Edited Transcript of TTKG.DE earnings conference call or presentation 30-Jul-20 12:00pm GMT

Now talking about the results. As you might remember, we have said that we have reacted immediately based on the experiences we have made during the last 2 crises. We have reacted immediately with the cost matters and with an active cash flow, means working capital management. So within a couple of days, I think we have agreed on clear targets. We have set up the structure for managing and steering those activities. And I think we have seen good results so far. And the main reason for that is, I think we have started quite early. And again, based on the experiences we have because of — yes, the things we have seen in the last 2 crises, we knew exactly what we needed to do. And on the other hand, I must also admit that the management teams within our business units have been pretty receptive and flexible and quick in order to adapt to those changes and to comply with the things we have agreed on. And so that was a good experience and that was one reason why we have seen also a very strong free cash flow generation in the second quarter and with that also, overall, in the first half of year 2020.

Besides that, I think we should mention that we have been successful in selling a real estate facility in the U.S. That’s something we have planned already a long time ago. We were very happy and maybe also lucky that during that typical time, we were able to sign and close that deal that generates also a onetime gain as well as a positive cash inflow, and Claude will talk about that impact later on.

So to put it in a nutshell, I think it was a challenging second quarter, with some really encouraging trends and good results, I think, under the given circumstances. And with that, we have — and we share with you later on, a strong balance sheet, strong financials. And with that, we believe we are well prepared to hopefully also benefit and identify opportunities that are now, I think, coming along with the corona crisis for us, where we can and should identify additional new markets, new customer groups, many new product categories for us in order to also see and perceive the corona crisis as an opportunity for our businesses and for our business model.

And with that, I would like to hand over to Claude. Thank you very much.

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

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Thank you, Felix. Good afternoon, everybody. I will give you a bit more details on a few explanations on the figures we just recently published.

Let’s start with the TAKKT Group and the development in quarter 2 2020. We see here an organic sales decline of 21% and if we look into that figure and describe the development during the quarter than we have seen in April, a figure, which was roughly around minus 30%, and followed by May and June, which has been roughly around minus 15%. So we can clearly see here during the quarter that the top line was improving during the quarter in May as well as in June.

Now some of that development of that improved development was helped by the demand from companies preparing to restart operations as well as for personal protection products as well as home office equipment. Felix has already mentioned that. So we have also seen, of course, one or the other sale being done due to that specific economy and a specific environment we are in.

If we then look at the profit EBITDA in the second quarter, we can see here that our profit was in decline of roughly EUR 12 million. And this is, of course, much less than the gross profit decline we have seen due to the minus 21% in sales on the top line. And what happened is that we have, as Felix said, started a very clear cost discipline and cash management and the cost discipline led to adjusting the marketing costs, adjusting the personnel costs as well as other costs in the second quarter compared to the comparable previous year quarter by — in total, a figure of minus EUR 40 million, less cost. EUR 6 million came out of marketing, so we had EUR 6 million less cost in marketing compared to the previous year quarter; we had EUR 6 million less personnel cost; (inaudible) previous year quarter, and EUR 2 million less other costs. And that figure of EUR 40 million is roughly half of the gross profit decline. So the gross profit decline, we were able to compensate by roughly almost 50% in order to achieve the figure and profit EBITDA you see here on that chart.

Of course, that figure was also helped by a onetime gain from the sale of the Hubert office and warehouse building in the States, [we can save money back, so we leased the facility back for 7 years. And that gain has, of course, halved that figure by EUR 4.5 million, which here has been accounted for. In the second quarter, we closed that transaction shortly before the end of June. And that transaction, in principle, (inaudible) in general was started mid-2019. So that was a transaction we have worked on for a while, and we were happy to close that despite the fact that corona hit us since mid of March. And so we were able here then to sell the building and lease it back before the end of the second quarter, and that’s why, of course, it’s reported here in that figure.

Now if we look at the — talk about the gross profit and the decline in gross profit, you can also see that the gross profit margin has declined in the second quarter, which post a bit as usual, at first glance by almost 2 percentage points. And here, the vast majority of that decline is the fact that, of course, when a — such a severe lockdown happens, and the demand is in decline. The way we have described it, then, of course, our inventory obsolescence, which is based on the reach out, you could say, as our stock. So how much we’re going to sell, of course, then based on the last recent trading and how far this is reaching out, then the scheme of calculating the inventory obsolescence leads to quite a high obsolescence. And so that’s primary factor here to see that gross margin decline despite the fact that also one of the other business model has. Volume-based vendor rebates, which, of course, and when the volume is down, are less available. So that’s the second biggest impact here. And these have led to that development and that figure we are reporting here on gross margin. Of course, once this is digested, we are not expecting that the gross margin going forward would be that much lower than previous year.

From a business perspective, we are not seeing a significant drop in gross margin or trade margins between buying and selling. So this is more here. Besides, of course, the volume impact, but the other one, obsolescence is more financial accounting and not so much the business into the business itself and operationally driven.

