fourth pillar of our strategy, which is sustainability, and that strategy is very well in motion. We have specific programs for healthcare, [h] care, education workplace. We have global solutions in sports that are also environmentally friendly, taking into account the need to recycle at the end of the use of the product. And we are also assessing and reducing our carbon footprint worldwide with very specific initiatives on that. So with this, I would like to hand over to Raphaël Bauer, who will detail the financials, and I will come back online to talk about the outlook. -------------------------------------------------------------------------------- Raphaël Bauer, Tarkett S.A. - Group CFO & Member of the Management Board [3] -------------------------------------------------------------------------------- Good morning, everyone. Let's start with zoom on the sales of the first quarter. As commented by Fabrice, the sales are down organically by 10.5%. It's actually worth of notice that we grew in the CIS, and that the 2 other flowing divisions, EMEA and North America improved sequentially. Sports, as expected, is down significantly 19%. Let me highlight also, on the right part of this chart, the headwinds that we face in -- given -- because of currencies. We are -- the U.S. dollar has weakened and that's penalizing our reported sales in euro. That's what's driving most of the EUR 21 million impact that you see here. And in Russia, the ruble has weakened. In average, in the third quarter, the ruble is down 16% compared to the same quarter last year. And that's fueling that negative effect of EUR 13 million. So it's a significant headwind in terms of currency, and we'll see the translation of that in EBITDA also. On a year-to-date basis, we are down organically by 11.8%. All divisions are down, but it's remarkable also to see that CIS, APAC and Latin America is down only 5%, and that's being driven by a stronger resilience in the residential activity in the CIS. The lowest performance is in North America. And let me remind you that in North America, it's a region where we have the largest exposure to commercial sales, which are around 85% of flooring sales in that region. So looking at EMEA, we commented on the strong sequential improvement after Q2 that was down organically almost 23%. Actually, all countries have gradually recovered except for Sweden. But Sweden has been much more resilient in the first half, and it also compares to a strong level of activity in 2019. Significant countries for us, such as France and Germany, are still slightly down but have materially improved sequentially. And we have a number of mid-sized countries that are also growing in the quarter. All in all, in EMEA, residential is growing, and that's due in particular to a good performance in vinyl. There is a good momentum in home improvement and home refurbishment that is driving that. Commercially, in commercial, the trends, although still improving sequentially, the trends are more weak. The office segment, in particular, is down. And we see a slower recovery for the office applications. While in healthcare, we see good trends. I already quickly commented on North America. North America, has been more severely affected by the pandemic in the second quarter. Organic sales were down 32%, so it's improving significantly sequentially. But this segment is more exposed to commercial sales, and that's weighing on the total sales performance. When we look at residential in North America, it has recovered, thanks also to good trends in home improvement, but also in new build in the U.S. So given the still low level of activity in North America in the quarter, we maintained strong measures on costs such as furlough and that allowed us to flex cost as much as possible. So CIS, APAC and Latin America grew in the quarter, and that's being driven both by CIS and Latin America. In CIS, we see a good level of demand in residential. Residential is 95% roughly of total sales in CIS. And it's in particular, Russia, but not only that is driving growth with a good level of demand with people refurbishing their apartments and their homes. Conversely, in Asia Pacific, our sales were down, and you all know that Australia went through a second lockdown, they actually just exited that second lockdown but that has weighed significantly on the third quarter. I mentioned that Latin America grew. We grew organically. We have implemented significant selling price increases in Brazil in order to mitigate the impact of the weakening- of the strong weakening of the Brazilian real. Last segment is sports. We knew that sports would be down significantly in the third quarter, that the results of projects being delayed or being canceled in some cases and most of that decrease is driven by the turf activity in North America, which is the largest activity in that segment. Let's remind ourselves, though, that this is compared to a very high basis of comparison. Turf in North America has grown double-digit in the past 3 years. And even within that segment, some activities have performed well, as we mentioned, trucks -- running trucks are still growing in the third quarter. So let's take a look at the drivers of EBITDA change in the third quarter. We mentioned that EBITDA is slightly up in the quarter, but the margin has improved significantly by 250 basis points. We have managed to offset the impact of the lower volumes. You see it on the first column, almost EUR 35 