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Edited Transcript of TKTT.PA earnings conference call or presentation 30-Jul-20 9:00am GMT

Nanterre Aug 1, 2020 (Thomson StreetEvents) — Edited Transcript of Tarkett SA earnings conference call or presentation Thursday, July 30, 2020 at 9:00:00am GMT

Tarkett S.A. – Chairman of Management Board & CEO

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

Ladies and gentlemen, thank you for standing by, and welcome to the Tarkett H1 Results 2020 Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today.

And I would now like to hand the conference over to your host, Fabrice Barthélemy, Chief Executive Officer. Please go ahead, sir.

Fabrice Barthélemy, Tarkett S.A. – Chairman of Management Board & CEO [2]

Good morning. This is Fabrice Barthélemy speaking, and thank you for joining this H1 call. First, I’d like to wish and hope that you and your families are doing well, especially during what is an unprecedented period since March this year. Today, I will lead this call with Raphaël Bauer, our CFO. But let me get directly into target results for the first semester.

In H1, our revenues declined by 12.4%, but we saw our EBITDA margin only erode by 40 basis points in H1 at 8.6% of sales. So we will show to you this morning what’s happened to our business and how we’ve managed this crisis. Of course, most of the impact on activity in H1 actually occurred in the second quarter, as of mid-March, but really in the second quarter. And in Q2, our sales declined by 20.5%. This is, of course, following not necessarily — not the COVID-19 epidemic and especially the lockdown measures that hit China first in Q1, but then Europe and North America and all countries globally throughout April. Very clearly, the trough of activity was in April.

Our sales declined by 40% in April. We had announced that already during the quarter. And from then on, we saw a sequential improvement throughout the quarter, minus 30% in May; and in June, only slightly down versus last year on a reported basis. But let’s keep in mind that we had more days in June, and on the same comparable number of days, it would have been minus 10%. Nevertheless, a strong sequential improvement across the quarter.

Even with a 20% reduction in sales, we managed to maintain an EBITDA margin with double-digit and only 40 basis points lower than last year. We also managed during the quarter, during the semester, to improve our financial leverage compared to what it was at the end of June 2019 to keep it at 2.8x adjusted EBITDA, which is well within our financial covenants. So we consider that these results, given the circumstances, are very good results in the context.

How did we manage the crisis? We set 4 priorities very clearly as early as March. And the 4 priorities were, of course, to protect our employees; ensuring the continuity of our business for our customers; and of course, protecting the profitability of the business; and preserving cash, which is really essential to keep our margin of maneuver. And I want to say that these 4 priorities were communicated with the entire company, I believe they were clear. And we have delivered solid results on all — on each of these 4 priorities.

To protect our employees, we have adapted our plants and offices to ensure social distancing. Some of the plants had to be stopped for a few days, especially in the second half of March and beginning of April to give us time to prepare, to segregate flows, to put in place a specific organization in local rooms, in canteen, et cetera. That being said, the processes we have in our plants make it relatively easy to adapt the workstations because the workstations are sufficiently distant from one another. So we carried that adaptation work very successfully and swiftly. Of course, we also moved within a matter of days to 100% remote working for all office-based associates. And that was a massive shift, which was done very efficiently. But for us, let’s be clear, remote working or homeworking is not the new norm. It was a very specific period of time. But as soon as it is possible, country by country, we encourage our associates to come back to the office at least a few days per week. And that for us is important because it has just built a sense of purpose and belonging that makes the company stronger.

Continuity of business meant different things in different countries and markets. We had to adapt to our customers, actually. For example, in France, during most of April, all DIY customers were completely shut down, except for Internet sales. At the same time, in North America, sports installations, outdoor sports installations were performed close to normally. So we had an activity that was very close to normal there. So country by country, we adapted the capacity and the pace of work to make sure we continue to serve our customers.

We took very early decisions to protect profitability with the Change to Win plan. We had already launched numerous initiatives on SG&A to reduce SG&A, for example, also on the manufacturing footprint. But on top of that, we had very decisive and vigorous action on all cost lines, and we managed to generate EUR 51 million of cost savings in H1, of which EUR 29 million were strictly related to COVID measures. And within those EUR 29 million, we can say that about EUR 11 million were related to government-subsidized schemes.