If we move on, let’s talk about the second quarter 2020 on omnichannel commerce, the biggest segment, the largest segment. You can see here an organic sales decline of 24%. Looking into the different divisions, which are within the omnichannel commerce segment, we report that the sales decrease at Ratioform was a high single digit. All the divisions have been in decline. Ratioform was a single digit, a high single-digit figure. And then the other business units with a double digit decline, KAISER+KRAFT, NBF and Central. So have been predominantly the factor, the reason why, organically, we are down by 24%. And then the best-performing division here, even if it was in decline, was Hubert, which was comparably stable with only an almost mid-single-digit organic decline. And that’s a very remarkable performance.

If we look at Hubert, who is serving catering companies, who is serving the retail grocery stores, so the food retail markets and hospitality, and education, I guess this is really a tremendous result, seeing that environment and who are performing as well and being able to change that many — the product range that their clients have then bought. And so the sales — the top line here has been a very good performance.

Of course, in the omnichannel, if we look at profits, there is the onetime gain from the real estate, which we have talked about. And at the same time, you see here similar impacts being managed in the cost structure. So the vast majority, which I talked about when it comes to marketing cost percent, other cost has, of course, then happened also in the omnichannel commerce. And so this altogether has then led to a profit decline on that chart here of only EUR 30 million.

Let’s move on, have a look at the web-focused commerce, the smaller segment of the two. In the second quarter, the web-focused commerce was declining organically by 9%, and here, we’ve got 2 divisions, which have a — shown an — a complete different development. We’ve got Newport here in that segment, which has shown a plus growth. So they have grown even more than 10%, double-digit organic growth here, in the second quarter, whereas Displays2Go, being quite dependent on trade shows and similar events has seen a quite severe double-digit decline, and these 2 have then led to that organic decline of 9% in that segment.

Looking at profits, profit was down by EUR 3.5 million. Of course, with the decline at Displays2Go, even with severe cost management, of course, that has been an impact on the profit and even Newport growing wouldn’t — wasn’t able to compensate for that. So we have seen here a EUR 3.5 million decline in profit figures for the second quarter.

Putting the second quarter together with the first one, brings us to the first half results and first half results for TAKKT Group have been organically on a top line decline of 16%, 15.6% exactly. And of course, the web-focused commerce here segment was more stable. And then the omnichannel commerce, due to what we have just seen also in the second quarter, that was, of course, then the outcome. In these figures, in the report for the profit for the first half since, of course, the EUR 4.5 million gain, onetime gain from sale and leaseback of the Hubert building as well as, and there was the first quarter, the onetime expenses we did for our TAKKT 4.0 organizational model of EUR 7.6 million. So these 2 are both in the figure you see here on the chart and not quite, but almost compensating each other here in the reported figure.

Looking at omnichannel commerce. First half year 2020, we see here an organic sales decline of 18%. We see an above-average development to that figure of Ratioform with a mid-single-digit decline, whereas KAISER+KRAFT, National Business Furniture have been more severely hit than the average of the segment here and Hubert and Central, with their double-digit decline, were almost in line with what the segment reporting is that they were quite close to the segment figure. And yes, so all the [5 by] declined with a bit of different speed and different development, and that then led to minus 18% for the first half year.

Profit is a consequence of things what we just explained so all the different impacts. And so we are losing here compared to the previous year figure, EUR 22 million, EUR 22.6 million profit, which overall, looking at the circumstances that the environment and the economy is for us a good result.

Similar web-focused commerce, also a good result for the profit considering the circumstances. Organically, at top line, the decline was 6.6% and here as in the second quarter, also the first half year figures showed that difference in the development, Newport with a high single-digit growth, whereas Displays2Go with a more significant double-digit decline. That also shines through in the first half year figures for the web-focused commerce.

Leaving profit and loss and coming to talk about cash flow, we see that the TAKKT cash flow follows, of course, not completely, but almost the development of EBITDA. If you look at the EBITDA figure, we see that there’s a decline of minus EUR 27 million and our TAKKT cash flow, and that means before net working capital, the cash flow has come in with a decline of minus EUR 20 million. And so you can see here that this was helped by the financial result, which was a bit better. So we paid less interest compared to the previous year figure, we paid less current taxes.

And then if we look at the next line, you can see here that our noncash expenses in the P&L have been significantly higher compared to previous year. And that is due to what I explained in the gross profit margin. So that’s a lot about inventory obsolescence and the calculated obsolescence here, which then has led to a quite significant noncash expense, which, of course, then, because it’s not cash, we haven’t lost any money here, can then be here corrected. And so you can see that the TAKKT cash flow before net working capital is down by EUR 20 million.

Moving on, on the next slide, the cash flow generation, we are down EUR 20 million on TAKKT cash flow. And then you can see here that we have been able to generate EUR 33 million cash out of net working capital. That’s a tremendous result. That’s more than we would have hoped for. And the reason for that EUR 33 million cash coming in here is, first, the reduction of receivables, predominantly trade receivables, we have been able for the first half year to get the trade receivables down by EUR 14 million in the second quarter, even by EUR 18 million.

