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Edited Transcript of TTK.DE earnings conference call or presentation 25-Jul-19 12:00pm GMT

Half Year 2019 Takkt AG Earnings Call

Stuttgart Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Takkt AG earnings conference call or presentation Thursday, July 25, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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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* Craig Abbott

Kepler Cheuvreux, Research Division - Head of Mid and Small Cap Research, Germany

* 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 the first half year of 2019 for TAKKT AG, hosted by CEO, Felix Zimmermann, and 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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So thank you very much, and also welcome from our side here to our first half conference call for the year 2019. And as usual, I would like to start with a kind of a quick summary and introduction, then hand over to Claude, our CFO, who will give you more insights and details about the figures. And then at the very end, I would like to summarize our outlook for the full year 2019, and then we invite you and are more than happy to answer questions you might have.

So let me start with the kind of a quick summary of what we have seen in the second quarter or in the first half 2019. I think we have reported a good growth rate of plus 3.6% for the second quarter, mainly due to acquisitions and currency effect. And I think, not surprisingly, we have seen a weaker organic growth in the Q2 in comparison to Q1 for a couple of reasons. I think everybody around here is aware that the economy is softening out there, and we have seen, let me say, 2 different, let me say, developments here.

First, looking at Europe, I think, it's pretty obvious that the PMIs are declining. And now we are seeing more and more special sectors within the industry are really suffering. To mention here, for example, the automotive industry as well as the manufacturing part of the economy. So we see here really the kind of a trend in terms of the PMIs, but also other indicators that are clearly indicating that we are facing a challenging second half of 2019. And that's a little bit different in the West, even as the GDP growth has been lower there, the estimates for the year 2019, they are still on a much higher level than the figures in Europe. And therefore, I think, it's fair to say that we are seeing there still a solid environment -- business environment and we actually do suffer mainly because of the termination of the business related to both the -- one of our major Hubert customers that became visible now in Q2 and will be also visible for the rest of this year and the first quarter of next year.

But besides that, I think, the U.S. is doing, under the given circumstances, as fine. Despite the slow organic growth, I think, with good result that we were able to keep the EBITDA margin stable on a like-for-like basis, means adjusted for the first-time application of the IFRS 16 effect. And that is mainly due to disciplined cost management, and some of you might remember that we have mentioned that quite early in the year 2019 and also at the end of 2018 that we need to do our homework in order to make our cost structure more flexible, so that we can react quicker and more flexible than we have been able in the past. And I think, now we are seeing here some positive results of our homework we have done, and I think, it's also indicating that we are prepared. But we have been prepared for a slower growth and that we are also being prepared for a softer second half of 2019.

On the other hand, I think, very good news is that we were able to acquire within the Newport group, the company XXLhoreca, an e-commerce direct marketing specialist for food service equipment based in Netherlands. I think a perfect addition to our Newport group. It is fulfilling all the acquisition criteria, and we are more than happy to answer questions you might have later on. I think the facts and figures have been released in our press release, and therefore, it should be available for you.

Last but not least, I think, it's worth to mention that our e-commerce share continues to increase and it is now at 54% on group level, indicating again that e-commerce growth is stronger than the, let me say, traditional or growth of the traditional business, which is undermining and which, I think, also supporting the fact that the ongoing digital transformation is showing good and positive results.

With that, I would like to hand over to Claude, who will give you a little more insight and then later on again, I will give you our thoughts on the outlook for the year 2019. Thank you very much.

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

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Well, thank you, Felix. Good afternoon, everybody. Let's start with the second quarter 2019 regarding the TAKKT Group. We can report that our sales have increased by 3.6%. Our organic sales development has been a minus of 0.7%. Now to put that a bit into context, we had less working days in the second quarter, which is, as a coincident, also exactly the 0.7%. So we conclude here that our organic sales have been flat in the second quarter. And this is despite the fact that we had to digest, of course, the loss of a major customer at Hubert. I think we have reported that several times. That contract came to stop at the end of February, and there was an impact of 1.5% less sales now in the second quarter. So if we look what can be adjusted and if we would add that impact from that large customer, we can conclude that the business was slightly in growth mode in the second quarter, which is quite a good result considering the circumstances I may want to talk about the outlook later on, anyhow, that there are some clouds out there, which might not help us in the second half of this year.

Now going from the top line growth in the second quarter to the EBITDA margins, it's worth reporting that the gross margin has been stable, second quarter 2019 compared to second quarter '18, same figure. And that was the same figure despite the fact that we had a structural impact here of 30 basis points, which means that business units with lower gross margins have had a higher growth rate compared to business units with a higher gross margin, then there was also an acquisition dilution impact of 10 basis points here in. So without the structural and the acquisition impact, the organic growth margin has even increased in the second quarter '19 compared to the second quarter '18.

