HORNBACH Baumarkt AG

Good morning, ladies and gentlemen, and welcome to the conference call regarding the second quarter first half year results 2021-2022 of Hornbach Group. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation. Let me now turn the floor over to Axel Müller.

Thank you very much. Good morning. Today morning at 7 o'clock we published, I would say, a fine set of figures on the second quarter and the first half. And we are sitting together with CFO Karin Dohn, CEO Albrecht Hornbach, Investor Relations Manager Arne Spies and myself, Head of Investor Relations. By way of introduction, Albrecht Hornbach will give you a first sight on the last six months of the current fiscal year. And Karin will follow and give you a detailed insight in the key data and most important facts of the first half. The first step is, Mr. Hornbach, I will forward the word to you.

Okay, thank you. Albrecht Hornbach speaking now. Good morning, ladies and gentlemen. A warm welcome to this analyst's call from me as well. Today we will be presenting our business results for the first six months of the 2021-22 financial year and pointing out some highlights of our business performance. I would like to start by focusing on a couple of key factors. My board colleague, Karin Dohm, will then comment on details of our performance and of our outlook. Despite severe lockdown restrictions, the first six months of the current 2021-2022 financial year were very successful for us. That confirms us that we are on the right track with our finely calibrated focus on customers. I would like to illustrate that with just a couple of key points. First, the pandemic has significantly changed what customers need. People are attaching greater importance to security and physical proximity. The homes are very important to them and they are prepared to invest in them. A shift in people's priorities towards security, their direct surroundings, their homes. That is what we have learned from the pandemic and it is a lesson that will not be forgotten so quickly. Second, people's need for security is also reflected in their shopping habits. Fewer contact, higher average spend, more click and collect, more online. All that is another lesson of the pandemic. Third, these two changes, greater willingness to invest in home improvement projects and more safety and convenience in shopping, both play to Hornbach's strengths. Hornbach offers customers everything they need to meet their requirements. Project expertise and suitable advice the right product range with large stock available, and not least, the right prices. That is only possible because of the close links we have built between our top performing webshop and our generously proportioned stores, all with the help of our logistics and interconnected retail, and all powered by the inventory management capacity of a closed merchandising system. These factors enable Tombaugh to gain substantial market share in the countries where it operates in the current 2021-2022 year under report as well. The extraordinary sales growth generated by the whole of the do-it-yourself sector in the 2020, the year of the pandemic, is often reported in the media and interpreted by many sector experts as an exceptional situation. Some people have clearly misintegrated the trend towards do-it-yourself as a kind of occupational therapy that is limited to periods of lockdown, times when there is nothing else to do. And the press release published by our sector association after the first half of the 2021 calendar year will have confirmed many people in that impression. The association reported a 15.9% downturn in like-for-like sales in the German do-it-yourself store sector. It was said that, and I quote, protracted lockdown restrictions and unfavorable weather seriously thwarted the first half of the year. On-bus performance in the same period was dramatically better. In the first six months of the calendar year, it outperformed the sector in Germany by more than 13 percentage points. Particularly during the months of lockdown, our interconnected retail meant we could offset most of the sales lost due to stores remaining closed. Not only that, since the restrictions were lifted, our sales performance has also remained ahead of the sector average. Our CFO, Karin Dohn, will now give you details of our half-year results.