And the other component is bringing down the receivables from vendors, so from vendor rebates. So due to the fact that, of course, then the volume-based rebates are less. Out of last year, still when they were higher, we get the cash in. But then, of course, the new, when the rebates coming in due to the sales decline are less, so we have generated here, also a quite nice cash flow from vendor rebates. And so all in all, there was already a figure of EUR 22 million coming in from trade receivables and vendor receivables and the rebate receivables.The other component is tax-related that has to do with the way TAKKT payments are done. We have been able to generate cash in from tax payments we have done last year, where the payment in advance for the taxes so has been higher compared to the taxes we then have to pay out of the tax [declaration]. And the other component is that we have used the ability in certain countries in Europe to postpone the value-add tax and so sales coming in, including the value-add tax in the second quarter and then countries where we can postpone these tax payments we have postponed it.

And that together — these 2 together, when income tax payments and as well as VAT, that has been another double-digit million cash in we had. Of course, that cannot be repeated. It cannot be repeated to have a further decline in receivables, hopefully not because that would mean our business, of course, is rebounding. And also on tax then, of course, at some point, we will have to pay these taxes of course, especially VAT. The others is a onetime income — cash in. And so we have to expect, of course, then also then where we pay the VAT in the second half, but this was a bounceback, a small one here when the cash goes out.

But overall, we are very, very happy about that plus EUR 33 million cash coming in, which then leads to a cash from operating activities of EUR 75 million. We had a CapEx figure, which was only roughly half of previous year, EUR 7 million out of EUR 12 million. And then we had the proceeds on the disposal of noncurrent assets where the predominant cash coming in is the property sales, the sale of the Hubert building in the States of EUR 22 million coming in. And so this has led to a free TAKKT cash flow of EUR 91 million, which is a very, very high free TAKKT cash flow for the first half year, higher than previous year, but also historically, a very, very high figure.

And considering the circumstances, that’s an excellent result, of course, which cannot be repeated. This is, of course, not sustainable because it has been helped by the sale of the building, and it has been helped by winding down net working capital, especially the receivables. And managing the tax payments, but we are happy, despite the fact that, of course, this cannot be repeated that we were able to bring the TAKKT Group in such a favorable solid cash position going forward.

Now looking at the balance sheet. As a consequence, of course, of that huge free cash flow, we were able to pay back bank liabilities, which now stands a little bit more than EUR 20 million, EUR 21.6 million bank liabilities. And then together with the predominantly lease liabilities that brings us to a net financial debt of EUR 116 million. So bank liabilities in the second quarter, we were able to pay back by more than EUR 70 million, because we were starting the quarter with bank liability shortly below EUR 100 million, and we have brought them down to a figure of EUR 21.6 million.

Of course then, in that net financial debt figure due to the sale and leaseback, there’s also some addition and roughly EUR 40 million has been added to that figure now being in a lease, a 7-year lease with the buyer of that building. And so the financial debt here has gone up by EUR 40 million due to that transaction.

Worth possibly reporting is that, at the same time, we have done an early prolongation of our short-term credit facilities of roughly EUR 130 million. So that means we had 1-year credit facilities, 12-month facilities, which normally would end at the end of this year, 2020, of EUR 130 million. We have used the opportunity during the second quarter to already extend these EUR 130 million into the year 2021. So we have done early prolongation in order here to be not at risk at the end of the year to have to manage that situation in December. So EUR 130 million was already now being prolonged into the year 2021.

And then at the same time, we have used the opportunity to extend our committed credit facilities slightly by almost 20%. So we have committed credit facilities of roughly EUR 250 million when we were entering the second quarter. And now we’ve got credit facilities — committed credit facilities to almost — to a figure of almost EUR 300 million.

Equity ratio as a consequence has gone up. So due to the fact that cost that we have been able to pay back and bring the bank liabilities that much down and the profit coming in, our equity ratio has gone up to a figure of 63%. So all in all, from a cash perspective, from a perspective of are we able to use opportunities going forward, we can conclude that we have prepared the group in order to be at all time in the driver’s seat and also to make use of opportunities, if and when they arise.

And with these words, I would love to, yes, hand back to Felix, who’s going to talk about the recent thoughts in the corona crisis management as well as some expectations going forward. Thank you.

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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 the additional explanation information. And yes, let me move on here with some thoughts on the corona crisis, the same management and the plan and the current priorities.

As you might remember, we have structured the corona crisis management in 3 phases. And the first one was a pretty urgent one, first couple of weeks where we were really focusing our activities on protecting our people, making sure that the businesses are, let me say, up and running and that we organize ourselves in a way that we were able to deal with the new circumstances.

The second phase was more a phase where we have said, let’s find out what the new normal might be. Let’s adjust our capacities, let’s adjust our agreed measures to make sure that we start and implement the measures.

And then the third one, the third phase is the phase where we are saying, wait a minute, maybe there are opportunities out there. And beside that, we shouldn’t forget other things that are important and relevant for the TAKKT organization. And therefore, we want to make sure that we are not overseeing things that are still important for us because of the corona crisis. And that’s the reason why we, as the Board have said, we have 4 areas we would like to focus on our activities going forward.