million negative impact. And that's thanks to a drastic cost reduction of almost the same amount. Within that cost reduction, there are some short term measures, but there are also EUR 16 million of structural cost reductions, thanks to the plans that we have deployed since last year. That's manufacturing footprint optimization. That's the result of automation also in our factories, but also, as you can see, a reduction in SG&A. Let me highlight also that in the quarter, we benefited from low raw material costs. And they are directly correlated to the low oil prices of the second quarter and that's a very significant impact of almost EUR 16 million on the quarter. And on the far right of the chart, as I commented already, you can see the headwinds from currencies both in the CIS region, that the selling price lag effect of minus EUR 3 million and from other regions, but that's mainly driven by the U.S. dollar for minus EUR 5 million. Again, we wanted to illustrate the success in cost flexing by reminding you our cost structure . Half of our costs are fully variable costs, that's raw materials and freight; 25% roughly, our personnel cost and 25% are other costs such as factory overheads, sampling, marketing and IT. On the -- in the third quarter, sales are down 14%. Raw material costs and freight costs went down 20%. So more than sales, that's being helped by the lower purchasing prices that benefits also these cost lines. Personnel costs have been well flexed, 10%, slightly less than what reflected in the second quarter, but we used less of partial work and less of furlough as activity level was higher, and other costs have been very carefully controlled, and they also benefit from the structural cost reduction actions. Hence, they are down by 18%. Looking at the year-to-date view. End of September, we improved margin by 50 basis points. And again, that's thanks to the very strong cost reduction and cost flex that we have implemented. It's EUR 84 million in total and within that EUR 84 million, EUR 35 million are structural. So at the end of September, we have already exceeded the target set last year of EUR 30 million structural cost reduction every year. We have set a new target for this year of EUR 45 million, and we are well on track to meet that target. Let's keep in mind also that these results benefit from the significant decrease in raw material price, that's EUR 24 million on a year-to-date basis in 2020 compared to 2019. As explained by Fabrice, we decided to publish net debt and liquidity because of the context because those are key indicators, given the current environment. And we are pleased to report that our cash flows in the third quarter were very strong, thanks to, first of all, a strong control of inventory but also still good payment patterns from our customers and a strong reduction in CapEx. That allows us to reduce net financial debt by slightly more than EUR 140 million between June and September and to reach a leverage post-IFRS-16 of 2.2x. It's really very reassuring for year-end. We confirm that we expect to be below 3x at the end of December. Let me just note that the pattern of our cash flow throughout the year is different this year, strong cash flow in the third quarter, but as we have already decreased significantly working capital, we do not expect the usual strong cash flows in the fourth quarter. Let's conclude with the high level of liquidity, EUR 1.1 billion of both undrawn credit facilities and cash in the balance sheet. It's a very solid level. In addition to that, we do not have any very significant maturity in 2021. So we are really in a solid financial position to navigate through the coming quarters. And I will now hand over to Fabrice, who will comment the outlook. -------------------------------------------------------------------------------- Fabrice Barthélemy, Tarkett S.A. - Chairman of Management Board & CEO [4] -------------------------------------------------------------------------------- Thank you, Raphaël. It's a bit difficult these days to make a very accurate forecast given the uncertainties around the pandemic and lockdowns, but we expect overall H2 revenue to be broadly in line in terms of organic change with H1 this year. Of course, there are some regions and categories that offer much more potential and that are actually on a better trend than that. You saw for example, the performance of CIS, Asia Pacific, Latin America in Q3, but some other end user segments like workplace and sports are likely to remain subdued in Q4 and into H1 next year. We are very confident that we have a solid pipeline of cost reduction towards Q4 and also into next year, as I alluded to just before. And we have decided that's been noticed, I know to maintain unchanged our guidance for year-end. It is obviously a cautious approach, and we feel it is necessary, given the uncertainties, especially in Europe around the evolution of the pandemic and the measures that government will take to contain that pandemic. So we expect adjusted EBITDA margin broadly in line with 2019 level. Let me, of course, tell you that with this guidance or target, there are more upside to it than there is downside, but we wanted to take into account the fact that the environment in Europe is rather deteriorating over the past few weeks. Our leverage will be within and probably well within 3.3x at year-end, as you saw with the results we reported at the end of September. So our midterm objectives