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Edited Transcript of TTK.DE earnings conference call or presentation 24-Oct-19 12:00pm GMT

Nine Months 2019 Takkt AG Earnings Call

Stuttgart Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Takkt AG earnings conference call or presentation Thursday, October 24, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christian Warns

TAKKT AG - Head of IR

* Claude Tomaszewski

TAKKT AG - CFO & Member of Management Board

* Felix A. Zimmermann

TAKKT AG - Chairman of the Management Board & CEO

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Conference Call Participants

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* James Letten

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Roland Könen

Value-Holdings International AG - Board Member

* Thilo Kleibauer

Warburg Research GmbH - Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the earnings call for the results of Q3 2019 of TAKKT AG, hosted by CEO, Felix Zimmermann; and COO (sic) [CFO], Claude Tomaszewski. (Operator Instructions)

Let me now turn the floor over to your host, Felix Zimmermann.

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Felix A. Zimmermann, TAKKT AG - Chairman of the Management Board & CEO [2]

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Yes, thank you very much for that brief introduction and also a warm welcome from our side here from TAKKT in Stuttgart and to our earnings call about the Q3 numbers 2019. And I think it's fair to say that we have had overall, the first 9 months, a pretty good run with reported sales of plus 5.1% and EBITDA margin of 12.8% in comparison to 12.6% last year.

So the cumulated picture looks pretty good. But on the other hand, we need to be fair and have to look a little bit deeper into the Q3 to see what's going on right now in our markets.

And if you look at the Q3 as stand-alone quarter, you realize that the market environment in Europe continued to become more challenging, especially the manufacturing, yes. Purchasing Manager Index is on a downward trend and in our core markets, and especially in Germany, where we are generating with the TAKKT AG sales volume of about 22%, 23% of the total TAKKT Group, there, the PMI is at the lowest level for a couple of years with 41.7%, which is even lower than the lowest number we have seen in the recession 2012.

At the same time, as you know, that the termination of the business with one of our major customers at Hubert had the expected significant, in fact, a negative impact on our sales development. And those are, I think, the 2 major, yes, impacts on our top line performance in Q3.

Now looking at the overall results. In Q3, I think we showed a solid performance with a good, slightly positive reported growth and a good profitability, and Claude will give you a little bit more insight later on.

But now seeing and facing that situation out there in the market, we have started already early within the year, our disciplined cost measures and management activities.

We have seen also some positive results helping us to deliver the profitability we have delivered in Q3. But now looking ahead and seeing what we're expecting for Q4, we at the Board have decided to, a, speed up that disciplined cost management; and b, also start structural cost adjustments. And with that, implementing measurements helping us to adjust our cost structure to the current volume and with that, reduce the cost level for next year.

And that's the reason why we have announced yesterday that we're expecting because of the weak environment out there, a soft sales development in Q4. And that's the reason why we have decided to accelerate the implementation of structural cost measurement, and I will explain that later on when I give you a little bit more details about the outlook for the rest of the year 2019.

With saying that, I would like to hand over to Claude, our CFO, who will give a little bit more insight into our set of numbers we have published this morning. Thank you.

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Claude Tomaszewski, TAKKT AG - CFO & Member of Management Board [3]

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Thanks, Felix. Good afternoon to everybody. Let's start with quarter 3 figures on the TAKKT Group, where you can see that we have increased sales by 1.2%, reported sales. That was helped, of course, by the acquisitions we did recently in the past as well as help from currency fluctuations, mainly the U.S. dollar.

If you look at the sales figure organically, we report a minus 2.3% which, of course, is lower than what we have seen in the second and the first quarter. Here, just to put this into perspective, we are mentioning that we had in Q3, a quite significant impact from not having the Aramark business anymore, a major customer of Hubert, which predominantly in the past, had always its peak in the third quarter when school is starting again in the U.S. So here, the impact has been 2.5% in that third quarter, not doing that business anymore with Aramark. So if you look at the 2 figures, you could conclude that we were almost flat on a like-for-like basis in the third quarter when it comes to the top line.