Of course, we also manage the business with an obsession for cash. And I mentioned the cash flow and liquidity. If we go into more detail on this, we had 2 sets of actions. One was very operational, which means monitoring receivables, making sure we didn’t build excess inventory. And I was very clear on that from the onset of the crisis. If we didn’t have demand, we prefer to shut down the plants temporarily rather than to build inventory that we will have to carry on our books. We paid our suppliers on time, and I was really adamant that this is the right thing to do, to — not to harm the trust and to build — to continue building the trust with our partners. We reduced our CapEx expenditures. Last year, in 2019, we had an objective of EUR 129 million. This year, we believe we will be around EUR 80 million of CapEx for the full year of 2020. And you remember also that we decided very early back in March to cancel the dividend that we had initially proposed. This has no impact on H1 because the dividend would have been paid anyway in July, but this is what we propose and our controlling shareholders supported that proposal.

That’s on the operations side. On the financing side, we received very strong support from our banking partners, not only with the covenant holiday for June and December 2020 that we are not using in June because we are well within the covenants, but also by giving us some additional backup credit lines. With 2 specific clients, EUR 70 million of state-guaranteed line and EUR 175 million with the club deal that is undrawn as of today. So all in all, we end June 2020 with a very high liquidity level with cash and undrawn committed credit lines of close to EUR 1 billion.

You have noticed that we are cautious on the outlook for H2, but I’d like to share also some optimism and opportunities that we can seize as a business and we have started to seize already. With this pandemic, new needs appear at our customers. For example, you’ve noticed that single waste have been implemented in lots of office spaces. So we have designed special ties to allow our customers to show visibly, but in an appropriate and neat manner, the direction to follow. In health care, our expertise in infection control, either real key, and I’ll comment later on that. Cleaning procedures in all segments is something that our customers are very keen to improve and develop, and that’s true for workplace, that’s true for hospitality, that’s true, of course, for education or health care. And we have opportunities to accelerate innovation on the — specific innovation that will give even better answer to those needs.

New channels are also accelerating. Clearly, all our customers reported very sharp increases in their digital Internet sales. So our customers saw that increase, and we know how to serve them better, to allow them to satisfy those needs, whether these are B2C customers that we serve through distributors or our B2B customers that we serve directly through our portals and websites.

Health care is obviously a segment where we see increased demand and where we have a strong experience and a very comprehensive product portfolio. We have a recognized expertise, and that’s long dated. We very quickly — actually, during the crisis, we have participated and we’ve been involved in helping to set up emergency hospitals. In some cases, by making donations, but in most cases, actually, by bidding for state or community-supported projects. And we — all the teams were very engaged actually to answer to those needs very, very quickly. At the same time, we completed, I would say, regular products — projects, some of them very sizable. This example in Turkey on the slide is one of the largest hospitals in one building in the world with 0.5 million square meters of flooring installed, and that was completed during that period. We have also partnered with an external network called Clean Hospitals to help accelerate the adoption of floor cleaning protocols, not only fighting against infection, but also fighting against on time microbial resistance. And our floors have the ability to be cleansed with a very limited use or no use of chemicals, which allows hospitals to fight against resistance.

During that period, I mentioned that, but I want to insist that even if our sales saw a decline, business carried on. In many — in all segments, actually, we continue to install very high level references in the sports business, for example, so it’s not just health care. Workplace also. We completed a very large project or actually one large project on the workplace segment as we see that even if our customers are sometimes looking at reducing their floor space, the need for renovation is really still there. So you see big names here with high-profile projects.

This period also was a time where there were a lots of talks about green recovery. And here, I want to stress that we at Tarkett, we firmly believe that in the need to change, and we believe that the company can be a strong actor in driving this green recovery. Sustainability has been one of the 4 pillars of our strategy, and we are walking the talk. This subject is owned by a member of the executive management with Arnaud Marquis, who is an experienced manager at Tarkett, who has both technical, industrial and business background and experience. Our objectives remain to accelerate the reduction of greenhouse gas emission, and we want to reduce them by 30% in this current decade. And we also work very hard to improve, increase the amount of recycled products material to 30% globally.

This is new frontier for the industry. And especially when you think about the post-use recycling, there is an enormous amount of raw material that is today installed in hospitals, in offices. And by being able to use these materials to make new products will contribute to a healthier planet.