are, of course, confirmed, even if we know the environment is going to be -- to remain volatile, the results we are demonstrating month after month and quarter-after-quarter, I think, show the resilience of our business model, and we are determined to reach these midterm targets. Maybe GDP will not grow as strongly as we thought initially, but that will be offset by work on cost reduction, cost structure and aggressive targeting to gain share in the segments that are growing as well. So we are very confident in what the company is demonstrating this year. And we are very confident that we are on the right path to deliver these strategic goals, both in terms of growth, EBITDA margin and of course, keeping financial structure on the cautious side with a leverage between 1.6 and 2.6x EBITDA at each year-end. So with these comments, I'd like to now hand over to you and your -- we'll be pleased to take your questions, Raphaël and I, and to answer that. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of Charles-Louis Scotti from Kepler. -------------------------------------------------------------------------------- Charles-Louis Scotti, Kepler Cheuvreux, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- Charles-Louis Scotti, Kepler Cheuvreux. I've got a few questions. The first one on your guidance. Your guidance implies a sequential deterioration of organic sales growth for Q4, something like minus 16% year-on-year and an EBITDA drop of 48%. Have you included -- have you already integrated the potential introduction of lockdowns in your outlook for the rest of the year? Or is it an incremental negative yield? In terms of the structural action, as well, EUR 35 million over the first 9 months, how much is already on back for next year 2021? And the same question for raw materials tailwind. Third question, on free cash flow. I guess most of the deleveraging was free cash flow in Q3, this means a free cash flow of around EUR 70 million at end of September. Should we expect the same level at the end of the year or free cash flow can be positive in Q4? And finally, with raw material prices declining, should we expect a negative sales pricing for 2021? -------------------------------------------------------------------------------- Fabrice Barthélemy, Tarkett S.A. - Chairman of Management Board & CEO [3] -------------------------------------------------------------------------------- So I'll take the first question on the guidance. I mean, you noted, obviously, that the guidance, when you do the math, seems on the cautious side. And the answer is yes, we have integrated in that guidance, a potential effect of further lockdowns. So this -- with this guidance, there is no additional negative impact that you would have to integrate if there are further lockdowns that are implemented. We believe that this is the cautious and very strict view given the way the pandemic has evolved in the recent week in -- especially in Europe and the measures that governments are taking one after the other to contain the pandemic. So that's why I mentioned on the call earlier that there is more upside than downside, certainly. And I think this is -- this was the spirit of this guidance. -------------------------------------------------------------------------------- Raphaël Bauer, Tarkett S.A. - Group CFO & Member of the Management Board [4] -------------------------------------------------------------------------------- On the cost -- Charles-Louis, Raphaël speaking. On the cost actions, indeed, there are a number of structural actions that will have a carryover effect next year. We are still targeting a significant level of cost reduction for next year, at least in line with our initial strategic plan also of EUR 30 million additional cost reduction in 2021 compared to 2020. We are also in the process of assessing how much of the one shot cost measures could become, at least in the first half of next year, a bit more structural. We'll see to that, but we are confident that in 2021, we can deliver at least EUR 30 million of cost reduction. You mentioned the raw material tailwind in 2021. So we expect to have, first of all, in Q4, a slight positive effect from raw material prices. But let me remind that oil price were really weighed down in the second quarter of this year. And we are recording that to the P&L of Q3 so the level of the oil price being in Q3 being higher than Q2 or purchasing prices have increased sequentially, if you want. They are still at a low level, but they have increased sequentially. What this means is that for the first part of next year, we still expect some positive in raw materials compared to the first half of 2020, but it will not necessarily be the same magnitude of what we've seen this year. And for the second part of the year, we'll see, depends where the oil price will land. But we do not necessarily expect, all in all, for 2021, a tailwind in raw material. So I think it's important to flag that at this stage. And we'll see how the oil price evolves, but my comments refer to assume the oil price being stable at the current level. You had a question on free cash flow. It's important indeed to flag that the sequence of free cash flow is quite different. We do not usually communicate on free cash flow at the end of September. It's indeed a positive at the end of September. For Q4, we'll see -- I mentioned that we already reduced significantly working capital. Cash flow could be neutral or slightly