So the first one is, of course, keeping our business on track. And you all see the news. In recent news, there’s still some uncertainty out there, especially in the U.S. but also here in Europe. And therefore, I think we are well advised in being always prepared for a second wave and to make sure that our businesses continue, even in the second wave, to stay open and operate.

Therefore, we track the developments very closely and exchange the most recent news and ideas how we should react on that. There’s nothing on the horizon right now where we must say, “Oh, my God, the second wave is coming,” but we need to be, I think, careful. And therefore, we have here a clear idea how we monitor the things, and what we then need to do in case of a second wave.

And at the same time, we continue to track and to deliver on our agreed cost and cash management measures and adapt the P&L, the main P&L positions, whether it’s marketing or personnel costs or other costs to the current business development. And that’s something where I think we have shown a very high flexibility, and that is good to note. So keeping business on track; and we are always, let me say, careful, but also ready to act.

Now the next one is proactively generating demand. And there, I’ve mentioned that already at the very beginning, we have made a good experience by adjusting our product range by adding products to our product range in order to include products that are currently in high demand; whether it’s anything around hygiene or health protection or food packaging or home office or whatever it is, that we have dedicated teams in our business units that are exploring opportunities there. And we will continue with doing that because we are seeing there, of course, short term trends but also mid- to long-term trends. And I think we are better positioned if we take care of that now instead of waiting; and therefore, I believe we’re going to see also some positive impacts and sales contribution from those activities in the upcoming month and quarters.

And then also approaching and develop new customers. And Claude mentioned already the performance of Hubert in the U.S. as an exceptional good one. And I think there, we have seen how the exploration and the development of new customer groups can help. And those customer groups came in predominantly via the corona-related products that we’re looking for. And now the job of the organization is, of course, to try to start that cross-selling activity and try to serve those new customers the existing product ranges and maybe new products we are finding in the market. And, therefore, a more active approach in order to develop new customers and new markets is now being required. And there, we are also in a close and constant contact with our business units. And I think those 2 things, more new products and also more new customers and markets, are growth opportunities, and we have to proactively approach them.

Then the third area is the implementation of TAKKT 4.0. As you might remember, the key strategic initiative of the TAKKT Group in the year 2020. And we believe the corona crisis certainly had an impact on the implementation of TAKKT 4.0, but it’s certainly not all questioning the overall idea of TAKKT 4.0, and we have described and explained it several times, and therefore, I don’t want to do that again.

So here in detail, we would like to go ahead with our clear focus here on the implementation of TAKKT 4.0. And there in 2020, one focus area, certainly, to prepare the business units in the omnichannel area, predominantly KAISER+KRAFT here, for a stronger integration into that segment. And you have seen, we have been pretty active already in the first quarter 2020 at KAISER+KRAFT, and we will continue to do so. I think it’s fair to say those initiatives are, under the given circumstances, on a good track.

And then last but not least, within TAKKT 4.0, I think it’s worth to mention also that the strengthening of our operational excellence with the new management methods and processes will also be higher on our list, and we have done here major steps already and additional will follow. So I think here it’s also fair to say we are on track.

And then last but not least, and that’s good to know, looking for growth opportunities out there, whether it is the organic ones I have described already or the acquisition-related ones in there. I think it’s good to see that the deal flow, especially in Europe, is starting to flow. While at the same time, the U.S., it’s still pretty difficult. So there is actually no deal flow at all out there. But we have been approached several times, and it’s good to know that the business is out there, and investment bankers and consultants are aware of that TAKKT is in the position right now to do an acquisition. We have the balance sheet. I think we can react in a quick way. And therefore, we are more than open-minded and looking for opportunities out there.

So those are the 4 main areas, our focus areas going forward. And with that, I would like to, move on with the outlook for the full year 2020. And on the following slides, you see the organic sales growth development per quarter. That is an additional information we are providing here always, just to give a little bit more insights in order to better understand why we are expecting what we are expecting for the rest of the year.

So let’s talk about the outlook for the year — for the full year on Page #13. We believe the environment will be challenging. It will stay challenging. The economies in Europe and especially in the U.S., we believe will show a severe negative GDP development in 2020. And we don’t know when we’re going to see that, let me say, turnaround. So therefore, high uncertainty with regard to the further economic development and the spread of the coronavirus, whether it is a second wave or whatever it is.

But high uncertainty is not creating a good and sustainable environment in our customer, let me say, groups and our customer base. And, therefore, we believe that challenging environment will continue to exist out there until we see a more stabilization of that pandemic, whether we are seeing it because the second wave might then be over, or someone founds a medicine against that virus. But I think unless we haven’t seen there any stability out there, the environment will be — and will remain challenging.