Thank you very much. Let me exactly follow up on that one, because some details will pick up with what Mr. Hornbach said and pointed out. We had, I think, a very good half year here, including both quarters in the first part of our fiscal year, and I think three main areas are worth mentioning. First of all, we had a really high customer satisfaction. The recent polls and surveys highlighted that we are really here in a good position in comparison to our competitors and to other market participants, both in the service that we provide in our stores as well as in the webshop performance in, for example, as you see here on the slide, Germany, Austria, and a couple of other countries. Secondly, let me point out that we continued with our organic growth. We mentioned to you earlier in our fiscal year that we planned five openings for this year. We are well on the track for that one. We have opened one in Sweden and one in Romania, and others in Switzerland, in the Netherlands, will follow in due course. We also have one replacement in Germany coming up. And thirdly, as said, e-commerce sales continue to rise. We see that not only of course during the first quarter where we had specifically high click and collect performances because a major part of our stores were closed and customers switched to online channels even stronger in the first quarter, but we also see the e-commerce sales continuing to grow in the second quarter. So we see that as a good underlining message to highlight that our performance in the omnichannel, in the interconnected retail area is really satisfying for clients and they take it up and use it wherever they think it is best suiting their interests and demands. A little bit further into the specific figures, we had a sales performance that shows that the records we set last year were not just the one-off, but continue to drive our business with half-year sales growth of 5.1% on the Hornbach Group level, further growth of 3.4% in like-for-like constant currency sales at the Baumarkt Group, and growth of 13.2% at the Baustoff Union, one of the subsidiaries of the holding. The demand for DIY products at All of our stores and online premises remained persistently high, also during the summer months where, of course, people went back a little bit to traveling where they were able to. Still, as said, we were very successful in satisfying those customers' change needs wherever it was necessary and demanded to combine online and offline activities. Our online business surged, as I said, 48% in the first half of 2021 and 2022. And that was, of course, on the back of an extremely strong growth in the first quarter, but also now in the second quarter, which just came to an end. Also, when we look into the guidance and the looking ahead, so to say, for the reminder of the year, the second half, We want to confirm our guidance that we gave you earlier. We see us coming in most likely in the upper third, so somewhere on the EBIT side between 290 million and 326 million with an adjusted EBIT margin between 5.3 and 5.7%. As said, we think that's a very good performance if you take into account the step that we took between the previous year and the year before, and continues our growth path towards the end of the year. When we look a little bit deeper, the net sales, which you can see here on the slide, especially when you look into the performances in both quarters, we had in the second quarter now a growth of 3.8%, so further driven by the significantly growth in the online sales, as I mentioned. A little bit going deeper into the specific performances of the various regions in which we are active, I want to remind you that some of our areas were still under lockdown even into June, so I think that's something that you need to take into account. Specifically, that was Of course, something that was a little bit twisted and distorted if you compare the figures of this half year with the previous one. That's why we continuously refer also to the year before to make sure to keep that in mind. On the e-commerce side, I mentioned we had a strong growth. We currently see 20% share of total sales in the whole ICC. Our area, and we have, as I mentioned, a robust e-commerce sales growth, both when we look into click and collect activities, but also direct delivery. So these deliveries, which are without any store contact, keep growing. We had there 20% up in the first half of this fiscal year. Looking specifically also into the like-for-like sales in comparison to the sector, Albrecht Hornbach mentioned that already. We had really a good performance in Germany if you compare our developments and contrast that with the competitor landscape. And we see that as a continued reconfirmation that our services please clients and allow them to run their projects, whether they are professional clients or whether they are