Having said that, I think it's also fair and worth mentioning that we had one more working day. So I would then -- we include the working day adjusted figure, we have been on slight negative growth mode again, looking at all these different factors.

Profitability, we're coming on an EBITDA margin of 12.5%, that compared to a 13.3% the previous year's quarter. Here there is, of course, help of the IFRS 16 impact, which is helping us 1 percentage point. So if you look here on that figure, you could conclude that we have a minus 170 basis point less profitability. One big factor here is the termination of -- early termination of the employment contract. And so if we adjust for that one-off expense and also take into account the IFRS 16 impact, it's fair to say that we have seen the profitability go down by 1 percentage point, by 100 basis points. And that, of course, is mainly due to the fact that the top line is not strong, it's negative, and then we see that negative impact as a negative operating leverage here and our profitability goes down.

If we then have a specific look at the European business in the third quarter. Again, here, we report an increase of sales of 2%, mainly helped here from the acquisitions of XXLhoreca. And organically, also here, we've got a slight minus of minus 1%. KAISER+ KRAFT has seen in the third quarter a mid-single-digit negative growth. So they've had the deepest reduction in sales, and we're going to speak about that, I guess, when it comes to the outlook.

Ratioform had a low growth rate and Newport has still a high single-digit growth rate in the third quarter.

Looking at profitability. Here, we are losing 40 basis points on a like-for-like comparison. We have here reported a higher EBITDA margin, but that's due to the help of IFRS 16. So like-for-like, there's a minus 40 basis points, which we recognize as being the impact and, of course, the not-so-strong top line and then the impact, of course, on the infrastructure and the negative leverage we see here in the P&L.

Having a glance at America. Third quarter has come in with a minus of 3.7% organically. Reported sales have been flat. Here, of course, the 2.5% negative impact of the major customer from Hubert, Aramark, had a 5% -- a 2.5% on the TAKKT Group. This has led to a 5% impact in America. So again, here, if we take the 2 together, to put it into perspective, we have seen a slight organic growth rate, like-for-like of plus 1%. And this has come predominantly from a solid growth rate from Central and Displays2go. NBF was almost at the same level compared to the previous year's quarter, recognizing that they had a very high third quarter '18 last year. And Hubert's underlying business without Aramark has been stable. But of course, including Aramark, they have seen a quite significant drop organically in sales.

If we have a look at the profitability. Here, again, if we adjust for IFRS 16, we see a minus 130 basis points decline in profitability. And this is mainly coming from a lower utilization of the infrastructure due to the sales decline. And of course, here again, the major impact is the volume which we are losing now from that major customer, Aramark, the contract which has ended in February 2019.

Leaving the specific figures for the third quarter and coming to the 9 months year-to-date figures on TAKKT Group. As Felix has mentioned, reported sales has come in with an increase of 5% for America and as well as for Europe, and so for the group. But this, of course, is a remarkable figure, helped a lot by the portfolio changes and the acquisitions as well as the stronger U.S. dollar. Organically, we have grown the business in the first 9 months by 0.5%. And here, we have digested in that 0.5%, an impact from the loss of Aramark, it's 1.5%. So you could conclude, on a like-for-like basis organically, we would have grown the business by 2% the first 9 months.

Looking at the profitability figures. Also here, already adjusting for IFRS 16, the conclusion would be we have lost 70 basis points. And that 70 basis points has already come in due to the fact that we have already done some structural measures. Beginning of the year, some of you might remember, we have changed the sales structure at Ratioform. We have integrated the Post-Up Stand with Displays2Go and we have repositioned Hubert at the time when they lost Aramark and now also including the expenses for that early termination of an employment contract. There, we can conclude that already more than half of that decline in profitability has come due to these impacts I was just explaining. And the other half is due to the fact that we have not enough sales growth, top line growth, to compensate for the cost increases. So negative operating leverage.