EBITDA margin, we reported an EBITDA margin, which is 90 basis points higher than last -- previous year's quarter; of course, very much after the positive effect due to IFRS 16, which was roughly 1 percentage point. So here, we can conclude that we have been on a very similar level on the profitability EBITDA, despite the fact that we have only seen a very flat development on the top line. And as I said, this is due to quite disciplined cost management here, which allowed us to have same profitability as previous year's quarter. And of course, at the same time, the gross margin has helped this time because that has been on the same level compared to previous year's quarters, so that we were able, on the cost side, to manage it that way. You might remember that we had a lot of gross margin challenges in the year 2018, which then made it not possible to get that great profitability result here. We could manage it that way, and we are happy to be able to report that fact that we have been on a stable EBITDA margin in the second quarter.

Now if we move forward to the TAKKT EUROPE segment; in the second quarter, that business has had top line growth of 3.1% reported, organically a minus of 1.0%. Here, less working days have contributed 1.3%. So again, we could conclude here that the second quarter has been flat in Europe in the top line growth. And KAISER+ KRAFT here has come in with a slightly negative organic development as well as Ratioform, whereas Newport, our new division here, has contributed with a double-digit growth figure.

Talking about EBITDA margin, again, here, IFRS 16 has had a positive effect of around roughly 1 percentage point. And that means that we have lost EBIT margin even on the adjusted level, 60 basis points, and half of that has come from the structural adjustment at Ratioform, and we reported also last time that we have taken the action-aggressive form to streamline the sales organization, and that had an impact in March as well as in April. And here in the second quarter, this had led to a -- half of that division is coming from that structural action, so diluting the EBITDA margin at TAKKT EUROPE.

TAKKT America, second quarter, we have seen sales increase by 4.2%, organically a minus of 0.5%, but of course, due to the large impact from the loss of that Hubert customer, which is roughly 3 percentage points, of course, has then contributed to that minus 0.5%. So corrected for that large customer, we have grown the business in America. It was a 2.5% figure. And that comes from a Hubert growth, which organically now, without that loss of the large customer and like-for-like, is in growth mode. Displays2Go had a low growth, NBF had a mid-single-digit growth and Central was slightly negative, 3 statistics here in 3 divisions in America.

EBITDA margin comes in with an 11.3% compared to a 9.8% the year before. Also here, IFRS 16 has that 1 percentage point, but that means that we have been able to increase the EBITDA margin here by 70 basis points, which is roughly the discontinuation of the Hubert unprofitable business in Europe last year. So -- and also a smaller impact from the integration of Post-Up Stand and Displays2Go. So here, we can conclude that we had a small increase in EBITDA margin, looking at the 2 on the profitability level, like-for-like in America, which, of course, is not excellent, but a good result.

Now after the second quarter, let's have a look for the 6 months figures. First half year of this year, sales have increased by 7.3%, organically by 2.1%. EBITDA margin stands at 12.9% compared to 12.2% the year before. Again, if we correct for the 1 percentage point, you can see that we have now a slight decline in EBITDA margin after the second quarter for 6 months at 30 basis points reflected on in the second quarter and that gap has come from the drop of EBITDA margin in the first quarter.

Now let's move on to TAKKT EUROPE for the first half year, you see a reported sales figure of 6.6%, organically an increase of 1.8%. Then, of course, in the second quarter, we have done at TAKKT EUROPE, an acquisition called XXLhoreca now in May. Of course, that has contributed to the reported sales figure as well, of course, also the 2 acquisitions we did last year, OfficeFurnitureOnline in February and Runelandhs in May 2018. So this, of course, all had a significant positive impact on our top line growth.

Looking at the different divisions; KAISER+ KRAFT after 6 months comes in with a slight negative organic development, Ratioform was a low single digit, and again, Newport here with a double-digit organic growth rate for the first 6 months. EBITDA margin comes in at a 16.8% figure. That compared to the corrected adjusted last year figure, corrected due to the impact of IFRS 16, comes in with an 80 basis points below last year. So we have lost here a little bit margin. Also due to the fact that there is a structural impact here from acquisitions and again, the structural adjustment at Ratioform, they both have had a negative impact on the profitability. At least half of that decline we see here has come from these impacts and also a little bit organically.