Finally, I would like to mention that we recently appointed a new person in the Executive Management Committee. So we have a new General Counsel, Audrey Dauvet. We have a new Executive Vice President in charge of operations, research and development. I mentioned Arnaud Marquis for sustainability. And I’d like to mention also Eric Daliere, whom I have asked to take responsibility for Tarkett North America in addition to its current responsibility for sports. I see and we see great potential to accelerate and generate some upside in North America. Eric has a fantastic experience and a great track record in Tarkett sports for the last 11 years. So I’m confident that with the addition of Eric to the team for Tarkett North America, this will help us to unlock more upside in the region and accelerate the development of Tarkett.

With that, I’d like to let — to hand over to Raphaël, who will take you into more detail in the financial results. And I will come back for the conclusion.

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

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Thank you, Fabrice. Good morning, everyone. So looking at the second quarter revenues, the impact of COVID on our sales was significant, minus 20% of organic sales decrease compared to the same quarter last year. Flooring segments were impacted the most. As in many instances, in our regions, deliveries and installations were made difficult by the lockdown measures. Only sports has seen a more moderate decrease of minus 5.7%. As Fabrice mentioned, we have been able to install turf and tracks, in particular, in North America throughout the quarter.

So looking at the first semester, our sales are down organically by minus 12.6% in spite of a good start in the first quarter. Sales have been penalized by the lower activity of the second quarter. As expected, the significant lower activity in the second quarter had an impact on EBITDA. EBITDA is down compared to the previous quarter, penalized by the drop of activity, which has a negative impact of around EUR 68 million, as you can see on this chart in the first bucket of this bridge chart.

But we have taken very strong cost flexing and cost-reduction measures that were already effective in April. That allowed us to offset more than 60% of that volume impact. We have delivered EUR 43 million of cost reductions over the quarter. Within that EUR 43 million, EUR 29 million are specific measures implemented in the COVID context. This is what Fabrice commented, and that’s, in particular, driven by partial work and furlough but also canceling and postponing of some projects. It’s important also to have in mind that within that EUR 29 million of COVID measures, EUR 11 million of them are related to governmental schemes such as partial work in France, for instance, but not [only].

In addition to that, we have delivered EUR 14 million of productivity in operations and SG&A cost reductions. So EUR 14 million are largely driven by the structural cost reductions actions that we launched last year as part of our strategic plan, Change to Win. So as a result, this has allowed us to preserve EBITDA margin above 10% at 10.2%. And I wanted to spend a bit of time to illustrate what we have achieved by showing you a simplified breakdown of our cost structure and how it has been adjusted in the quarter.

So taking as a reference on the left part of the slide, the second quarter of 2019, you can see that half of our costs are fully variable. That’s raw material consumption, that’s freight. The other half is relatively fixed in the short term. And it’s about half personnel cost and half other costs, be it pollution costs such as maintenance or factory overheads; and SG&A costs such as marketing, sampling, professional events or travel. Thanks to the measures that I just highlighted, if you look at the right part of the chart, we have been able to reduce significantly those costs that are fixed in the short term. Personnel costs have been reduced by 14% and the other cost by 23%. That’s how we managed to maintain EBITDA margin above 10% in the second quarter. This has also allowed to preserve the margin in the first half. The EBITDA of the first half is down only EUR 20 million compared to last year. And the margin remains at 8.6%. Again, I want to stress that we have been significantly penalized by the lower activity in the second quarter. On the semester, the lower activity impact is a negative of EUR 78 million, but we have offset more than 60% of that through cost reductions that amounts to a total of EUR 51 million in the first half.

You also noticed that we benefited from lower raw material prices, EUR 8 million positive that’s being driven by all derivatives. I want to highlight that this is going to accelerate in H2 as we are going to recognize in the P&L, the purchasing prices based on the lower oil prices of the second quarter. We estimate that the benefit of lower purchasing price will be around EUR 15 million in the second half compared to the prior year.

So it’s really a solid achievement in the light of this difficult COVID-19 context. And I want to take some time to quickly comment the performance in our main segments, starting with our largest segment, EMEA, which was penalized by the lockdown measures, and sales are down 20% — 22% in the second quarter. Due to the severity of the pandemic in some countries, the impact on the activity was more significant in the U.K., in France and in South Europe. On the other hand, in Germany and the Nordics, although the second quarter was down, those countries performed better.

In EMEA, as soon as mid-March, we decided to implement strong cost reduction measures, and in particular, partial work. So we managed to protect margins and it’s still 11.5% in the first semester.