So therefore, the management focus right now is, as I’ve described them, on the business continuity, maintaining the cost discipline and further adapting our P&L structure as well as the product ranges and the working capital to the current environment. And that’s something, again, I think where we have seen a good flexibility in the last couple of month and where we have, I think, a good track record out of the past. And so we will continue to focus on that. And going forward, we will proactively look for organic as well as inorganic growth opportunities. And then you can be sure that we have opened our minds and are visible out there, have raised our hand. We are ready. And whenever there are opportunities, we will look at those and we’ll explore them.

Now the current expectation for the full year 2020 is unchanged. We believe sales and EBITDA will be significantly below the level of 2019. And even after the second quarter, we have no reason to adjust that and to say that we could make a forecast for the remaining 6 months of the year. There, we are careful. We have seen the positive trend in Q2. We hope that this will continue in terms of that we have found a new level of that sales development. But for us, it is too early to give a more detailed guidance here. And I’m sure there are some questions later on. We are more than happy to give you a little bit more comfort. But for the time being, I think it’s fair to say sales and EBITDA will be significantly below level — or below the level of 2019.

But at the same time, and I think that’s important to keep in mind, we would generate a very positive free cash flow. And that will help us in all directions: will strengthen our balance sheet, will give us some more flexibility to invest into our future, and will make us more independent. And even we can repeat that, as Claude said this already, I think it’s good to know that we can unlock that cash, that we have the flexibility, and that’s making TAKKT pretty resilient in that crisis.

With that, I would like to hand back to the operator and open the Q&A session. Thank you very much for your attention.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And I see the first questions coming for today. First up, we have Christian Salis calling from Hauck & Aufhäuser.

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

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Hello, Christian?

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Hans Christian Salis, Hauck & Aufhäuser Privatbankiers AG, Research Division – Equity Analyst [3]

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Yes. Hi, everyone. Can you hear me?

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

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Yes.

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Hans Christian Salis, Hauck & Aufhäuser Privatbankiers AG, Research Division – Equity Analyst [5]

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Excellent. And first of all, congrats, gentlemen, to the better-than-peer results this morning. So particularly, I find the cash flow generation really impressive. So I’ve got a couple of questions. So first of all, you have outlined these 3 areas where you basically benefited even from COVID. So could you please provide us with an idea of how much it is in terms of group sales for these products, maybe?

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

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Is that the first question, or you want to move on and ask the other questions, or –?

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Hans Christian Salis, Hauck & Aufhäuser Privatbankiers AG, Research Division – Equity Analyst [7]

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No. Maybe let’s take them one by one, please.

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Felix A. Zimmermann, TAKKT AG – Chairman of the Management Board & CEO [8]

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Yes. Claude, do you want to talk about that?

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Claude Tomaszewski, TAKKT AG – CFO & Member of Management Board [9]

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Yes. Yes. Let me just make one remark before we talk about the figure. I guess there is a few ways how we can approach that. There’s one way looking at products; and specific products which is, let me say, more COVID related, which we might have also sold before, but now, of course, go to a complete different volume. And then there is, of course, the second area where it’s more difficult to see whether they are now related to some reopenings and so on. But you can only assume that would be the case. Because at the end, they will know exactly why that specific transaction or why that specific product was now bought from your customer and [you can only assume].

So more precisely on the product. I think it’s fair to say that we have concluded that roughly 10% of our sales are generated by some more specific personal protection or COVID-related products where people try to react to their environment and the pandemic. The other impact, of course, is very difficult. And there, I think, not really seriously possible to frame the figure.

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Hans Christian Salis, Hauck & Aufhäuser Privatbankiers AG, Research Division – Equity Analyst [10]

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Okay. And then the second one would be on the home office topic. So it seems like the trend towards home business was really kind of a tailwind for you in Q2. So could you maybe give us an idea of what companies basically have been buying for their employees? So what have been the best sellers maybe? That will be quite interesting.

And then secondly, on rather the midterm, to what extent are you worried that the trends for home office and subsequently, maybe reduced office space could present a challenge for you in the midterm?

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Felix A. Zimmermann, TAKKT AG – Chairman of the Management Board & CEO [11]

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Yes. I’m more than happy to take those 2 questions here. First of all, we have seen, let me say, more demand for home office equipment in our web-focused commerce area. And of course, to some extent, also in our National Business Furniture group. But the major shift was they are visible in the web-focused commerce area, where we are serving predominantly smaller customers close to, let me say, consumers, business to anyone, we call it.

So to answer your questions, we have sold the home office equipment predominantly to people who started to work from home. We have had one or the other order from businesses in order to equip the home office of their employees, but it was more the exception. So it was the business for anyone, let me say, part; and there, especially companies like Equip4work or Office Furniture Online in the U.K. benefited from that. And that was a good experience, and we have seen a lot of traffic. And we have seen the weekends where we have received more orders on a Saturday and a Sunday for home office equipment than we normally receive on a normal working day. So very positive dynamics.