positive in Q4, we'll see. Again, I have no worries for debt level regarding covenants, but then it's difficult at this stage, given the uncertainty in the coming months to be more precise on the cash flow patterns. Again, for 2021, and we need to bear in mind that so far, our customers have paid on time, being helped by government programs. We will be very cautious on the customer payment patterns also in the quarters to come. And I will ask you to remind me your last question on raw material, your comment? -------------------------------------------------------------------------------- Charles-Louis Scotti, Kepler Cheuvreux, Research Division - Research Analyst [5] -------------------------------------------------------------------------------- Yes. My last question was on sales pricing going into 2021 considering easing raw material prices? -------------------------------------------------------------------------------- Raphaël Bauer, Tarkett S.A. - Group CFO & Member of the Management Board [6] -------------------------------------------------------------------------------- Well, you've seen, Charles-Louis, that our sales prices have remained in actually positive territory so far this year. And we are very confident to be able to maintain sales prices, overall, at least stable. There will be some pressure in some areas, but there are also other regions where we are increasing sale prices due to the currency environment, for example, overall, we believe the industry is rather disciplined that keeping the sales prices stable or up. So we don't anticipate any negative coming from that end. On the other hand, we are very active in actively managing our selling prices in order to optimize them, I mean, increasing them as much as possible. And we are getting good results from that. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- (Operator Instructions) We have no further questions at this time. Please go ahead. -------------------------------------------------------------------------------- Fabrice Barthélemy, Tarkett S.A. - Chairman of Management Board & CEO [8] -------------------------------------------------------------------------------- Okay. So if we have no further questions, I'd like to thank you for attending this call. Once again, we are pleased with the results that demonstrate the resilience of the business model. We are determined to reach our midterm targets, maybe slightly cautious in Q4 given the short-term uncertainties, especially in Europe, but the business model of Tarkett and the ability to flex costs and maintain prices in this environment, I think, is exceptional. And I believe we'll demonstrate it further with both EBITDA and cash generation. Thank you very much for your attendance this morning. Sorry, there is one question now? I was about to conclude, but there is one question in writing. From Pierre Rousseau, the second wave of COVID-19, do you foresee any change in the amount of public support you might receive compared to Q2, would you comment by geography? And longer-term COVID consequences for the industry and Tarkett, do you see consolidation potential? And you believe -- so many questions. You believe that Tarkett gained market share? So second wave, there is a change in the amount of public support related to furlough, slightly reduction in the support we are receiving, but overall, governments, when they implement further lockdowns, they also put in place measures. So we'll, of course, follow that very, very precisely. And of course, take the opportunity of the public support when it's available. In the longer-term consequences for the industry, there will be consolidation potential. Right now, it's not been our priority to be very active in terms of M&A. Priority was to de-leverage and make sure we sell-through that period, protecting the company and its profitability. Yes, there will be probably further consolidation potential, and we clearly target to be an active player in those. Did we gain market share during the period? Our market share in our sector is always difficult to measure in realtime, but yes, in some places, we gained market share actually. And when we see the performance of some countries and business units. In those cases, we absolutely gained market share in residential, in some places, we gained significant share. Circular economy initiative, that was the last question. We see it as a market share driver, not in all segments, to be frank, more in commercial segments. And the ones that are the most obvious are, of course, workplace, hospitality, education and healthcare, where the end users, the tenants, their employees as well, they care about renovation projects and actually, the environmental performance of those renovation projects. So being able to offer full recycling of the products we take off, we will remove from the buildings is absolutely a differentiating factor. And it is more and more included in the request for quotations and in the discussions we have with tenants, with end users or with architects in those segments. So thank you for these additional questions. Once again, thank you very much for your participation to that call, and I'm looking forward to meeting you in real terms or over the phone in the next few weeks and months. Thank you very much. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Ladies and gentlemen, that does conclude your conference for today. Thank you for participating. You may now all disconnect.