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Edited Transcript of TKTT.PA earnings conference call or presentation 24-Jul-19 9:00am GMT

Q2 2019 Tarkett SA Earnings Call

Nanterre Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Tarkett SA earnings conference call or presentation Wednesday, July 24, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Fabrice Barthélemy

Tarkett S.A. - Chairman of Management Board, CEO and Acting President of EMEA & Latin America Division

* Raphaël Bauer

Tarkett S.A. - Group CFO & Member of the Management Board

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Conference Call Participants

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* Charles-Louis Scotti

Kepler Cheuvreux, Research Division - Research Analyst

* Eric A. Lemarié

Bryan Garnier & Co Ltd, Research Division - Research Analyst

* Jean-Francois Granjon

ODDO BHF Corporate & Markets, Research Division - Analyst

* Mourad Lahmidi

Exane BNP Paribas, Research Division - Analyst

* Pierre Bosset

HSBC, Research Division - Head of French Equity Research

* Pierre Sylvain Gilbert Rousseau

Barclays Bank PLC, Research Division - Research Analyst

* Raphaël Moreau

Amiral Gestion SA - Fund Manager

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Tarkett H1 Results 2019 Conference Call. (Operator Instructions) I must advise you the conference is being recorded today, Wednesday, the 24th of July 2019.

Without any further delay, I would like to hand the conference over to your speaker today, Fabrice Barthélemy, CEO of Tarkett. Please go ahead, sir.

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Fabrice Barthélemy, Tarkett S.A. - Chairman of Management Board, CEO and Acting President of EMEA & Latin America Division [2]

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Good morning, everyone. I am Fabrice Barthélemy, CEO of Tarkett. Thank you very much for joining that call. This morning I will be on the call with our CFO, Raphaël Bauer.

As we presented a month ago during our Investor Day, our environment is not very favorable, we are not expecting any tailwind and our improvement in profitability will only come from our own actions. I think the results we are presenting today are in line with those statements. And 2019 is a year of transition during which we are building strong fundamentals for the group.

We are pleased to see that sales are up 7.2% in H1 compared to last year. Out of those 7.2%, 1.3% is organic growth, 3% is linked to the perimeter and the acquisition of Lexmark and about 2.5% linked to favorable exchange rates, especially the euro-dollar exchange rates.

We are also very pleased -- so we are very pleased to see that our selling prices are holding up very well and more than offsets and the purchasing price increase that are in line with our expectations.

Over H1, we had 2 reporting segments that are significant or rather down compared to last year, North America and CIS, Asia-Pacific and Latin America. In North America, the market remains soft in some segments and we are engaged in the turnaround of that division with -- including commercial sales force and industrial performance. In Eastern Europe, the economy remains depressed and -- but our innovation capabilities are demonstrated year after year and we have once again demonstrated our pricing power.

Two segments are growing strongly and within that organically. Sports, that is still a very strong growth driver for Tarkett, driven by innovation, cost efficiency and customer focus. And EMEA, with diverse situations but some regions are growing strongly in the Nordics, in Netherlands and in Middle East.

The second quarter was a bit softer due to destocking effect, especially in the U.K. after the end of March and post potential Brexit announcement. We'll come back to that.

We are disappointed by our adjusted EBITDA that is down versus last year, but it was really impacted by some unfavorable product mix and some onetime inventory write-offs in North America, up to EUR 5 million for the write-offs.

We are pleased that we have maintained our financial leverage at 2.9x EBITDA, stable compared to the end of December, and that is despite the structural seasonality of the group, of our business in H1. So you will see that we have implemented very strong actions to achieve that result.

Our strategic plan that we have presented a month ago is being implemented and deployed, and the restructuring plan will start delivering soon.

Just one thing on the following slide on the strategic plan. You remember the 4 pillars of our strategic plan, with growth, with a new way to do our business; and an alignment of all Tarkett departments and divisions towards our customers; a strong focus on people and planet, and especially on circular economy; and a priority given to cost reduction and to financial discipline in the way we allocate capital.

This is not just a corporate plan, it's a plan that is being deployed across the group. And I'm just coming back from an internal roadshow to meet our teams, to engage with them, to explain the plan and also, of course, to get their feedback and to engage them in building their own action plans in line with these strategic priorities. And I can say we had very good feedback from the teams that are all engaged within Tarkett around our objectives and strategic priorities.

One of the strategic initiatives that we took was to say that the footprint was going to be reviewed and taken action upon. And this half year, we have announced 4 restructuring operations that are all progressing according to plan. On the Slide #6, we are showing an update on these plans.

In carpet North America, we have completed the transfer of the equipment and production from Canada to Georgia, and the Truro facility in Nova Scotia, Canada will be shut down effectively during the course of July, this month.

In accessories, we are also -- we have also completed the installation of a new equipment in Ohio and the shutdown of the Waterloo site in Ontario has been effective at the end of June. So this is also according to plan.