private clients, so it's both the B2C as well as the B2B business which keeps underlining our performance here. The regional splits and there the comparison on market share also gives you a good figure and understanding that we were able to take here advantage of our performance and gain market shares in four countries where we get the clarity and transparency on those Shares, specifically worth mentioning, not only the German market where, as you know, competition is quite dense and fierce, but also in other countries, highlighting here, for example, Netherlands or the other regions which you see on the slide. We have there the chance to also extend our market share. That all resulted, as I mentioned earlier, in an adjusted EBIT which is going here in both quarters added in an area where we see margins stable coming in with really good figures as 10.2 you see here in an average on those two quarters. We also have the EBIT here with the adjusted with no adjusting events here so far with 337.2, so profitability significantly above the pre-COVID levels of two years ago. I mentioned already Baustoff Union, which not only performed very well, but also did a good jump in their adjusted EBITs. That is driven by not only very good sales, but also by the fact that they had a very stable cost part. They also had their, and that is a contrast, perhaps, as I mentioned, we did good investments on the Baumarkt Group, and that, of course, is not so much here visible in the Baustoff Union, so their EBIT was really with a good margin at 9.9%, once again, significantly above the pre-COVID level. Cost structure in our group, as said, we have stable cost structures. We have normalized a number of cost factors very deliberately. For example, I would like to mention here our marketing expenses. I mentioned already the fact that we extended further in an organic growth manner our network of stores. So we also invested continuously and keep investing into the maintenance of the existing store network. So we deliberately have managed expenses slightly up if you compare that with the previous year. But if you compare it with the year before, we are normalizing some of those expenses. Nevertheless, I want to underline we have really a good cost structure with good cost control and a stable level there, which gives us the confidence, as said earlier, to narrow the corridor also, not only on the sales, but also on the EBIT side when we talk about guidance for full fiscal year. Looking into our cash flows, excuse me, we have the funds from operations here compared over the two half years to make sure that you get the full perspective, not only last year, but the one before. You see our increased capex, as I mentioned. purchases of real estate, building of the new stores. And in addition to the five stores we are opening up this year, we will also, as mentioned earlier, go for five new stores next year. So that slowly ramps up coming through in the free cash flow as well. And of course, you see that here partially reflected specifically in the Hornbach Baumarkt CapEx Keeping up on the really strong balance sheet, we increased slightly the size that reflects specifically our inventories, which we keep now building up in light of both managing the challenges in the logistical network that everybody knows is currently still affecting global purchasing and logistic networks. So in order to make sure that we have a good position, not only for the second half, but also for the first quarter of the next fiscal years, we currently keep building up inventories in areas where we think it is wise to do so to also avoid potentially some limitations that might affect imports from Asia due to further constraints, for example, driven by Winter Olympic Games in China or other aspects. So you see that reflected here in the inventory. Of course, there's also a little bit the effect that, in general, we still have high price levels, which increases slightly on a ceteris paribus level the inventory value. Reflected there is also another increase in our shareholders' equity ratios, so that underlines our continued urge to make sure that we have stable ratios, that we are built on solid pillars, and can act and invest from a good, healthy position. To bring that all to a close, as said at the very beginning, we are sharpening our guidance We see ourselves there expecting a landing, so to say, in the upper third above the lower level of the guidance range. We see in the adjusted EBIT area on group level, as I said at the beginning, 290 to roughly 326, 30 million. We have a capex, as I said earlier, that goes beyond the 200 million, most likely. And we see sales going up to the upper end of the 5% growth in comparison to last year. I would come to a close here to make sure we have enough time for your questions and any specific detail you want to discuss with us.