In North America, you recall that we had a good start of the year until lockdown measure were deployed. And activity is down over the first semester by 18.6%. This is due to a particularly weak activity in commercial. Projects are being delayed or canceled, and we see weaknesses in the office segment and also in hospitality. However, here again, we managed to preserve the EBITDA margin, which is at 9.1%. And that has benefited both from structural cost reductions that were implemented already last year, in particular, with the shutdown of 2 production sites in Canada, but also short-term measures such as follows: in Eastern Europe, the performance is relatively better compared to EMEA and North America with organic decrease of sales of 9.7%. This is thanks to a faster pickup of activity in the CIS in June in particular. Activity in the region, which is, by far, driven by residential for us, is showing some signs of improvement. In Asia, we were penalized by lower activity, in particular, in Australia, and more recently, there are some locations in China, for instance, where there are new confinement measures, local confinement measures. In Latin America, the business has been also difficult in Brazil, yet we managed to implement selling price increases in order to fight the currency devaluation in that country.

As I explained, sports activity remained at a fairly high level in North America, in particular, installation were still possible throughout the second quarter. And we managed also to improve the level of margin to 7.6%, thanks to cost reductions. However, we know already today that the sports industry is being penalized by the absence of games, and we expect our customers to be cautious in the quarters to come and project to be postponed or canceled. We also know that Q3 is seasonally by far the highest quarter of the year, and we expect the performance in Q3 to be not as good as in the second quarter.

So that conclude the — this quick look by segment. And let me give you a few highlights on our net results, starting with the EBIT of the group, which is penalized by EUR 54 million of noncash asset impairment. Lower activity prospects in some of our segments has led us to impair some assets, mainly related to hospitality in North America. As you know in this COVID context, the activity in this segment is significantly down. Projects are being postponed or canceled, and we believe that the recovery path will be slower than in other segments. So we had to impair a significant part of the intangible assets from Lexmark acquisition.

We have also accrued, over the first semester, EUR 11 million for restructuring. That’s part of our structural cost reduction actions. It’s somewhat less than last year. Since last year, we had announced a shutdown of 2 manufacturing sites in Canada.

So the results, net income of the group is down and is negative by EUR 65 million, being penalized by this noncash impairment that we took in June. Financial expenses in the first semester, as you can see, are lower than last year due to the lower level of debt.

Now Fabrice has also commented on the net debt, and I want to stress that our cash performance in the first half was also good. Seasonally, our free cash flow generation in the first half is negative. But as you can see on the left part of this slide, free cash flow, excluding factoring, was better than in the 2 previous years, minus EUR 59 million. We managed to have a lower cash consumption, in particular by tightly monitoring inventories but also by reducing CapEx. And we exit this quarter with a solid level of liquidity of EUR 945 million. Our revolving facilities are only still partially drawn, and we have the EUR 260 million of cash available. We had a strong support from our main banks. And we have set up new credit lines in May, as it was explained by Fabrice. We’ve obtained a covenant holiday, both for June and December, and the extension of our main credit lines, the EUR 700 million RCF.

And to conclude on liquidity, let’s remind also that we have no major debt repayment until April 2022.

So now let’s talk about the perspective for activity, and I will hand over to Fabrice.

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Fabrice Barthélemy, Tarkett S.A. – Chairman of Management Board & CEO [4]

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Thank you, Raphaël. Not surprisingly, our H2 outlook is rather cautious. Why is that? Because it’s not like a usual, I would say, economic crisis. It’s all driven in great proportion by the virus and the pandemic and as we all know, many regions of the world are still fighting, resuming some lockdowns regionally or locally so it’s very difficult to make one forecast. And what — actually, we manage the company now more with scenarios than with one central budget or one central forecast. What we know of course, is that hospitality but also sports and workplace are likely to remain more challenging in H2. So overall, we plan that Q3 will be lower than Q3 2019. Q4 might be a bit better because we have a favorable basis of comparison in Q4.

We will absolutely continue to apply all cost reduction initiatives, accelerating the plans that have already been — had been launched even before the crisis or the new ones that we are finalizing right now. We will address all cost lines, and that’s for sure. And for example, I mean, we will certainly not resume travels like before. We are very sorry for the airlines, but we will travel less, maybe stay longer. It will be much better cost-wise and also probably better for the planet.

We will have a positive contribution from purchasing. We are very confident in the EUR 15 million we are announcing for H2. That is very secure, and it will be a tailwind in the second half.