In EMEA, the laminate operation will be shut down by the end of 2019. And the carpet site in the Netherlands, in Goirle, will be shut down beginning of 2020.

We are also reporting and recording commercial successes. So before that, we have, on top of site shutdowns, selective investments that support our growth. We have completed the installation of a new wood parquet production line in Russia to serve the Russian market and benefit from a better cost base in Russia. In Russia, we're also starting a line of rigid LVT in our Otradny site near Samara.

In EMEA, we are investing in a new rigid LVT line also in Poland to serve the European market. And in Chagrin Falls, together with the shutdown of Waterloo, we're also investing in a state-of-the-art factory to produce accessories for the North American market.

As I was about to say, we are also recording some very strong successes in terms of commercial wins. We show a few examples here. The segment -- the workplace segment is a real area of focus. We are pleased to be partnering -- a partner of Orange worldwide. And especially, we will equip their new HQ near Paris in the coming months with a combination of carpet tiles and LVT.

In health care, we are -- we have been selected to supply the flooring for the Bursa Hospital. It's a huge hospital, nearly 200,000 square meters of sheet vinyl, LVT and also carpet tile.

And for some of you who follow Sports, the Women's World Cup that took place in France last month was played in some cases on our turf with a very strong hybrid solution that was, for example, used in the Groupama Stadium in Lyon. It's a combination of natural and synthetic turf that provides a very unique experience for the players and very consistent product performance.

We have also been very visible at major flooring shows. You know we are in a business where design is very important. So we were awarded some awards at NeoCon last month in Chicago. Same for hospitality in Las Vegas earlier in H1. And we were present for the first time in Milan for the design week where we were able to show a new collection of vinyl -- sheet vinyl product, the iQ Surface, that was extremely well received by architects and designers. And we were able to promote not only the design aspect of the product but also its unique capabilities and versatility for installers.

In Russia, we are also at the leading edge of innovation and design innovation. We have performed during the month of May and June what we call a Tarkett Show, which is a roadshow across the entire Russia, where we showcased our new collections. And they were extremely well received by the distributors and retailers, 1,500 of those that we visited in 20 cities.

We're also launching, like in other countries, a new range of rigid LVT called Progressive House. On this advert, we show actually the unique benefit of rigid LVT, which is resistance to moisture and wet environment.

With that, giving you a bit more color on the commercial activity and recent successes, I'll let Raphaël present the financials, and then we'll come back for outlook and wrap-up.

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Raphaël Bauer, Tarkett S.A. - Group CFO & Member of the Management Board [3]

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Good morning, everyone. Let's start with the activity of the second quarter. The organic growth was roughly stable. And it's compared to second quarter in 2018 when sales grew by 5.3%., so the basis of comparison was quite high.

In EMEA, we were slightly down, penalized by a lower number of working days and also softer market in a number of countries. In North America, we faced a high comparison basis. In the second quarter of 2018, we grew in North America by 3.7%. And in the quarter, we are down in volumes and prices are still up. The CIS segment is down in a soft environment. But all of that is almost offset by the very strong performance of Sports, which kept growing slightly above 10%.

Our reported sales grew by more than 5%, also owing to positive perimeter effect and mainly the integration of Lexmark acquired end of last year and also the positive effect of currencies, namely the U.S. dollar.

So, we grew by 1.3%, which was really, driven by 2 segments. Sports, first, with above 13% growth. And also EMEA, with a nice growth of more than 2%. On the other hand, we were down in North America in the semester, and also in the CIS, where we've seen a soft market throughout the semester.

Now you've seen our adjusted EBITDA figure for the quarter and it is down. It's down EUR 10 million compared to last year before the application of the IFRS 16 norm. So we're down mostly because of poor mix and lower volumes and also because of a one-off inventory adjustment in North America that I will comment in further details on the slide dedicated to North America.

So let's focus on the volume and mix negative impact. It's EUR 20 million negative impact. It's a combination of less volumes in some segments and mainly North America and Eastern Europe throughout the semester. It's also some destocking in North America, we've reduced the level of inventory. And it's also a poor product mix, which is a combination of a variety of situations depending on the region.

In North America it's, for instance, lower sales of commercial carpet that have higher margin than the average. In CIS, it's some shift toward more entry and midrange products. In Sports, it's higher growth of turf versus tracks, which is slightly above average also. So as you can see, it's a really combination of a variety of effects.

The second negative impact, as I commented, in the quarter is the one-off on inventories in North America. And this has been partially offset by a very good level of pricing. Pricing -- prices -- same prices have remained at the high level after having been increased last year. And they are more than compensating raw material and freight inflation.

We've seen also some nice cost reduction over the quarter coming both from manufacturing, and that's in the productivity bucket almost EUR 5 million, and also from SG&A with almost EUR 5 million of cost reduction.

So looking at the whole semester. Our EBITDA is down slightly more than EUR 4 million. And again, here it's chiefly the negative impact of the mix and volume in the second quarter that is penalizing performance.