On the other hand, you have asked the question whether that trend could lead to a situation where there’s less office space out there and with that, maybe a lower demand for office equipment and therefore, also for office furniture. Yes, there are certainly a risk that there is a lower, let me say, office space need out there. But on the other hand, we are seeing a huge trend there, not only towards home office. We’re also seeing a huge trend that the furniture people are buying for their home are, let me say, furnish and equipment, they can use, we call it in a kind of a dual way. So they can use it as a desk during the day, and they can use it also then later on as a kind of a desk for dinner or for lunch or for whatever. So there, we have seen in the U.S., a lot of product innovations, where you have dual use and for furniture and equipment. That is bringing a lot of product innovations to the market that is driving demand.

So yes, there will be — certainly, and there is a risk out there that the office space will be less in the future. But on the other hand, especially in the home office area, we have seen a lot of very interesting product innovations and a lot of opportunities. And again, we have to keep in mind our market share, if that at all is making sense to look at that, is at about 1%. So we should focus on those innovations and should make sure that we are out there with the innovations on time with a reasonable and competitive price on our website and make sure that the customers are looking for that, finding it earlier on our website than on the other websites. And so we focus on product innovations.

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Hans Christian Salis, Hauck & Aufhäuser Privatbankiers AG, Research Division – Equity Analyst [12]

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Okay, then. And maybe my two final questions. So first, on cash flow and on particularly on working capital. So you mentioned the strong progress you made on the receivables, bringing the receivables down in the first half of the year. I think the inventories and payables were roughly stable year-over-year or even — or eventually is even slightly increased. So could you give us maybe an idea of how we should think about the development in terms of inventories in H2? Do you see also some optimization potential there? And also the same question on the payables.

And then the final question would be that, yes, could you provide an idea of — or give an indication on the current trading? I mean, you said May and June were down by around 15%. Are you seeing, yes, another recovery in July? Could we assume maybe that July sales are contracting by maybe 5% to 10%, would that be fair?

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

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Yes. Claude this is something for you.

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Claude Tomaszewski, TAKKT AG – CFO & Member of Management Board [14]

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Yes, yes. It feels like something for me. Yes, let me start with the inventories. We have started, of course, also to look at our inventories and, of course, have reacted to the sales decline. Inventories, the way in our business, we manage them, of course, reacting in a different time frame compared to receivables. So inventories, I think in the second quarter, went down, at least on a cash (inaudible) perspective by something like EUR 2 million to EUR 3 million. And we are expecting a bit more going forward.

Now when we look at inventories, I think it’s fair to say that the core inventory has gone down a bit more than that EUR 2 million to EUR 3 million. But due to the fact that, of course, we were buying new product ranges, especially for personal protection and similar use cases, so going back to [the three benefits we] explained, where we benefited from. Of course, then that’s a counter effect. And so of course, that has also then led to some additional inventory.

But overall, when we look into the second half, we are expecting inventories to come down a bit more. Of course, again, depending on the top line; but we have actions in place where we can see that the inventory is going — is and will go down more than what we have seen in the second quarter, at least, if the top line stays similar. And of course, if other things are all equal, then we’re going to see a decline in inventories going forward.

Payables at the end is a — is at the end, a counterpart to inventories because payables, there are 2 major categories. The first one is the purchasing, the sourcing of the product. And the second one is paying the search engines of this world. Or the one search engine, you could almost say, so that’s the bill to Google. These are predominantly 2 big payables here. And so if we look at products that will be more in parallel, of course, to inventory across the next 6 months, when we think about the trends. And when it comes to the other payable, that means basically, it will follow the trend of our marketing budget or our marketing costs.

Looking at current trading, when we look into July, I think it’s fair to say that in July, we are seeing a very similar current trading compared to previous year to what we have seen also in June and also in May. So it is somehow between [a minus 10, minus 15], when you look across the weeks where we are kind of trading. So it’s fair to say that we are close to or similar to what we have seen. So there is not a significant major improvement which we could conclude in July compared to the weeks before. It goes up and down, of course. It’s a bit — so, difficult to see a trend there. But in the longer term, we are not — we are seeing a similar development, full stop.

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Operator [15]

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The next question we have comes from Mark Josefson calling from Pareto Securities.

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Mark Josefson, Pareto Securities, Research Division – Analyst [16]

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Yes. And again, congratulations on the speedy action to focus on adjusting the cost base there. I’d just like to push you, first of all, on your last answer with respect to the development of orders or sales in Q2 because in your opening remarks, you talked about April, minus 30%. And then you said May and June remain at minus 15%. And I wondered if was it both May and June was around about the 15% decline? Or was it that these 2 months together were minus 15%, so maybe it was, I don’t know, minus 20% in May and minus 10% in June? So I’d like to just push you on that.

I have two other questions. First of all, with respect to the comments on the gross margin in Q2, down to 30 basis points or so. And the way — which is quite conservative in the way you treat obsolescent stock. And I wonder if we start to get a pickup in sales now, is there a chance that some of that comes back and supports the margin in Q2? Alternatively, are there further risks do you see with your stock levels at the moment? You might have to write-down further inventory as we go through the year.

And then I have a question with respect to TAKKT 4.0 in terms of the remainder of the year, and I think it was EUR 7 million or so was — has been spent so far. What is the amount that you’re anticipating to spend for the rest of the year?