So while we are cautious on the environment, I am optimistic, and as a team, we are optimistic on the ability of the company to navigate this environment. This — what we have demonstrated in Q2 and the support we have received from our partners, from our employees, to our shareholders, of course, our banks, all our employees and suppliers, they lead us to confirm our ’22 objectives. Of course, we’ve suspended the leverage target for this year, but I’m very confident that we will go back to the leverage target as soon as possible. And that we can achieve a 12% EBITDA margin, even if the economy remains depressed in 2022. And that will be achieved on the back of better efficiency, seizing opportunities to grow our share and to grow sales wherever we can grow them and optimizing our cost base. So our strategy is maintained. We believe it’s the right strategy, and it’s adapted to the situation. But of course, we are putting more emphasis on some specific segments. We’ve mentioned health care, aged care, education, that should also benefit from investments, that those segments should help us to navigate also the recovery. We will leverage our expertise and the strong characteristic performance of our products. We will intensify the development and our efforts on digital channels. And of course, focus on cost and cash.

And on a more strategic and long-term perspective, let me insist again that we are more than ever convinced that Tarkett will and can lead a green recovery, not only on reduction of greenhouse gases, but also on offering our customers unique schemes of circular product and circular solutions. So I would like to thank you very much for your attention this morning. And I propose now to take your questions.

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Questions and Answers

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Operator [1]

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

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

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Yes. I’ve got a couple of questions. The first one, when you say that the trend in June cannot be extrapolated for Q3, do you refer to the minus 3% or the minus 10%? My second question, can you give us an idea of the new tendering activity post lockdowns? I know that your order book is very short. But can you give us an idea of your year-on-year increase or decrease in order book? Another question on your leverage target, you have actually abandoned your 2.6x leverage target by year-end. But let’s say, if we assume that the EBITDA in H2 will decline like in H1 by EUR 20 million, a 2.6x leverage would imply less than EUR 10 million of free cash flow over the full year. Is it what you have in mind? And finally, the free cash flow generation was quite good in H1. How much did you benefit from the deferral of tax and social challenges that will obviously reverse in H2?

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Fabrice Barthélemy, Tarkett S.A. – Chairman of Management Board & CEO [3]

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Thank you, Charles-Louis. This is — so I will take the first 2 questions. The trend in — when we say the trend in June cannot be extrapolated, we refer to the minus 3%, to be very clear. This minus 3%, we think, is a bit ambitious for — a bit high for Q3, at least in our scenarios where we are lower than that. In terms of tendering activity, I mean, you are right in saying that we have a very short-term order book, but we see also the bids for new projects for later this year. And this activity in most regions, and especially in workplace and hospitality, this activity is down. It is better in other segments. Noticeably, I mean, the residential is doing quite well, and especially the channels like DIY, yes, are doing well, even in some countries growing recently. But so is health care, which is deemed to be better than other segments. But overall, the tendering activity is still down.

And before handing over to Raphaël for the free cash flow, let me just — precise because that’s important. We have suspended our leverage objective, but we have not abandoned it. So I think that, that difference is important, at least in our eyes.

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

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No, indeed, we are not giving up. Charles-Louis, you know that our usual seasonality of cash flow is to have significant positive cash flow in the second half of the year. From where we sit today, there is still some level of uncertainty, first of all, in particular, on activity. But there are some scenarios also where we could see lower cash flow in the second half than usually due to an increase in customer overdues, for instance, and we know that the number of companies are under tough financial situations. We could also see a stronger decrease in our factoring programs. You know that the amount of — that we can transfer to the factory is capped up to the credit limit, and the credit limits of some of our customers have been adjusted downwards. So there are scenarios where we could see a low generation of cash flow in the second half. However, we’re not giving up and be assured that we will tightly monitor inventories as we’ve done in the first half. And we will also reduce the level of CapEx compared to the prior year. And as Fabrice has mentioned, there will not be any dividend cash out in the second half. So all of that will contribute to control, as good as we can, the level of net debt.

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Charles-Louis Scotti, Kepler Cheuvreux, Research Division – Research Analyst [5]

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How much was coming from the subsidiary?

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Raphaël Bauer, Tarkett S.A. – Group CFO & Member of the Management Board [6]

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Yes. On the tax deferral, I, guess your, question was on the payments that were postponed between H1 and H2, Charles-Louis, related to tax and social charges. That’s around EUR 8 million that are being transferred from one semester to the other.

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Charles-Louis Scotti, Kepler Cheuvreux, Research Division – Research Analyst [7]

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Okay. Just 2 quick follow-up questions. On the government support that were quite strong in Q2, how much do we expect for Q3, if any? And I will be also curious to hear your thoughts on the potential impact of generalized work from home on the office segment.