Looking at Europe, the first 9 months have come in organically with a figure of 0.8%. KAISER+ KRAFT now is in a low single-digit negative growth rate. Ratioform still a positive one, a low single-digit positive one; and Newport, in the first 9 months, a double-digit growth, which was helping here the European division.

Profitability, the margin has, adjusted for IFRS 16, come down by 70 basis points. And also here, of course, mentioning the Ratioform restructure, which has cost us 20 basis points as well as the dilution from our acquisitions, 20 basis points are already here also. More than half of that decline is due to a structural effect from acquisitions as well as the structural measures we have done for Ratioform and the other half then is missing top line growth.

In America, the first 9 months have come in with an impact -- or with an organic sales growth of 0.2%. So flattish development. And that figure has included a 3% decline from the loss of the Aramark business. So on a like-for-like, you could conclude that the first 9 months in America have shown some growth of 3 percentage points.

Where has this come from? Central, Displays2Go and NBF had a low to mid-single-digit organic growth. And Hubert without Aramark has shown a slightly positive performance on a like-for-like basis. Of course, again, including Aramark, of course, this has been a significant -- this shows a significant negative growth rate considering the Hubert business.

Profitability, EBITDA margin is going down by -- adjusted for IFRS 16, by 40 basis points. And also here, again, half of that is due to restructures, repositioning of Hubert, integration of Post-Up Stand and the other half is coming from missing top line speed.

Leaving for a moment all these P&L figures and moving forward to cash flow. We've talked about, of course, the development in the top line, which is rather flattish. After having digested the loss of Aramark, we have talked about, profitability is going a bit down. Half of it more due to structural measures, the other half to missing speed in the top line. A different picture is, of course, shown when we look at cash flow, especially when we look at cash from operating activities in one moment. TAKKT cash flow has increased due to also IFRS 16. If we adjust for that, it's rather on a similar level, we can see that we have had a little bit more financial costs. And on the other hand, a little bit less current taxes. So again, this is compensating for each other. And if we look then at the cash generation, we can see after the TAKKT cash flow, a huge deviation in the change in net working capital. Whereas last year, we had a cash outflow of minus EUR 14 million, this year, we had a cash inflow of EUR 11 million in our cash flow statement due to the fact that we had a severe inventory buildup in late '18. And now, of course, due to the fact that there has been some forward price awaiting the Chinese tariffs, but also, of course, now the top line, which is rather softening. We have got a lot of inventory and stock going down, and this has led to that plus EUR 11 million here in net working capital, which then, of course, with a similar CapEx figure, produces a more than EUR 30 million higher free cash flow, which is available now that year.

So complete different picture when it comes to cash. Again, just to reemphasize, which shows the resilience of our business model compared to the P&L figures.

Looking into the balance sheet, that higher pre-tax cash flow has then helped also the net financial liabilities not to grow as much as possibly thought, because here, when we look at that figure of EUR 207 million, EUR 280 million (sic) [EUR 208 million] net financial liabilities, it's worth mentioning that a plus EUR 60 million, 6-0, comes from the fact the application of IFRS 16 accounting standard, whereas the EUR 88 million free cash flow, we could easily finance the XXLhoreca acquisition, that's EUR 19 million, as well as the dividend payout of EUR 56 million. So you can see here that there was almost a balancing act and that the huge increase is just -- in net financial liabilities is just coming from that application of the IFRS 16 accounting standard.

As a consequence, equity ratio has come down a little bit because financial liabilities -- reported financial liabilities is going up. And so our equity ratio now stands at 56.5% after the 9 months.

Having a look at the gross organic sales growth development over the quarters, before I hand it back to Felix. Yes, it's worth mentioning that after a slight negative growth in the second quarter, almost stable, we have seen now a more severe negative growth rate of minus 2.3%. Again, in all these figures, we digested around 2 percentage points loss of Aramark business. Always worth mentioning when we look at all these figures this year, but clearly, it's softening, it's getting more negative, and that's, I guess, a bridge to possibly hand over to Felix, our CEO, to talk a little more about the outlook.