TAKKT America, safe, as it comes in with a plus 8.2% after 6 months, organically that means the sales growth figure of plus 2.5%, even after adjusting a negative impact of around 2% due to the loss of the large customer, Hubert. So America has been still in a quite good shape considering the circumstances after 6 months. And here, Hubert has come in on a like-for-like basis as well as Displays2Go with a mid-single-digit figure organic growth, National Business Furniture on a high single-digit organic growth and Central now after 6 months has seen a flat development in the top line. EBITDA margin was a plus of 18 basis points reported. Again, there is that impact from IFRS 16. And so if we look into the adjusted figures, of course, then we can conclude that we have had a bit more profitability due to the effect of cost of discontinuation of the Hubert's unprofitable European activities, which came to a stop in October 2018.

Let's move forward talking about cash flow after talking about the sales figure and the EBITDA figure. And also here, we have reported that also after the first quarter that the definition of TAKKT cash flow has slightly changed. It hasn't changed too much to comparison, but it has increased our TAKKT cash flow also previous year by EUR 2.5 million. If you look at the comparison year-on-year, we see here that there is a slight positive development on the cash flow margin, which, again, has also been helped, of course, by the new lease accounting IFRS 16.

Looking at the TAKKT cash flow, absolute TAKKT cash flow figure, of course, this has increased due to IFRS 16, if we check what has been going on between EBITDA and TAKKT cash flow, you see that the financial result has gone up a little bit. Again, due to IFRS 16. Sorry for constantly repeating that, but we hopefully have adjusted that after 6, 12 months, and that we don't have to talk about that anymore, the technical accounting change. And then, possibly more worth noting here, the context is that come in with a very similar figure. It's the same as the other non-cash expense, so no big deviations here. And this has led to a TAKKT cash flow figure of EUR 62 million.

The change in net working capital now after the first 6 months has been quite favorable for us. What's the reason for that? We have filled a lot of inventory in the year 2018. Also, of course, due to forward price of the set of tariffs from China. And now there was a lot of stock, which was released in the first 6 months of the year 2019, and that has meant that we have not used cash in the net working capital segment, but that the cash was set free. And then, of course, compared to the previous year figure, that meant to be a huge spin and so the cash from operating activities now counting at EUR 64 million, and it's roughly a bit more than even EUR 20 million higher than the first 6 months '18 and that, again, also shows the robustness of our business model that includes that. Unfortunately, the top line is suffering a bit in all, then business volume goes down and at the same time, there is that feature that the cash is set free in our warehouse and then our cash from operating activities, which is benefiting from that due to the slow growth in the top line.

CapEx has come in similar figure, EUR 12 million compared to EUR 13 million, just to say that this slight reduction has nothing to do with digital agenda. We are still continuing there in a similar amount. That is just the way that some of the CapEx has come in a bit lower. And so our pretax ratio stands at EUR 53 million, which, of course, we have used, for example, to pay dividends of EUR 56 million in May. At the same time, we have financed the XXLhoreca acquisition for roughly EUR 20 million. And then there was reportedly an increase in our net financial liabilities of EUR 54 million to 2016, and so our net financial liability figure now stands at EUR 231 million on the 30th of June 2019. As a consequence, our equity ratio goes down from 60%, 61% to 55%, still very solid, but then worth noting now that our equity ratio stands at 55%.

And before I hand over to Felix -- hand back to Felix, just a quick look at the different organic sales growth figures for the last quarters. I think it's fair to say, after a weak first quarter '18, we had a good run for 4 quarters in a row, from the second quarter '18 to the first quarter '19, with roughly always 5% growth rate organically on top, of course, acquisitions. And now in the second quarter, we have seen the first quarter, again, after 12 months, where we have had a slight organic sales to figure, as I said, adjusted for working days. It's a flat development, but it's still a different momentum compared to the 4 quarters before, so we have a flat development. Then, that's a good bridge to hand over to Felix to talk about the outlook because there is, of course, some interesting topic to talk about what might second half this year bring for the TAKKT Group.

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

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Thank you, Claude. It's certainly, a bridge, I don't know whether it's a good bridge, but it's a bridge. And let's have a look at the outlook for the year 2019. And as you know, we look first at the economic environment we can expect there, then also referring to some specific things internally we have to consider when we talk about our outlook for the full year.

And when we look at the economic environment, I think it's pretty fair to say that we are seeing more and more adjustments of GDP growth rates projection for the full year 2019, whether it is in the U.S., in Europe or in Germany. I think in Germany, I don't have it 100% right now in my head, but I think that has been reduced from 1.5%, that was the original assumption for 2019, now to 0.8%, 0.9%. So that's really a kind of a sharp decline here. And so that's something we have to face, that is reality.