When we look at the net effect of the selling prices and the inflation of raw material and freight, it's largely positive. We've been able to cover 140% of this inflation. We've seen some salary increases but that's fully in line with our expectations, and they are more than offset by the cost reductions. Costs have been reduced by EUR 11 million, that is EUR 9 million coming from manufacturing, in productivity, and EUR 2 million over the semester coming from SG&A.

And also to insist on the good pricing management in the CIS countries and that's reported in the dedicated buckets selling price lag effect in CIS. This is a net effect of same price adjustment that have been made last year and the fluctuation of the currency and the net effect is EUR 2.7 million. We really enjoy a good pricing power in the region.

The perimeter effect of EUR 9 million is mainly the contribution of Lexmark, but also some acquisitions in Sports. And of course, the application of IFRS 16 is also improving reported EBITDA by about EUR 15 million, in line with our estimates.

So let's zoom on the main segments, and starting with the largest segment, EMEA, where sales over the semester were up, slightly above 2%. And let me remind you that the second quarter was penalized by lower number of working days, and that effect on the quarter was about minus 1.2%.

But we've seen also in the second quarter a slowdown in a number of countries. And first of all, the U.K. In the first quarter, you may recall that we had a good performance owing to stocking effect on our customers in anticipation of a potential hard Brexit. So the reverse effect was felt in the second quarter.

Throughout then the first half, we've seen good growth in some regions, and first of all the Nordics, but also Poland and the Netherlands. And Middle East has done much better in Q2 and is up throughout the semester.

EBITDA margin in EMEA has contracted and there are 2 drivers. First of all, it's the impact of a more negative product mix, as I commented, a shift towards some lower-margin product. In some countries, it's quite granular, and we operate in more than 20 countries. But this has a significant impact on margin.

And also productivity was slightly below our expectations. It's actually, in some factories, it's nothing structural and it's mostly onetime specific issues in some factories. So all in all, we have good expectations for productivity in EMEA going forward.

The good news in EMEA, that selling prices are maintained at a high level and they are fully offsetting raw material and freight inflation.

Now North America is down throughout the semester in a market that is difficult. Residential activity is clearly not buoyant. But also we've seen softer carpet markets both in -- not only in residential, and that's penalizing our activity.

We still enjoy strong successes in the accessories, for instance. And accessories, we have optimized in the share footprint that was the shutdown of the Waterloo factory in Canada and expanded in our U.S. factories, as Fabrice explained, in Chagrin Falls. So we are investing in this growing product category and enjoying good success.

The other success in this semester in North America is the high level of selling prices that is being maintained and also of freight inflation. Yet margins are down, owing to lower volumes, destocking and also poorer mix.

Of course, the one-off inventory impairment of almost EUR 5 million also penalized the margins. That's being triggered by initiatives that we have launched to rationalize the product ranges. We are reducing in some product ranges a number of SKUs or part numbers, and so some products are not anymore part of the ranges. So we will not be able to sell some of these products or at least we won't sell them at the same value. The realization value will be lower. And we have reflected that in our books in the first half, and that's a onetime adjustment.

In CIS, Asia Pacific and Latin America, organic sales are down 3% over the first semester. It's really, first of all, in the CIS countries where the market is soft, the activity has been soft and we see purchasing power of the consumer still being at a low level. So it's really the environment that is impacting our activity.

We are well positioned in Russia. As you see on the margin, we've also variabilized and flexed the cost. So we are in a good position to benefit from growth when it should come, if the economy is getting stronger.

In Latin America. We're very pleased with the performance. In a difficult market in Brazil, we've been able to grow organically and also to increase significantly selling prices, more than offsetting the impact of currency. This is also the case in the CIS, as I already commented. We have a net positive effect of same price and currency adjustment.

So we've been able to protect the margin not only through same price management but also through very good level of productivity with variabilized labor cost. We've improved -- we've generated savings on our material costs, so that's really positive.

Sports is a great success throughout the semester, 13% organic growth not only in North America, also in EMEA. And it's driven more by turf. Tracks have done well but some of the projects of the second quarter have been delayed due to heavy rain in some parts of the United States. So all in all, we've done very well in Sports. Not only that, but we're also ending the semester with a good level of backlog that makes us really confident for the semester going forward.

Now our reported EBIT is EUR 33 million, so down compared to last year of EUR 48 million. And here I want to stress the impact of the restructuring provisions that we took during the semester, that EUR 13 million, triggered by the footprint optimization decision and the factory shutdowns that we announced. So it's an increase year-on-year of EUR 8 million of restructuring costs penalizing the reported EBIT.

Our net income is down compared to last year also, slightly below EUR 8 million for the semester. It's down because not only EBIT is down but also our financial costs are up. The reported financial costs are up, also impacted by IFRS 16, the impact of the norm on financial cost is almost EUR 2 million. But that change in norm is almost neutral on net profit. When we look at the rest of the financial expenses, they are up since that is above last year, following Lexmark acquisition.