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Felix A. Zimmermann, TAKKT AG - Chairman of the Management Board & CEO [4]

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Yes, Claude, thank you very much for giving us here further insights and details. And I think it's -- yes, it's challenging out there right now. And when we look at our forecast for the year 2019, there are, let me say, 10 weeks left, actually. So we are at the beginning of the fourth quarter. What we are seeing out there is kind of a negative trend in our key, let me say, industry indicators, especially in Europe and there, especially in Germany.

And as I've mentioned at the very beginning, the PMI is right now at 41-point-something percent. This is a pretty low number, and I think that's the sixth number in a row that is showing a negative momentum. So right now, the trend is kind of a negative one.

Looking at the U.S., I think the picture is a little bit different, even if the growth rates and GDP growth rates have been adjusted for the U.S. as well. The growth rate as an absolute number is still a lot higher than in Europe. And the dynamics we are seeing over there is, yes, the dynamic is sort of a positive one, even if the PMI also slowed down, it is now below 50, kind of an indication that the economy is softening a little bit, but not at all on the level or at the level we have seen or we are seeing right now in Europe.

So a challenging environment and something where we know how to deal with that. And that's the reason why we have started early within the year 2019 our cost measures, introducing flexible cost structures, reducing costs where it was not necessary to spend the money. But at the same time, also continuing to invest into our digital agenda, into our -- yes, further development of our business model. So we should not forget that we have given the commitment of investing EUR 50 million from 2018 to 2019/'20 into the digital agenda, and we stick to that. And I think that was and is a good investment, but of course, is being visible in our P&L structure on different levels, and we can talk about that later on.

But besides that, I think the slowdown we are seeing right now in the fourth quarter was a clear signal for us that we have to take the next step now in our cost measures and start to think more about structural cost measures, which have been actually prepared already in the second and third quarter. So it's now more a question of the implementation and starting point.

And there, we are in direct talks with our management teams, and we are ready to start those initiatives right now in order to adjust our cost base for the year 2020, and we can talk later on about some examples.

So the expectations for Q4 are definitely a negative organic sales growth. The reported number, we don't know, will certainly be positively impacted by the ongoing positive currency effect, but nevertheless, the organic growth rates we are expecting will be negative.

At the same time, as we have mentioned that, we are ready and we want to implement our cost structure measurements, and that will lead to one-off expenses in Q4. But at the same time, also helping us to reduce our cost structure for the year 2020.

And therefore, our adjusted, let me say, guidance here for the full year 2019 is now that we are expecting for the full year, an organic sales development in the range of minus 1% to minus 2%. And at the same time, an EBITDA margin at around 12%, including the one-off effects for the cost structural measures we want to implement in the Q4 2019 and the ones we have already implemented.

That is, let me say, the summary from my side. And now I think we hand back to the moderator and are ready to answer your questions. Thank you very much so far for your attention.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from Thilo Kleibauer from Warburg Research.

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Thilo Kleibauer, Warburg Research GmbH - Research Analyst [2]

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Yes. You mentioned already the cost measures. And you said that you are prepared maybe to give us some examples. So you mentioned the KWESTO example in Eastern Europe, which is maybe not the only one. And so maybe you can give us a little bit more color on your plans there? And also at which magnitude you would expect one-off costs in Q4? Is it fair to assume maybe roughly, yes, EUR 5 million or EUR 6 million, which put around 50 basis point margin effect? Or what should we assume there? And maybe you can also give us the targets for the cost savings you expect from these measures for your budget in 2020? Thank you.

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Felix A. Zimmermann, TAKKT AG - Chairman of the Management Board & CEO [3]

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You're welcome. So let me start, and I think there have been actually 2 questions. One question is more about where do we want to adjust our cost structures and then the financial impact. And maybe I'll start with where we want to do the structural cost measures here, and then Claude can give you a little bit more insight into what we're expecting for the kind of negative impact in Q4 2019 and as well, of course, the positive impact for the year 2020. So you have mentioned already the KWESTO example. There, our idea is to merge the 2, let me say, distribution, marketing activities of different brands into one, into the leading one, KAISER+ KRAFT. That is helping us to reduce the costs significantly by, let me say, eliminating the infrastructure cost for KWESTO and making the existing KAISER+ KRAFT infrastructure more efficient, so it means generating a higher leverage for the infrastructure cost of K+ K in Eastern Europe. That will help us a lot. That is one example.