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Fabrice Barthélemy, Tarkett S.A. – Chairman of Management Board & CEO [8]

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So on your first question, Charles-Louis, on governmental support, that’s EUR 11 million in the second quarter. We expect maybe a few millions from that in the second part of the year. We still have some furlough measures that are taking place in North America. We’ll see in the rest of the year, depending on the level of activity, what we activate and what is still made available by governments. So there is a bit of an uncertainty on that. So we do not expect as a high level as in the second quarter.

On the office space, I mentioned that earlier, Charles-Louis. I personally don’t believe that working from home will be the new normal. That being said, what we have lived in Q2 shows that we need to — and I speak here as the CEO of a company. So in our company at Tarkett, we will be more flexible in allowing more people to work more time working from home. And that also will allow us probably to reduce, in some cases, some floor space in offices. But we still need offices because what we have shown also in the last 3 months is that not being at all together leads very quickly to lose of the — loss of the sense of purpose, of the loss of the team spirit and some creativity also. So we’re still in offices. And don’t forget that what could be good for us as well, maybe not in the very short term, but more in 2021, 2022, is that even if tenants choose to reduce their floor space, just by organizing this move, very often, they need to change their floors. So there might be also opportunities as tenants try to revamp and reorganize their office space.

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Operator [9]

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(Operator Instructions) And your next question comes from the line of Pierre Bosset of HSBC.

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Pierre Bosset, HSBC, Research Division – Head of French Equity Research [10]

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I just would like to know if you have been able to quantify the impact of the cyber attack on sales and EBITDA? So have you lost anything because of that?

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Fabrice Barthélemy, Tarkett S.A. – Chairman of Management Board & CEO [11]

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(inaudible) Pierre, yes, on the cyber attack, just to remind a few facts. So first, we are very humble with this because this risk is permanent and for everyone. And what helped us in the cyber attack is that we reacted very quickly within minutes of the attack, and that certainly prevented greater damage. So we shut down our systems to prevent further damage. It was not the attack itself that throws our systems. Our operations have been stopped for about 2 weeks at the beginning of May, and that’s the time it took to cleanse the systems of any virus, restore backups, et cetera. During that time, the local — the teams everywhere did a tremendous job to maintain continuity whenever possible. So we lost sales, of course. We lost some of the day-to-day business where customers can choose another supplier, if you don’t have the products readily available for small projects and for small quantities. There is no doubt that we lost sales. We — it’s very difficult to quantify. And as for the cost, the cost is in numerous ways. We had people who were idle. We had some direct costs of consultants and remediation. And so far, in the accounts, we have taken these costs in the P&L. We have an insurance policy, but we have not yet fully agreed on coverage by the insurance. So we have not taken any revenue from the insurance. So I would say there was a negative impact on sales, but very, very difficult to quantify, and in the grand scheme of things, not massive.

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Operator [12]

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And your next question comes from the line of Pierre Rousseau of Barclays.

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Pierre Sylvain Gilbert Rousseau, Barclays Bank PLC, Research Division – Research Analyst [13]

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Congrats for the good delivery on cost savings. My first question is on the growth outlook. I understand the cautious message in — for H2 2020. Looking a little bit beyond, we have some stimulus in the pipeline. We know that it could be renovation driven, at least in Europe, and that it could be very much inching towards a green stimulus and recyclability. So I was wondering if you could help us understand potentially the impact for Tarkett. If it’s — is it only a question for Europe at the moment? Do you think you can capture some growth from that? And do you think that the product positioning is good, especially versus competitors to gain some market shares with these trends? The second question is on the 2021 and 2022 profitability objectives. Obviously, it’s a very strong commitment that you are doing. So I was wondering on the different level if you could help us understand what makes you confident that you can get there even if the macro does not offer much support? And the last question is a bit more of a technical one, but there used to be the transactional ForEx effect, especially with the ruble, we are not really seeing that in H1 numbers. So I was wondering if this was changed for good operationally because you source a lot more locally? Or if there was anything special in terms of hedging on that?

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Fabrice Barthélemy, Tarkett S.A. – Chairman of Management Board & CEO [14]

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Thank you, Pierre. So I’ll take the first 2 questions. Maybe on the outlook, certainly, 2020 is very difficult to forecast. 2021, of course, is even more difficult. But we know directionally that there should be stimulus plans in terms — in the field of aged care, health care, aged care, education. And those should help us, and we are very well positioned on this segment with a product offering that is very well adapted and that we are making sure is even more adapted by applying some innovations and leveraging existing innovation.