On the other hand, we have to keep in mind that the U.S. is showing still significantly higher GDP growth rate than Europe. So there is a better dynamic out there, even if it's on a slowdown, let me say, in part there, but it is higher than in Europe. And so therefore, we think that the market conditions will be better in Europe in comparison to -- the market conditions will be better in U.S. in comparison to the European circumstances.

On the other hand, I think, you know that all the trade conflicts have a negative impact. And as long as they are not being solved, I think the negative impacts will continue on the economic development, whether it is the manufacturing industry in Germany, whether it is any kind of trade business in the U.S. and so on and so on. So there is an impact certainly there. And last but not the least, the industry indicators, whether you take the PMI or others, clearly indicating that the second half of the year 2019 will be more challenging than the first half.

Now the expectation for the second half, our forecast overall remains valid under the assumption that the market conditions do not deteriorate further than we have assumed. Then the termination of the business relationship with the major Hubert customer will continue, as I've mentioned that at the very beginning already, to have the expected negative impact on organic growth in the second half. And last but not the least I think, it's important to mention, we will continue with our disciplined cost management. So we have done our homework, we are ready, and we are flexible here to react.

So in total, we are expecting for the group for the full year, a slightly positive organic sales growth, and at the same time, we have narrowed a little bit our EBITDA margin target for the year from 12% to 16%, now to 12% to 14%. And just to give you color and flavor for the, let me say, leverage here. Assuming that some sectors we have mentioned already, whether automotive or manufacturing, will suffer even more than we have assumed that from today's perspective, and other markets and other regions will suffer from the trade conflict and other things. We cannot exclude a slightly negative organic growth rate for the full year. But even in this case, we believe that the profitability could be and should be in the range of 12% to 14%, but then certainly be at the lower end.

With that, I would like to hand over and back to the operator, and invite you to ask the questions you might have.

Thank you very much so far for your interest. We are looking forward to get your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Craig Abbott of Kepler Cheuvreux.

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Craig Abbott, Kepler Cheuvreux, Research Division - Head of Mid and Small Cap Research, Germany [2]

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Maybe just 2 to start off on my side, please. First of all, I just wondered if you could -- let me take a step back. We've had a lot of companies that, of course, have profit warning in the last couple of weeks. And the message has been that June, in particular, saw a sharp slowdown, particularly in the manufacturing space here in Germany. And I just wondered if you could give us any kind of indication of what kind of trends you're seeing so far in July, in particular in the 2 units that were -- where you pointed out in the actual report that you've seen clearly slowdown during the quarter and in particular, KAISER+ KRAFT and the Central Division also in U.S.?

And secondly, I just wanted to ask, as you continue to roll forward with increasing your e-commerce share business, will there be other units beyond Ratioform, where you will have to undergo a restructuring of your sales structure? Those are my 2 questions for now.

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

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Yes. Thank you very much, Craig, for speaking out here in the Q&A round. And let me start to answer your first question here concerning what we have seen in June and what we are seeing so far in July. I think it's important to first distinguish between Central and KAISER+ KRAFT. I think 2 different markets, 2 different, let me say, environments. Let me start with KAISER+ KRAFT, and as you know, as most of you know, there is a kind of a strong correlation between the Purchasing Manager Index and our order intake. And we follow the PMI, basically with a time leg, 3 to 6 months. That is still valid in the case. No major time leg deviations here in comparison to the past.

We have seen a soft June, absolutely. But I think the June month is a very difficult month to compare this prior year because of the number of working days and the number of the holidays and the longer weekends. But even if you eliminate that, the performance was soft in June, especially in comparison to May and April. So within the second quarter that was the softest month. And July, yes, we are already a couple of days here down the road. And we are still seeing there a soft environment. Does it accelerate in terms of being even more softer? I think that's too early to say, but especially in Germany, I think, that's challenging out there, especially when you talk about the automotive industry. But overall, still in line with our, let me say, expectations and what we have expected for the second half. But again, the environment is challenging out there. And therefore, we have done our homework. We have prepared our organizations for reacting; a, with the flexible cost structure and take costs out there and adjust, let me say, the flexible cost part; and on the other hand, also think about what we can do to invest into the market to gain and to win additional business in the areas where we are seeing nice growth.

And I think, that's also fair to say, if you look at the KAISER+ KRAFT business, there we are seeing countries that are performing nicely. We are seeing industries or target markets that are performing nicely, but we're also seeing manufacturers and especially automotive industry right now underperforming.