A quick comment on the tax rate. Last year, our effective tax rate was especially low due to a positive conclusion of the tax litigation in Canada. This year, 28% is being in line with the normalized level.

The success of the semester is really cash flow management, and in particular working capital management. We said that we would really focus on the working capital level. We've controlled our inventory ramp-up. And most of you know that owing to our seasonality, our usual pattern is to have significant increase in working capital and negative cash flow in the first semester. So here, we've controlled the inventory ramp-up.

And also, we've extended significantly our factoring programs in the second quarter, up to EUR 109 million, and that's going to generate positive cash flow over the semester. The level of CapEx is where we expect it to be and we still target around EUR 120 million for the whole year.

So that positive cash flow allows us to reduce the absolute value of net debt. We ended up last year at EUR 754 million of net debt. And end of June, at EUR 716 million of net debt. So that pattern for us is quite unusual and it's really owing to the actions taken in terms of the working capital management. So at the end, we were able to contain the level of leverage slightly below 2.9x adjusted EBITDA.

On that note, I will hand over back to Fabrice for outlook and conclusion.

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Fabrice Barthélemy, Tarkett S.A. - Chairman of Management Board, CEO and Acting President of EMEA & Latin America Division [4]

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Thank you, Raphaël. Moving on to the outlook. We -- our expectations for 2019 has not changed. We know that the environment is not especially favorable, but this was largely anticipated and we communicated that our plan is about self-help.

We are positive on the outlook for Sports this year. It's the division where we have rather better visibility because we have a longer backlog than in other activity. And that backlog is very healthy at the end of June, so we should record another good year in Sports.

We're also very well positioned to take up -- to take advantage of any recovery of the economy in Russia. But it's too early to say the economy will recover in Russia and when it will recover.

We also maintain our outlook for raw material prices. We indicated a negative impact on a full-year basis between 15% and 20%. We are totally in line with that expectation. And we have demonstrated in H1 that we are able to fully cover that -- those raw material price by an increase in our selling prices.

The priority this year is really to take actions and to restore profitability through cost reduction, especially in North America and Europe, with the actions on footprint, with the actions on automation and with also -- with the actions to control and reduce administrative and general -- SG&A and especially general and administrative costs.

We will also continue to reduce our leverage, to improve our leverage, to regain financial flexibility, as we have indicated through work on working capital and especially inventories and also through a tight management of CapEx.

The strategy is being deployed in order to achieve growth, profitability and to maintain that healthy financial structure with the objective that we have communicated last month, both on growth, above GDP; improvement of profitability to reach 12% of EBITDA margin by 2022; and maintaining, throughout the course of the plan, a leverage between 1.6 and 2.6x EBITDA at each year-end throughout the period.

With that, I believe we have covered the H1 results and the outlook, and we would like to open a Q&A session. So back to the operator, maybe, to manage the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Charles Scotti from Kepler.

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Charles-Louis Scotti, Kepler Cheuvreux, Research Division - Research Analyst [2]

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Yes, a few questions from my side. The first one, maintaining the profitability stable versus last year implies 6% EBITDA adjusted growth pre-IFRS 16 in H2. What shall we expect in terms of volume mix impact on the EBITDA in H2? Do we expect still a negative contribution? The second question on the LVT market in Europe. You mentioned in the press release that the LVT market was slowing down. Is it your LVT sales or the LVT market as a whole? And is it related to any [tightening] competition from the Chinese player?

My third question, on the U.S. market. You also mentioned a soft commercial carpet market in the U.S. How much of the minus 6% organic sales growth in Q2 was related to weather condition? And do you expect to recoup part of the business in Q3? And my last question, on Lexmark. Can you update us on the integration of Lexmark? Are you still happy with how the business is going?

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Fabrice Barthélemy, Tarkett S.A. - Chairman of Management Board, CEO and Acting President of EMEA & Latin America Division [3]

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Charles, I would answer the first question. On H2, your calculation is correct. In most of the flooring businesses, our order book is quite short in terms of number of weeks. It's difficult to predict exactly the impact of mix. What we indicate -- the only part of the business where we have a good visibility is Sports throughout the end of the year. And there, we are very optimistic because we have a healthy order book.

In flooring segments, it will also depend on how the flooring market and the economy behaves. Europe would be, overall, product-oriented. However, you -- we have seen that in H1, events like Brexit and anticipation of a hard Brexit could create swings in stocking policy at the distribution, for example, which created some swing in our activity.

In North America, we see that there is a slowdown in residential housing that could also continue throughout the end of the year, which is why we are really focusing on cost reduction and flexing production in order to adapt to whatever level of demand we'll have.

In Europe, the growth of LVT market is slowing down but still a growing market, especially in commercial segment. We are facing competition from Asian manufacturers, but they are -- some of them are also our suppliers. It is true that the tariffs in North America are rebalancing some of the flows throughout the world. However, we are very focused on serving our commercial segments where we have -- where we can clearly differentiate from Asian competition through product offering but through also service.