Other example is that because of the inventory we have carried for different reasons since 2018, we have also rented additional warehouse spaces. And there, especially in Europe, we want to reduce this, let me say, volume and really concentrate our activities on our core warehouses and with that, reduce any kind of external rent we are paying for, let me say, rented warehouse space in order to, yes, carry the additional inventory. At the same time, we are thinking about streamlining our sales organization in some regions in Europe, making sure that we, a, adjust the capacities according to the current volume, but at the same time, also thinking about structural measures, making it more efficient and using also the benefits of the implementation of ERP systems and other tools in order to be more efficient in our processes there. And there, we are expecting also a reduction in cost and in some areas also, in headcount.

And I think, Claude described already the example of Ratioform, the adjustment there of their sales organization beginning of the year, where we have combined and centralized the activities of taking orders in the eastern part of Germany, while at the same time, we have reduced the cost structure in the different, let me say, offices across Germany and concentrated their activities really on the field sales and being out there and visiting the customers. And so those are a couple of examples where we have a clear agenda, where we know what we want to do and where Claude can give you a little bit more insight to what we're expecting here in terms of one-off costs for doing that and be kind of a cost saving for next year.

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Claude Tomaszewski, TAKKT AG - CFO & Member of Management Board [4]

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Yes. Talking about the fourth quarter, we plan at the moment to invest an amount you just mentioned, the EUR 5 million-ish into these cost -- structural cost measures, and your guess was correct. The -- what we expect is that we expect a similar figure as a run rate savings for next year, that will be the target. Still, of course, to be worked out more precisely, but that would be at the moment our expectation for next year, what's going to happen here.

Having said that, we're going to invest EUR 5 million into the P&L. Talking about structural cost measures, I think it's worth mentioning that we have seen almost EUR 2 million of that beginning of the year as a one-off expense at Ratioform, Felix was just mentioning that, cost in Hubert. And in addition, if we look at the early termination of the employment contract, I think it's worth saying that we're going to carry quite a lot of one-off expenses this year in the year 2019. So when we later, beginning of next year, review the year 2019, it could well be that we would have to report almost EUR 10 million of one-off expenses due to the structural cost measures or early termination of contracts and to compare that then properly to the year 2018. So quite a figure we're going to address this year here in our annual figures.

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Thilo Kleibauer, Warburg Research GmbH - Research Analyst [5]

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Yes, okay. Maybe one follow-up. You mentioned the early termination of employment contracts. I mean it's more than one, because you say contracts in your Q3 report, that there was one announcement of a change in the management board during Q3, but has there been more than one changes in the management team? Or maybe you can give us the number of contracts which are contained in this number?

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Felix A. Zimmermann, TAKKT AG - Chairman of the Management Board & CEO [6]

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Yes. We have had an internal discussion whether we should say one contract with a round number or whether we should say contracts to make sure that we are talking. Then we talk about a round number about different contracts. And I think it's fair to say we don't have to and don't want to report about each and every contract that has been terminated there. But I think there, at the very end, 2 contracts, we, I think, or where we have to digest the kind of impact because of severance payments, and those 2 contracts are rounding or summing up to a number of around EUR 2 million. It's not more and not less.

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Operator [7]

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At the moment, there seem to be no further questions. (Operator Instructions) The next question comes from Roland Könen from Value-Holdings.

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Roland Könen, Value-Holdings International AG - Board Member [8]

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Hello. You all hear me?

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Felix A. Zimmermann, TAKKT AG - Chairman of the Management Board & CEO [9]

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Yes, we can hear you. Not really loud, but we hear you.