Talking about Central Restaurant, I think, a different topic. They are active in the restaurant industry in the U.S., predominantly serving the independent smaller restaurants in the U.S. I think they have had very nice run over the last 8, 9, even 10 years. And this year, in the first quarter, they're short a little bit in comparison to the first quarter, where they have tested things with trade and aggressive pricing. And first quarter this year, I think, it's fair to say the restaurant performance index was indicating that the market is a little bit challenging out there. But on the other hand, I think, Central, right now, is also suffering from the numbers of new restaurants that are being opened and overall, the market is competitive and that's the reason why they have put their plans together to become more aggressive in second half of the year or already started in the second quarter, and there we are seeing first really good signs. So 2 different animals, 2 different things. I hope that answers the question.

And second one was about e-commerce, and I'm not sure whether I got that question.

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Craig Abbott, Kepler Cheuvreux, Research Division - Head of Mid and Small Cap Research, Germany [4]

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Well, yes. Basically, Ratioform, you have revamped your sales force both in Q1 and Q2. And if I understood it correctly, the problem for this was, as the business goes even more digital. And I just wondered, as you continue with your digital transition overall as a group, if there are other business units where you think now you might have to undergo more restructuring of your sales force? That was the question.

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Felix A. Zimmermann, TAKKT AG - Chairman of the Management Board & CEO [5]

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So in order to support and facilitate the digital business, right?

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Craig Abbott, Kepler Cheuvreux, Research Division - Head of Mid and Small Cap Research, Germany [6]

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Yes.

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Felix A. Zimmermann, TAKKT AG - Chairman of the Management Board & CEO [7]

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Yes. I think that was -- within Ratioform was pretty obvious that this change was after all the investments we have made and after all the good things we have seen within the digital transformation, the most obvious one. So far, we have no major restructuring here on our table or any planned, but we are certainly always reviewing whether the sales structure and the go-to-market strategy is under the change, let me say, circumstances in the market have changed customer behavior and changed development dynamics in the market, is still the right one. And that's something we are constantly doing, so I cannot exclude that we are also going to restructure one of the other, let me say, go-to-market strategy, will that ultimately sales structure in other divisions. But right now, nothing is specifically here on the table.

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Operator [8]

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(Operator Instructions) The next question is from Thilo Kleibauer of Warburg Research.

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Thilo Kleibauer, Warburg Research GmbH - Research Analyst [9]

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I have one question concerning your acquisition of XXLhoreca. You mentioned in the Q2 report, the purchase price of almost EUR 20 million and potential performance-related second purchase price of another EUR 20 million, where you assume currently to have to pay around EUR 3 million. So what is your base scenario? And what do you -- what is the current growth rate of this activity? And then what is your expectation for the growth of this business currently?

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Claude Tomaszewski, TAKKT AG - CFO & Member of Management Board [10]

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Thanks for your question, Thilo. Let me start answering the question by saying there is 2 parts of an earnout. There's one which is up a maximum of EUR 5 million and then there is a second one, which is in -- which has got a CapEx of EUR 15 million. So that's the total of EUR 20 million. If we look at the first one, which has a CapEx of EUR 5 million. That's the one based on the business performance of this year 2019, and that then will come due beginning of the year 2020. That's more out of a negotiation to agree on a purchase price. And here, we feel that it is reachable. And they're going to see some of that performance, and we have accounted for that based on the current run rate. The current run rate at -- if it's out, it's something approximately growth of 30%, 3 0, roughly. And that would then lead to that performance at the end of this year to be about half of what the cap would be of EUR 5 million, which is then paid out to the original bonus.

The second one, EUR 15 million -- CapEx of EUR 15 million is based on the year 2020 and '21, and that one, which has a much higher threshold to even be able to be in the money. At the moment, this is still clearly out of the money and so we have taken the decision, if we look at the threshold, whether it's reachable that, at the moment, the business plan is not too quite reach that threshold, and so we have not accounted for liability. It is fair to say that we would be very happy if we could pay something else to increase the purchase price because that would mean that the business has grown in a way and also in a very profitable way, because it's based on profitability, so it has grown to a figure, which is -- would just be extremely positive for the TAKKT Group when it comes to value add. And so at the moment, we don't feel that this might be more likely an earnout, so we have not accounted for anything on the second earnout.

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Operator [11]

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(Operator Instructions) At the moment, there seem to be no further questions.

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Claude Tomaszewski, TAKKT AG - CFO & Member of Management Board [12]

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In this case, thank you very much for your attendance. I would like to point out that we will publish the figures for the first 9 months on October 24, and we will invite you then to join the call again. And thank you very much for now, and whenever you have additional questions, please do not hesitate to contact us. Thank you very much. Bye-bye.

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

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Thank you very much, and have a great day.