So again, it’s very difficult because at the macro level, I mean, you see all the scenarios predicting recovery of 2019 level in 2021, 2022, 2024. What we — what’s important is that we want to remain very flexible and agile, on one hand to seize opportunities commercially; and on the other hand, to adapt the structure and the cost structure of the company to the macro environment. And the reason why we are confident to reach the 12% EBITDA margin is that — there’s nothing that says that we can reach 12% EBITDA margin with more than EUR 3 billion of sales and that we could not reach it with less than EUR 3 billion of sales. I mean what — we will adapt the cost structure again to the level of activity. On the other hand, we know we have a few tailwinds from raw materials, at least in the short term. We also have a discipline in pricing, in selling prices, so that we also — we apply to help us on that. And the 12% margin is really objective for the entire team and that horizon. We will use all levers to reach it.

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Raphaël Bauer, Tarkett S.A. – Group CFO & Member of the Management Board [15]

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And Pierre, to your question on the ruble foreign exchange effect, it’s a very good point. Over the first semester, the net effect of the ruble and the selling price adjustment that we make in Russia is almost neutral. But as you may have noticed in the second quarter bridge, it’s negative by EUR 2.5 million in the second quarter. And the ruble has weakened. With today’s level of ruble at EUR 1 for RUB 85, we will have a negative impact in the second half of the year related to the ruble currency. In last year and in previous years, we had increased prices to a relatively good level. I would say that [all those], to offset that effect in the first quarter, in particular, and let’s say, over the first half. But clearly, there is some risk for a negative impact in the second half. To your point on localizing raw materials, it’s true that we have reduced somewhat the exposure to — the transaction exposure to ruble, euro by purchasing more raw materials in Russia. Still, there is a fair share of raw materials that come from Europe, from our manufacturing needs in Russia. And then bear in mind also that the Russian producers are still themselves purchasing some inputs in euro. So that’s how we see the dynamic regarding the ruble.

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Operator [16]

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There are no further questions at this time.

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Fabrice Barthélemy, Tarkett S.A. – Chairman of Management Board & CEO [17]

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Do we have a question on the Internet? (inaudible)

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Operator [18]

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We got a question from (inaudible) About the impairment charge, does it concern Lexmark only or other acquisitions? And was it focused on goodwill or other specific assets, brands, for instance?

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Fabrice Barthélemy, Tarkett S.A. – Chairman of Management Board & CEO [19]

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Yes. It’s a very good question. It was not focused on goodwill. It was indeed focused on intangible and tangible assets. It’s mainly driven by the hospitality intangible assets, so resulting from the acquisition of Lexmark. And there are some other few adjustments on residential business, be it in North America or in Europe, but that’s a smaller impairment. So this is largely driven by hospitality.

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Operator [20]

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There is a second question of [Albern.] Could you elaborate about your efforts on circular economy?

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Fabrice Barthélemy, Tarkett S.A. – Chairman of Management Board & CEO [21]

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Thank you, [Albern], on this. So on the circular economy, let me remind you what we do today. Today, we incorporate about 12% of raw materials coming from recycled sources. And that can be either recycling our byproducts or scrap from our own factories, acquiring, buying products from different streams coming from recycled sources. For example, calcium carbonate coming from the purification of water. For example, some chemicals coming from windshields, from the auto industry, when — with the used automotives. So all this, we are doing. Since November last year, we also offer — and we are the first ones to offer that to our customers, a fully circular carpet tile solution. Whereby at the end of the life of the carpet tile, when you take away the tile, we collect it, we disassemble it, and we have specific recycling streams for the fiber on one hand and from the backing on the other hand. The new frontier is to enlarge and develop and deploy this post-use recycling to other segments and other products, such as PVC in the health care segment, in education segments. And that’s what can help us to go from 12% to 30%.

Today, we also propose to our customer service by which we take back all the off cuts on the installation job site. When we sell 1 square meter, about 10% of it doesn’t get installed because the installer cuts the product to fit the size of the room and the shape of the room. That we are able to take back and recycled in our own factories. And what is important is that these initiatives were pushed by us many years ago. But what we see is that they become more and more important for our customers who want to score points either in official rankings to show to their stakeholders and their employees that they act responsibly by making sure that they — when they revamp their offices, when they revamp their hospital, they take advantage of every possibility to use more recycled materials. And you would be surprised by how much — by the magnitude of the change among the customer base. 5 years ago, when I was visiting a customer, it was always us putting the topic on the table. Now this topic of circular economy is always part of the top 3 that is raised by our customers.