And for commercial segments, such as workplace , such as hospitality, such as health care, aged care and education, being able to deliver with a short lead time is very important and this is something that the Chinese competitors cannot achieve with 80-day lead time on the sea, most of it on the sea, from Asia. So we will -- we are -- this confirms also our focus on the commercial segments.

The third question was on the commercial carpet.

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Raphaël Bauer, Tarkett S.A. - Group CFO & Member of the Management Board [4]

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Yes. On the U.S. market -- Charles, Raphaël speaking. On the U.S. market, it's true that carpet is down not only in volume but also in value according to the information we have on the markets throughout the semester. And carpet is 50% of the U.S. flooring market. So that's significant. Once we said that, there are a variety of factors. Of course, some weaknesses in residential explain that, and as you know we're not active in residential carpet. But we're active in commercial carpet and we feel also those impacts.

We don't believe that the weather conditions in the Q2 really had an impact on this part of our activity. It has an impact on the activity in Sports where, as you know, we install outdoors and we had to delay some installations. But the weather condition in North America did not really have a material impact on our North America flooring activities.

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Fabrice Barthélemy, Tarkett S.A. - Chairman of Management Board, CEO and Acting President of EMEA & Latin America Division [5]

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On Lexmark, the integration is progressing well on several fronts. One is -- the first one is the commercial one, the head of Lexmark is now head of the hospitality segment worldwide. And we are seeing the first benefits in having that strong relationship with the large customers in the U.S. We recently won -- were awarded a preferred supplier contract globally with one of the major players in hospitality, and that's clearly was only made possible because of Lexmark. Tarkett was not strong enough in hospitality in Asia Pacific or in Europe on a standalone basis to be awarded that type of contract. So we -- this confirms actually the validity of the strategy to manage last key accounts on a global basis for the hospitality segment.

The other area where Lexmark is bringing benefit is the manufacturing, restructuring and consolidation because the closure of the under-loaded site in Nova Scotia was made possible by Lexmark because in terms of process and products, there is a very good fit with -- between those 2 entities. And so we are actually managing to consolidate and, with the closure of Truro, to make savings and to get the first savings actually in H2 this year.

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Operator [6]

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The next question comes from the line of Pierre Bosset from HSBC.

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Pierre Bosset, HSBC, Research Division - Head of French Equity Research [7]

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I have several questions, if I may. So first one is on sort of volume mix. You give some granularity on it, but I was very surprised between -- by the difference between Q1 where there was virtually no impact and Q2 where the impact was something like EUR 20 million. So I would like to understand better what has changed between Q1 and Q2.

So second question is also on the U.S. market Interface and Mohawk are going to release their Q2 profit at the end of the week. But if you look at Interface Q1, revenues were up 2% like-for-like. So just wondering if even if the market is difficult, do you think you are losing some market share in the U.S.?

The third question -- and the third question, third and last question, is on the factoring. Can we have a little more granularity on it? Is it -- are you deconsolidating some client receivables through that? And you mentioned the figure of EUR 109 million of factoring at the end of June this year, what was it at the end of last year?

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Raphaël Bauer, Tarkett S.A. - Group CFO & Member of the Management Board [8]

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Thank you, Pierre. I will start with your first question on the volume and mix effect between the first quarter and the second quarter. Indeed, it's really focused on the second quarter with a combination of several things. First of all, volume are being down in our EMEA segment, in North America segment and CIS segment in the second quarter. And EMEA over the course of the first semester is up, but not in the second quarter. I've mentioned, in particular, the impact of the U.K. So volume is weighing negatively, that's one. We've also reduced our inventory level in North America in the second quarter, and that's being reported in that volume and mix bucket in the bridge.

And last, the mix impact is really the combination of several different type of effects, some shifts toward less-profitable product in some region, as I commented. For instance, in North America, this is lower commercial carpet sales. In the CIS segment, you know that we have a very strong position in vinyl residential. We have a very large range and we have entry, mid, high of our products. And depending on market conditions, our customer can easily switch from high to mid or mid to low. And what we've seen in the second quarter is more purchase of mid and low products, and that has some impact on the level of margin. So that's really what's within this volume and mix impact in the second quarter that you see on what we report.

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Fabrice Barthélemy, Tarkett S.A. - Chairman of Management Board, CEO and Acting President of EMEA & Latin America Division [9]

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On your second question, Pierre, it's first difficult for me to comment on competitors' results. The only thing I would say is that our segment and product mix is fairly different from Interface's. It's true that like Interface, we are present in workplace with carpet tiles, for example, but we do many other things. And -- like residential. And clearly, the residential housing market is not well oriented in North America. So in Q1, we reported, in North America, sales very slightly down by 0.6%. Bridging that with the reported numbers of Interface is somewhat difficult. You cannot draw any conclusions.