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Roland Könen, Value-Holdings International AG - Board Member [10]

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Okay. I try it a bit louder. Concerning your guidance, new guidance, it's on the level of EBITDA, if you think about the consolidation of KWESTO, do we have to expect some impairments out of these structural cost adjustments you're doing in Q4?

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Claude Tomaszewski, TAKKT AG - CFO & Member of Management Board [11]

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At the moment, there is no -- there might be a very small one, but there's no significant impairment to be expected below EBITDA when it comes to the merger of KWESTO into K+ K. That would be well below EUR 1 million, possibly even below EUR 0.5 million. So nothing which would surprise you on the group level figure.

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Roland Könen, Value-Holdings International AG - Board Member [12]

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Okay. That sounds good. And second question would be on your very good cash flow development in Q3. I guess, you could also mention that Q4, if there's also a good cash flow development? Does this has any impact on your minimum dividend of the EUR 0.55?

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Felix A. Zimmermann, TAKKT AG - Chairman of the Management Board & CEO [13]

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I think that's a very reasonable and fair question. And on the one hand, I think you're right, the cash flow number is indicating, underlying the -- Claude mentioned that already, the resilience of our business model. When you look at the historic development of cash flow, it was much more stable than the development of the EBITDA over the cycles. And therefore, you're right, you can expect for the reasons we have mentioned already, that we expect a decrease in inventory, with that is kind of a reduction in working capital, that would certainly help the cash flow of the operations, but also free cash flow. So we think Q4 will be another good quarter for cash flow.

In terms of the dividend, I think it's too early to talk about that now. We normally try to stick to the schedule here that we look at the full year numbers and then make a recommendation to our Supervisory Board. But from today's perspective, I don't see a reason why we should not propose that minimum dividend you have mentioned here. So because of the cash flow strength and because of the -- I think, yes, as Claude described, that the character of the profitability that has been impacted in 2019, mainly because of one-off impacts, I think it's fair to say that we will take that all into consideration when we look at our dividend proposal for the Supervisory Board. So clear signal, no reason to assume that we change that.

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Roland Könen, Value-Holdings International AG - Board Member [14]

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Okay. That sounds great. My last question would be on your sales guidance for the full year 2019. If I do my calculations right, we have to assume that the organic decline in Q4 must be between 6% and 10%. Is it right? Or is there any mistake in my calculations? And the add-on question would be, is this a realistic assumption also for the first half of 2020 at least?

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Claude Tomaszewski, TAKKT AG - CFO & Member of Management Board [15]

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Let me start with your first question, and then hand over to Felix talking about 2020.

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Roland Könen, Value-Holdings International AG - Board Member [16]

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As -- are we early for 2020?

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Claude Tomaszewski, TAKKT AG - CFO & Member of Management Board [17]

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You're right. You're right in your mathematics. So you shouldn't worry about that. You're correct, that a minus 5% to minus 10% is what we have kind of assumed in our organic sales, just to report that again, and organic means digesting the Aramark impact and also digest -- and then also before currency fluctuation, but yes, you're correct, organically, that would be the figure which could happen in Q4 and is then, of course, in alignment with our annual sales guidance. And that's predominantly coming from Europe, where we see high single-digit and sometimes even more, declines, especially in K+ K and Ratioform, whereas America is more flattish, but there, we have to digest the Aramark impact, yes. So you are absolutely correct in concluding that magnitude.

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Felix A. Zimmermann, TAKKT AG - Chairman of the Management Board & CEO [18]

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Yes. And talking about the year 2020, I think we all are aware that it is maybe a little bit too early. But as we all know, the year does not -- or the year might end at the 23rd of -- or the 21st of December, but the economy is still negative out there, that's what we see a little bit for the first quarter at least, because what we are seeing right now in terms of the early warning indicators, and we know and you might know, we follow them with a time lag of around 3 to, maybe in some areas, up to 6 months, indicating that the next quarter will not be, let me say, a strong one. But on the other hand, we've also seen in the past a very quick recovery. So whenever we have seen that the PMIs are picking up, I think we will see that also very quickly in our numbers. So I think visibility right now is maybe the next 3, maybe 4 months. And beyond that, I would be very careful.