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Felix A. Zimmermann, TAKKT AG – Chairman of the Management Board & CEO [17]

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And I think, Claude, it’s again your call.

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Claude Tomaszewski, TAKKT AG – CFO & Member of Management Board [18]

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Thank you, Felix. It feels like I should look at these questions. Thanks for the question. So I’m happy to not only look at them, but also try to answer the question.

May and June was similar. So there was no big difference between the — if you look at the figures on the top line compared to previous year, May and June, you could say May itself was around minus 15% and also June was roughly minus 15%. So kind of we went to that level, minus 35%, minus 30% — minus 30%, 35% — in mid-second half of March and in April. And then it became better during kind of end of April, going into the May period, and then we are trading at that level almost since mid-May. And since then, in the weekly figures, we cannot see huge differences in the account trading. Of course, when you look at the different businesses, there’s up and downs all over the place. But for the group, it feels like that that’s kind of what the outcome is now being in that environment, that economy. Would we hope for a bit more in the second half? Yes, possibly; but to be fair, when we look at July, we are still trading at that level.

Looking at the obsolescence, you’re right. In general, let me speak further about in general and then possibly about the risks. In general, we would see at some point when the demand comes back and the sales figures goes up, then from a financial accounting perspective, of course, some of that cost which have been put into the P&L to cover for a longer reach of your stock, would, of course, then come back if that reach becomes shorter, and that will be depending on the volume and then the recent sales. So, correct: financially, some of that will come back.

At the same time, of course, there are risks sitting in the inventory because even if the sales come back, we might have products on stock which possibly at some point — which possibly might not be that easy to sell because of a structural change, and people are not looking for that product anymore if it just stays there too long. And so we are, at the moment, of course, also looking into the inventory, not just to bring it down, but also at the — what we call the nonmovers and the very slow movers.

And of course, we are looking at that type of product and, of course, managing it to find solutions and to hopefully then not have to write too much down. And so that the risk is not materializing, which will be covered from a financial accounting perspective, I guess. But then, of course, even if they come back, if we have to use that obsolescence to cover that risk, then, of course, the counter — the spin back what we just described, would then not come back because of the risk. So we have to be careful here. And we have started also on that to look into the details of the nonmovers and the slow movers.

Talking about the one-offs for the second half, I think we have seen the vast majority of the one-offs for the year 2020 in the first half, with the EUR 7 million to EUR 8 million. We are doing, of course, one of the other action now, especially because of the volume. So there is, of course, stuff happening. With — I mean, thoughts about do we have the right workforce? Or do we have to, of course, adjust? And there will be one or the other company who might go into a program of just in workforce, but that will all be in figures which are low single digits. So we are not expecting an amount similar to the first half when it comes to one-offs, but one or the other possibly smaller amount, we’re going to see where we are adjusting, of course, for the volume also we see. Hopefully that helps.

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Mark Josefson, Pareto Securities, Research Division – Analyst [19]

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Okay. Yes, that does help. If I still got the mic, I can tell that Felix is feeling a little bit left out here. And I just want to bounce in one question with respect to marketing. To take out EUR 6 million in a quarter, it’s quite a huge lump out of the marketing spend. Have you learned something from that in terms of your — I mean it’s done against a very awkward background, I accept that. But have you learned something out of that sector maybe going forward, you don’t need to spend so much going forward, or indeed may change the way you start to promote your businesses going forward?

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Felix A. Zimmermann, TAKKT AG – Chairman of the Management Board & CEO [20]

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So maybe that’s the question I can answer.

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

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Yes, it was designed for you.

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

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Yes, yes. So it’s all about the efficiency of the marketing spend. And I think it’s no surprise since we are basically not offering products or things where we could generate additional demand by spending more marketing dollars. I think we need to look at the marketing efficiency. We are more in a position where we cover demand. So someone is having a need for a desk or for work bench or for locker or whatever, then searching on the web, and then we need to be present out there.

So since the demand right now is pretty low, the efficiency of the marketing spending also pretty low. That’s no surprise. And I think it’s important to understand the attribution means the contribution of each and every marketing dollar you’re spending out there for online, for offline and for other marketing tools. And I think that we have a pretty good understanding when we shift the marketing or when we should spend the marketing dollars and when we should not spend the marketing dollars.

And I think the ongoing change in our marketing toolbox towards more online marketing is giving us more flexibility to react in comparison to the other 2 crises we have been through in 2008 and ’09 and 2001 and ’02, where we had predominantly catalog costs as marketing costs, and that was pretty difficult to react quickly. So 2 key takeaways. I think it’s good to have a flexible marketing toolbox, and it’s good to have a good attribution, let me say, model of feeling in place so that you can steer the marketing spending along efficiency. And that is what we are doing, and that’s what we have done.

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Operator [23]

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The next question comes from Thilo Kleibauer calling from Warburg Research.

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Thilo Kleibauer, Warburg Research GmbH – Research Analyst [24]

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Yes. Thilo Kleibauer. I have two questions. The one is a follow-up on the gross margin deterioration in Q2. Can you give us some more details in which segment and in which activities, especially you had to write-down inventories? That would be helpful.