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Raphaël Bauer, Tarkett S.A. - Group CFO & Member of the Management Board [10]

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And then your third question regarding factoring, 2 comments. So factoring, yes, is a deconsolidated scheme in which we sell invoices to factors. This is really something interesting to note is that it's really competitive financing in particular in Europe. The cost of these schemes are significantly lower than our average financing costs. So it's something we have in the financing mix. In the past, we have not used it as much. And to your question, end of -- in June last year, we did not have any significant factoring impact. End of December last year, factoring was slightly below EUR 5 million. So it's really when it was needed in this semester that we activated this program to improve working capital level.

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Pierre Bosset, HSBC, Research Division - Head of French Equity Research [11]

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Okay. So large but it's a large -- well, it's a swing of EUR 100 million. So a large part of the improvement in the working capital requirement is coming from that, huh?

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Raphaël Bauer, Tarkett S.A. - Group CFO & Member of the Management Board [12]

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Definitely. Definitely. As you know, in the first semester, our activity requires inventory buildup, otherwise we are not able to serve the -- our customers during the peak season in the third quarter. So that was really the right moment to activate those program in order to keep indebtedness under control and control leverage.

In the second part of the year, as you know, our activity has it that we generate positive cash flow. So we'll keep deleveraging in the second half thanks to activity, first. But also thanks to the good success of the scrip dividend option that we offered, we had 80% take-up. So this means that all dividend in the -- in cash-out in the second half will be around EUR 7 million. And the way to see it is that it will be around EUR 31 million of cash savings compared to last year. So that will also contribute to deleveraging, which is our goal for the end of the year.

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Operator [13]

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The next question comes from the line of Mourad Lahmidi from Exane.

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Mourad Lahmidi, Exane BNP Paribas, Research Division - Analyst [14]

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Yes. I have 3 questions, please. Can you give us a sense of how trends were between April, May and June? Was there a major difference on a month-to-month basis? Second question, what should be the base of productivity gains going forward? You did EUR 9 million in the first half, should we expect EUR 21 million in the second to square with what you said during the Investor Day? And third question, how much restructuring should we expect on a full year basis?

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Fabrice Barthélemy, Tarkett S.A. - Chairman of Management Board, CEO and Acting President of EMEA & Latin America Division [15]

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So the -- we don't report numbers by month. But June was the month where the number of working days were there -- was lower than last year in Europe. So that's one of the impact. Otherwise, there's no specific trend within the quarter, and those trends would not be necessarily relevant.

In terms of productivity gains. As we've said, we expect actually to accelerate the rhythm, the pace of productivity because we will benefit in H2 from the first effect of the restructuring announced in H1. We -- in the H1 numbers, we don't have any benefit of the factory shutdowns, so that will ramp up and provide some gains. The objective we have for full year in our plan, in our full year plan, is a rhythm of about EUR 30 million per year, which in this year will be -- should be more heavily in H2 than in H1.

In terms of restructuring. We are not -- we cannot announce plans or initiatives that have not been announced externally, but we continue to review the footprint, review also the businesses that are less performing than others. But right now, we -- the only guidance we've given is to stay -- we should be between EUR 20 million and EUR 25 million of restructuring costs for the full year. And as we speak today, we have no reason to believe it should be different from that.

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Operator [16]

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The next question comes from the line of Pierre Rousseau from Barclays.

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Pierre Sylvain Gilbert Rousseau, Barclays Bank PLC, Research Division - Research Analyst [17]

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Yes. First question on Europe, you mentioned poor product mix but also the fact that you had productivity issues. Could you describe the nature of the issues? Are you able to quantify what the exact impact is? And also would you be able to time some sort of recovery of these exceptional costs?

The second question is on Sports. You mentioned that you have a good backlog but we have, nevertheless, seen that there was some margin compression in H1 due to the poorer mix. So what's your view on the mix in the backlog? And what can we expect in terms of margin for the full year? And the last question would be on restructuring costs beyond 2019. Is there a guidance there that you could provide?

And maybe a last question on the leverage ratio that you would expect by year-end. In your strategic plan, you mentioned that you could achieve 2.6x at the end of each annual period. Is that within reach for this year? Or is it more a target for 2020?

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Fabrice Barthélemy, Tarkett S.A. - Chairman of Management Board, CEO and Acting President of EMEA & Latin America Division [18]

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This is Fabrice, so I will take the first question on Europe. Actually the -- we were starting the semester and especially the second quarter with a very high comparison basis, comparison last year in term of productivity and factory performance. In a couple of factories, we've seen a few issues linked to lower productivity, lower material yield. But there's nothing structural there, so we are implementing actions to recover. And this is exactly -- the financial performance was exactly in line with actually physical indicators that we are measuring on the line. So we -- I am confident that it will be solved in a rather short term.

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Raphaël Bauer, Tarkett S.A. - Group CFO & Member of the Management Board [19]

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In terms of Sports, Pierre. You mentioned some margin compression in the second -- in the first half. Let's bear in mind first that the first half is a near small part of Sports activity. Actually, the third quarter is really very significant and can make a difference.