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Operator [19]

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The next question comes from James Letten from Berenberg.

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James Letten, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [20]

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Just wondering very quickly, if you could touch upon the America business. If we take out the impact of Aramark, it's pretty much flat organically. And I'm just wondering if you could sort of talk us through why the division slowed down since Q1, Q2, with that in mind? And then going into sort of Q4 and 2020, if we do get a trade deal between the U.S. and China, how does that change the outlook for the division? I mean what could the division be -- the region be growing at if we didn't have the trade war?

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Claude Tomaszewski, TAKKT AG - CFO & Member of Management Board [21]

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Yes. Let me start with talking about the slowdown, possibly this year, which you might have seen in the reported figures in the States. I think it's worth mentioning that we still had the Aramark business in the first quarter. So that's, of course, then, if you look at the figures, something which had an impact then from the second and third quarter onwards. The other impact is that we had very tough comparisons during the year. So basically, it was constantly, the hurdle was higher. We had excellent business, for example, at NBF in the third and fourth quarter last year, which then made it more difficult to keep the same momentum in growth rates in America. And I guess these are the major factors we have seen there across the year. Yes, there's one of the other business was possibly also coming down. So there's a bit also a lower momentum, but the other 2 factors are also factors to be taken into consideration when we look at the different top line development during the year in the States.

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Felix A. Zimmermann, TAKKT AG - Chairman of the Management Board & CEO [22]

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And second part of the question has been what?

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James Letten, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [23]

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Yes. Sorry, go ahead. Just on the trade war.

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Felix A. Zimmermann, TAKKT AG - Chairman of the Management Board & CEO [24]

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Yes, on the trade war, that was the second part of your question. And yes, to try to simplify a little bit what we are seeing there. The trade war is leading to higher tariffs, higher tariffs means our cost of goods sold is going up in some areas by up to 20%, and some product categories even more. First reaction measurement on our side was, as you have seen that, as we have described that, the buildup of inventory. So we bought stuff before tariffs really kicked in. So that was good, that helped us, helped us a little bit in generating a stable gross profit margin and having good deals. But on the other hand, of course, we paid some cash for the inventory. Now we try to reduce a little bit the inventory in order to set some cash free. And because there's only also a likelihood that the tariffs might be reduced, hopefully go away, and then we don't want to have all that expensive inventory on our balance sheet. And that's the reason why we are now a little bit more careful in buying inventory and doing forward volumes here. Any kind of release of the tariffs, any kind of reduction of tariffs would certainly help us, because then we could reduce our prices again and with that, could hopefully generate more volume. But on the other hand, there is certainly a risk there. If they reduce the tariffs from over the weekend, let me put it this way, from one week to another, of course, we would have to sell the inventory we have bought in the meantime for higher prices for maybe then a lower price. That is a kind of a risk, but I think something we can manage, and we know how to manage it. In a nutshell, I think release or reduction in tariffs would be a positive sign and signal for our business. Does that make sense?

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James Letten, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [25]

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Yes, yes. Very clear.

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Operator [26]

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There are no further questions.

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Christian Warns, TAKKT AG - Head of IR [27]

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Then thank you very much from our side here in Stuttgart. I would like to point out that we will publish the preliminary figures for the 2019 fiscal year on February 19, 2020. And whenever there are further questions, follow-up questions, then please do not hesitate to contact us. And I wish you a great day. Thank you very much for your participation.

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Felix A. Zimmermann, TAKKT AG - Chairman of the Management Board & CEO [28]

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Yes, thank you very much also from our side, for your ongoing interest here, your good questions and your interest in TAKKT here. And as Christian pointed out, we are more than happy and ready to answer all the questions you might have. Thank you very much also in the name of my colleague Claude here, and the Investor Relations teams. Enjoy the rest of the day. Thank you, and bye-bye.