And the second question regarding the — yes, maybe also the online marketing. I’ve seen that at KAISER+KRAFT, you currently offer across Europe, a kind of summer sale with a 10% discount, 10% off the total assortment. So I mean, this is something which KAISER+KRAFT is doing every year? Or is it a kind of a new marketing tool? Because normally, you say, well, omnichannel is less price-sensitive than the web-focused companies. And omnichannel maybe is more driven by the demand and not by offering a 10% discount. So maybe you can give us the reason and what you expect with this kind of summer sale.

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Felix A. Zimmermann, TAKKT AG – Chairman of the Management Board & CEO [25]

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Should I start with the last question, Claude, and then you’ll answer the other one?

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Claude Tomaszewski, TAKKT AG – CFO & Member of Management Board [26]

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Yes.

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Felix A. Zimmermann, TAKKT AG – Chairman of the Management Board & CEO [27]

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Yes. You’re absolutely right. That is normally not our style to say, at 10% on everything. On the other hand, I think that’s the beauty on omnichannel and direct marketing business models. It’s always — there are always opportunities out there to test something. And we have tested during the corona crisis an even higher sales, let me say, or discount campaign, and we have seen some encouraging results. And that has been caused by the situation we are in. That is not, I think, something we can extrapolate into the future.

But in the given circumstances, we have seen that people are receptive to that kind of an offer. And therefore, we have said, let’s try that again for a limited period of time and with a clear understanding that we need to evaluate afterwards, what kind of new customers we got on board here. Is that a nice and a valuable addition to our customer base and do they represent a customer lifetime value that is justifying the discount? That’s point number one.

And point number two, the discount is only relevant for people who are not having an agreement with us, kind of a discount or a framework agreement, and therefore, only for a limited proportion of the business. And therefore, the risk of a negative impact on our gross profit margin is manageable. Does that answer your question?

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Thilo Kleibauer, Warburg Research GmbH – Research Analyst [28]

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But — so it’s a tool to acquire new customers?

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Felix A. Zimmermann, TAKKT AG – Chairman of the Management Board & CEO [29]

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Yes.

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Thilo Kleibauer, Warburg Research GmbH – Research Analyst [30]

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But is — so — but this is obviously customers from smaller companies or private orders or something like that. So this is not the normal profile of KAISER+KRAFT?

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Felix A. Zimmermann, TAKKT AG – Chairman of the Management Board & CEO [31]

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It is attracting the German Mittelstand and maybe below the Mittelstand. But even with number of employees of more than 50, it’s an attractive customer. For KAISER+KRAFT, below 50 — you’re right, then the potential of the customer is not high enough. And we have learned that people and companies who were looking and searching for corona-related products now to get ready for a reopening searched on the web. And there, the idea was to attract those customers by offering them a special discount. That worked out in the first campaign, where we have tested it, and now we test it again.

But you’re right, it is not, let me say, should not be a new element of our overall marketing strategy.

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Claude Tomaszewski, TAKKT AG – CFO & Member of Management Board [32]

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Yes. Looking at your questions on gross margin and which business units are impacted and where does it come from. I guess it’s fair to say that it predominantly comes from these business units, which, of course, have a much more severe decline in the sales development, because it’s based on recent sales. And if we look here at the business units where we have the highest, then, obsolescence to be built, that was KAISER+KRAFT; that was Displays2go, which is the most hit by the crisis; and that was National Business Furniture.

And on top of that, that was Hubert. Hubert is of course surprising because we are talking about Hubert, that they would have excellent — that they were able — that excellent performance, they were able to generate a good top line but they were able to generate good top line with new products. So their underlying core product range is also in severe decline. And so of course, then having that stock, they had to do that obsolescence. So the business units which are hit here the most is KAISER+KRAFT, Hubert, Displays2Go and National Business Furniture are the ones also, which in the top line, directed by the, you could say, COVID product sales are hit the most.

And talking about COVID product, I think it’s fair to say that we also have a bit more than EUR 1 million one-off write-down here, because we were also a victim of having all these new products from Asia, especially for personal protection, which has helped a lot and was a great business now in that period. We also had, of course, unfortunately, 1 product where we have been a victim of the quality coming in. And so we had to write that down. And of course, we are in dispute there to get something of that back. But it also sits in our figures, a bit more than EUR 1 million, where we had to write down a product due to quality issues. Hopefully, that answers your question.

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Operator [33]

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Okay. It looks like we don’t have any more questions at the moment. (Operator Instructions)

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Felix A. Zimmermann, TAKKT AG – Chairman of the Management Board & CEO [34]

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That does not seem to be the case. Thank you very much for your participation. We will publish our Q3 results on October 29. And in the meantime, if you have any further questions, please do not hesitate to contact us. And yes, have a nice day. Goodbye.

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Claude Tomaszewski, TAKKT AG – CFO & Member of Management Board [35]

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Yes. Thank you very much, and enjoy the rest of the day and enjoy the summer. Stay healthy.