In terms of margin compression. I've quickly mentioned some mix. It's true that some of the tracks project were delayed due to weather conditions, and tracks is slightly above the average of Sports margin. We've seen also some increase in costs in freight still in Sports. But then the operating leverage, owing to better volumes, allowed to offset that. So we are not worried for Sports margin and we see a potential for some improvement going forward.

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Fabrice Barthélemy, Tarkett S.A. - Chairman of Management Board, CEO and Acting President of EMEA & Latin America Division [20]

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As for restructuring costs beyond 2019, we don't give any guidance for restructuring costs beyond the end of this year because it will not -- it will depend, on one hand, on the conclusions of some of the work we are doing on the -- on some parts of the business that we want to turn around. It is also going to depend on how the environment evolves and the state of the economies. What -- our commitment is actually to take actions.

And we have demonstrated that also -- I'm not sure it was mentioned earlier, but in Eastern Europe, the economy in Russia, the economy is very soft, it's rather depressed. And we have taken strong actions to flex the workforce both in the factories and in the structure, and to maintain a margin that stays above the average of the group despite a very poor economy. So we'll take that type of action, but it's very difficult today to give an indication. Keep in -- just keep in mind that this year, with EUR 20 million, EUR 25 million, we'll shut down 3 factories to our -- 4 factories, actually, so it is also an order of magnitude of -- this year, it's a bit of a high year in terms of restructuring anyway.

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Raphaël Bauer, Tarkett S.A. - Group CFO & Member of the Management Board [21]

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And to your last question on leverage. We ended up this semester at 2.9x including IFRS 16. And I mentioned that our priority is still deleveraging. We will closely monitor inventory and target inventory reduction. There is still room for progress in that area. We will control CapEx. I mentioned also the cash savings related to the lower dividend amount in cash because of the good success of the scrip dividend option. So yes, we believe we'll be in the right position toward the end of the year and we'll be able to be within the range that we indicated.

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Operator [22]

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(Operator Instructions) The next question comes from the line of Jean-Francois Granjon from ODDO.

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Jean-Francois Granjon, ODDO BHF Corporate & Markets, Research Division - Analyst [23]

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Three questions, please. Regarding the depreciation of the stock in the U.S., do you expect a new depreciation during the second half or not? Second question. For all the group, do you expect a decrease for the EBITDA margin in H2 compared with H1? H1 though we have minus 90 basis points. So do you expect a decline for the second half or not?

And for the last question for the Sports division. So despite the strong increase for the sales by 13%, so we saw a decline for the EBIT margin due to the mix. Do you consider that the mix should remain poor for the second quarter (sic) [second half]? And should we expect a moderate margin or decline for the EBITDA margin for the full year 2019 for the Sports division?

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Raphaël Bauer, Tarkett S.A. - Group CFO & Member of the Management Board [24]

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Thank you, Jean-Francois. I will take your first question on inventory impairment. This is really the result of the work that we've done on our ranges. We've explained that this was actually one of the strategic -- part of the strategic initiatives to reduce also cost going forward. We're looking at our collections and wherever we believe we have too many part numbers, we reuse those part numbers. In some cases, we believe we're able to reduce by around 30% of the part numbers of the -- some of the ranges.

Going forward, that will allow to reduce costs, reduce development costs, reduce sampling costs, to ease also the sales process and to better -- to reduce the level of inventory and better manage inventory. So that's really a virtuous cycle and this action will -- of course, it will take some time to materialize.

Short term, this means that some of the products are not anymore part of the collections. And therefore, we've assessed the potential risk on inventory that some of these products will not be sold as part of the collection. So either sold at a lower price or potentially not sold at all. So therefore, we took this onetime impact on inventory valuation, and that's in North America actually. So it's really onetime.

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Fabrice Barthélemy, Tarkett S.A. - Chairman of Management Board, CEO and Acting President of EMEA & Latin America Division [25]

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On the second one, your question about the margin in H2. Yes, we expect that the margin in H2 will improve sequentially over H1 this year but we don't give any guidance as per the margin range for H2.

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Raphaël Bauer, Tarkett S.A. - Group CFO & Member of the Management Board [26]

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And regarding Sports, your third question. Again, the margin of the first half is a combination of several factor. Some higher freight costs also. Indeed, slightly less favorable mix. Again, some tracks project are being postponed to the second half, and then they are being installed, actually, as we speak as the weather is much more favorable. So it's not necessarily a proxy for the second half. And we believe Sports has some room of maneuver, some maneuver, and that we could improve slightly margin in Sports.

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Operator [27]

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The next question comes from the line of Eric Lemarié from Bryan Garnier.

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Eric A. Lemarié, Bryan Garnier & Co Ltd, Research Division - Research Analyst [28]

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Yes. Three questions if I may. So first on the EBITDA margin this year, maybe I missed something, but you -- so you mentioned that your target is to restore profitability. But -- so basically, should we expect EBITDA margin this year to be at least flat? Or is it possible for -- or is it possible to see a decline or a slight decline of EBITDA margin this year?