Are there any further questions? What?

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Operator [22]

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You do have a follow-up question from Pierre Bosset of HSBC.

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Pierre Bosset, HSBC, Research Division – Head of French Equity Research [23]

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Just a follow-up question on the working capital requirement. You mentioned that factoring is, obviously highly dependent on the credit rating of your clients. Will you anticipate that as of H2, credit rating of your client could (inaudible) much further? Do you have in mind a sort of level of factoring you are aiming at towards the end of the year?

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Fabrice Barthélemy, Tarkett S.A. – Chairman of Management Board & CEO [24]

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Pierre, as I said earlier, we managed with scenarios. So we have different scenarios. Clearly, when we — back in March this year, we had scenarios with further deterioration of credit limits, which did not take place. Actually, customers have paid on time. Past dues have not increased or barely increased actually over the period. So we have been in our best case scenario in Q2 in terms of credit limits and customers. It will all depend really on the macro this time for the — for H2. So it’s difficult to have one prediction, but we are ready to react on different scenarios. What is good for us is that we have a very fragmented customer base. We serve hundreds, thousands of customers. So we don’t have a massive exposure especially in Europe and North America with one big customer. So that helps also mitigate the risk. But overall, I mean, if the economy stays as it is today, I mean, we could well very well maintain the same level of factoring at the end of this year or it could be worse and depending on what happens, especially in the U.S. and Europe.

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Operator [25]

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And your next question comes from the line of Jean Granjon of ODDO.

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Jean-Francois Granjon, ODDO BHF Corporate & Markets, Research Division – Analyst [26]

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Yes. Jean-Francois Granjon from ODDO BHF speaking. Just a quick question, please. For the Q3, you expect a decrease for the top line for the sales. Do you expect some depreciation for the EBITDA margin as the same magnitude for the first half or 40 basis points or lower than that? And do you expect for the — for Q4 an improvement for EBITDA margin due to the positive base effect?

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Fabrice Barthélemy, Tarkett S.A. – Chairman of Management Board & CEO [27]

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Jean-Francois, thank you for your question. There are several puts and takes in the second half. You’re right to pinpoint that the fourth quarter is a low basis of comparison for us, both in terms of top line and EBITDA related to North America and lower sales in North America at the back end of last year. So that’s a bit of an easier comparison basis. The second impact I want to flag on the second half, which is positive, is the raw material pricing. I mentioned the EUR 15 million of tailwind that will benefit the second half compared to previous years. On the other hand, coming back to a question we had by Pierre also, the ruble will most certainly penalize us. And the U.S. dollar at $1.17 or $1.18 will also penalize us, not so much in the transactional effect, but in the conversion effect for our EBITDA in dollar zone. So that’s a headwind on the currency side that we must keep in mind. And in terms of productivity, we are committed to keep delivering structural productivities, as we explained, but there will be lower COVID measures.

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Operator [28]

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There are no further questions from the telephone lines.

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Fabrice Barthélemy, Tarkett S.A. – Chairman of Management Board & CEO [29]

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Thank you. So let me conclude maybe with a couple of words. First, thank you very much for attending this call in what is a very busy season for you. We have a plan that is called Change to Win, and I really believe that this crisis is an opportunity to change and to make changes that will be still present in the long run. Whether we talk about circular economy, sustainability or if we talk about cost cutting, we will become leaner through this crisis, and we will change also the way we work, and I think, to become more efficient as well. So there is optimism. And there is optimism also in our ability to navigate these times and to seize opportunities. So our teams are all motivated and extremely engaged to seize those opportunities. It is obvious that H2 remains uncertain, and not just for Tarkett, for the entire economy and for us as citizens. But we will continue to be very agile and flexible and to adapt. And I think what we have shown in Q2 was that the company was able to adapt to very tough circumstances. So I take very optimistic takeaway from this quarter. And I think it’s very encouraging for our ability to execute our strategic plan, whatever the macroeconomic environment is in the long run. Thank you very much for your attention today, and I look forward to meeting you as soon as possible in person.

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Operator [30]

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Thank you. Ladies and gentlemen, that does conclude your conference call for today. Thank you for participating, and you may now disconnect.

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