Second question, regarding factoring. Could you confirm or not that in your balance sheet, because of this factoring, you got some offsetting liabilities in the balance sheet equivalent to the factoring, to this EUR 109 million? And the last question on the gross debt. Could you give us maybe a guidance on the cost of gross debt or cost of the net debt this year or maybe next year due to the recent refinancing you've done recently?

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Raphaël Bauer, Tarkett S.A. - Group CFO & Member of the Management Board [29]

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Thank you, Eric, for your questions. So to your first question on EBITDA margin, as you know, we don't give guidance. And as Fabrice commented, the way we see the second half is that the market are challenging, we mentioned in CIS. In EMEA, it's also a bit contrasted situation. In North America, it's not either. Sports is well orientated. So all in all, I would say a cautious approach on growth.

On costs, we are confident that the total inflation impact for the year can be offset by the selling price increase. And as Fabrice explained, we should see the first benefit of the restructuring action that we've taken on our industrial footprint, and therefore, generate more productivity in the second part of the year. So that -- and as you've seen on SG&A, we're also managing tightly costs. So that's to give you the bricks to simulate the second half.

Regarding the factoring scheme, what happened in terms of factoring is that we sell invoices, so items that are in our accounts receivable, and we receive cash. So that the impact in our balance sheet. So there is no corresponding debt or liability.

And to your last question in terms of cost of debt. You know that we successfully refinanced our main facility, our main banking facility or revolving credit facility of EUR 700 million. It's not withdrawn, of course, but we were able to get a lower pricing compared to the previous facility. We've also refinanced some of our private placement Schuldschein shares also at a slightly lower cost. So all in all, we still see a total cost of debt slightly below 2.5%, which is evening -- which is a good level.

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Operator [30]

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Thank you. I would now like to hand the conference back to Mr. Barthélemy for closing remarks. Please go ahead, sir.

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Fabrice Barthélemy, Tarkett S.A. - Chairman of Management Board, CEO and Acting President of EMEA & Latin America Division [31]

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Sorry, we have one question from the web -- on the call. Is there an additional question on the call?

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Operator [32]

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Yes, we just got one more question coming in from the line of Raphaël Moreau from Amiral.

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Raphaël Moreau, Amiral Gestion SA - Fund Manager [33]

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Yes. Just a question on gross margin because you have some -- at least I mean inflation -- cost inflation is coming down and you've managed to get price increases that stick. But still you -- your gross margin has been -- is still much lower than what it used to be a couple of years ago. So what are the expectations on this front? I know you're working a lot below that, but I'm sure you're -- you have many things to do to improve gross margin. So what are the prospects?

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Fabrice Barthélemy, Tarkett S.A. - Chairman of Management Board, CEO and Acting President of EMEA & Latin America Division [34]

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We are working a lot both on gross margin and below gross margin. Actually, as you know, compared to the situation a couple of years ago, the main hit on gross margin has been raw materials. And the strategy has been not only to work on productivity but also to cover raw material price increases by selling price increases. So this is what we are implementing. And all the impact of raw materials, energy and freight is, of course, hitting gross margin, and especially compared to a couple of years ago.

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Raphaël Moreau, Amiral Gestion SA - Fund Manager [35]

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And what visibility do you have on raw material prices for maybe the rest of the year?

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Fabrice Barthélemy, Tarkett S.A. - Chairman of Management Board, CEO and Acting President of EMEA & Latin America Division [36]

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Well, we -- for the rest of the year, we are comfortable with the previous guidance we gave at the beginning of the year, which was a gross impact of EUR 15 million to EUR 20 million negative, fully offset by our pricing -- selling prices policy. And so first, as we speak today, we are confident that we will remain in line with that initial guidance on raw material inflation and selling prices.

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Operator [37]

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I would now like to hand the conference back to Mr. Barthélemy for closing remarks.

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Fabrice Barthélemy, Tarkett S.A. - Chairman of Management Board, CEO and Acting President of EMEA & Latin America Division [38]

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So I would like to thank you very much for attending this call. Just a few points to remind you, we are pleased actually to see that we are growing strongly in Sports, also growing in Europe by more than 2% in the quarter.

Clearly, the economy is not buoyant and is a bit depressed in the CIS. But right there, we are also implementing cost and productivity actions that have enabled us to maintain margin. And in North America, we will benefit from the restructuring and the overall plan to turn around this division in the coming periods.

We are cautious on the environment -- economic environment going forward. But we are really determined to implement our strategic plan and encouraged by some successes on the commercial side, especially the key account approach and especially the focus on some key commercial segments.

We are also very pleased with the work that has been done on the structure of financing and the control of inventories and working capital in general. And we are confident that, as Raphaël said earlier, we should reach fairly quickly a leverage between -- in the range that we had indicated as our objective for the coming 3 to 4 years.

With that, I would like to thank you again for your attendance, and end this call and hand over to operator. Thank you very much.

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Operator [39]

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Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you all for participating. You may now disconnect.