Thank you, Karen. So we would like to enter into the Q&A session.

Ladies and gentlemen, if you'd like to ask a question, please press 9 followed by the star key on your telephone keypad. To withdraw your question, please press 9 star again. Please press 9 star now if you'd like to raise a question. Okay, we have our first question for today from Mark Yosefson, who's calling from Pareto Securities. Over to you.

Thank you. Great of the figures. Well done again. I had a question with respect to the strength in e-commerce. I think last year you indicated that you were actually making some investments in some specialized depots just to service the e-commerce business. I like an idea in terms of the e-comm that you're doing now, obviously click and collect is in store, but how much of that e-comm business is actually serviced in store by your employees and how much can you do remotely away from the store base? And then the second question with respect to the gross profit or with respect to sourcing, et cetera. I mean, we have commented in recent quarters that the gross profit has been under pressure largely because of the higher rate of growth with e-commerce. That still continues to be the case, namely the growth in e-commerce, yet you've got a nice improvement in the gross margin there. I think that's not out of line with what we've seen elsewhere in the sector. But I'd just like some color with respect to your outlook with e-commerce. margins going forward, or rather, do you see any issues with respect to source in which we are increasingly hearing of in other quarters? Thank you.

Yeah, maybe I can start on your first question. So, in general, everything that is labeled as click and collect is, so to say, set up and delivered into the hands of the clients, if you want to say so, in the stores. So you can take that ratio as a part where a client comes to a store, there's contact with the store, and there has been handling, so to say, in the store to make sure that the client gets what they ordered online. We had, during the heat of the pandemic, if you want to say so, we had as far as direct delivery is concerned, so the part that goes without contact with the stores, we had set up a number of delivery centers, if you want to call them, and I guess that's what you're also referring to, which were attached literally, physically, to the side of some of our stores to make sure we really are, those were kind of pop-up institutions, which were really meant to make sure we We keep the time that clients wait between ordering and getting their products as short as anyhow possible. We have optimized that now based literally on the client demand schemes to make sure that, A, we use our central delivery stores wherever possible and wherever it makes sense, and optimize thus the flow of goods. and ultimately also, of course, the margin that is attached to that side of the business. Okay. You had another question on the availability of goods, was that correct?

Sourcing and margin. Exactly that, yes.

So, on the sourcing side, of course, in general, goods on a global scale, so to say, Goods are scarce and prices are on high levels. I think that's a given currently for everybody who's in, unfortunately, nearly every industry. On the good side, we really have a very strong merchandise team and we have a very strong logistic team. And both of them, which is also, I think, one of the strengths of Honda, work nicely together. So the question of where can we... get our goods? How can we make sure we really look and order and organize these processes ahead of time and then assure the right logistic support? I think that is something where a huge part of our team is really focused on and where we also make sure that we, talking about investments, really use anything that modern IT and other means can support to make sure that we do not only buy on time but also have the means to then bring goods into our stores or to our clients respectively. And I mentioned this example where we currently deliberately build up some inventory because we want to make sure we're not running out of steam over winter or ahead of the next spring season. As I gave you that example, we do expect that things will be challenging over the course of the next month and will keep challenging. But so far, knock on wood, that has all worked out good in a manner that we were able to stay in stock to make sure we stick to our all-time price offer for the client and to make sure we are there a reliable partner for our clients and customers.

Okay, thank you. That answers both those questions. I just have a third, if I may. I think you alluded to a slight acceleration with the store opening program next year. Can you give us an early feel on where the new stores might be?

For next year, it will be Romania, most likely. There will be most likely some activity in the Netherlands. There might be one more in Sweden, so we're going a bit, and there is one in Slovakia also that we're currently working on, too.

Thank you again.

Thank you. We do have another question here from Tilo Kleibauer, who's calling from Warburg Research. To all other participants, please don't hesitate to press 9 and star if you'd like to raise a question. Over to you, Mr. Kleibauer.

Yes. Good morning. Thank you. I have, yeah, two follow-up questions, more or less. The one on the five new stores next year. Should we expect that all five stores are on their own real estate property? So you mentioned also the increased investments for land and buildings, maybe to get this together. And my second question is also on supply chain issues and the difficult situation here. Do you expect further price increases in the coming months? And especially energy prices have significantly increased over recent weeks. So do you expect that this will affect private consumer spending consumer sentiment in the coming months and also affect maybe your business on this side?

Yeah, good question. Let me take the first one. On the real estate and owning versus renting, we always said we want to have a mixture in the general setup between owning and renting with a slight surplus, so to say, on the owning side. We currently, and of course, that is also affected by the fact of what is taking everything into account, what is the best for the company. You of course sometimes have questions on the refinancing side that make buying more attractive than than renting, you sometimes also have more freedom when you own the whole ground as well as the building when it comes to adjustment changes in later years, things like that. So currently, taking all aspects into account, we expect in the next couple of stores, we expect more ownership than renting as far as, so to say, the foreseeable future is as we talk about here this year and next year. Your second question, the pricing. Yes, we expect price levels to stay high in general. We see a certain relaxation on the wood side where apparently the The bottleneck, which was created by a lack of sawmill capabilities, to my understanding, has now loosened, so that things are a little bit relaxing there. That might also happen on the one or the other commodity, but we expect those levels to stay high. And yes, of course, as you mentioned, energy prices seem to be a high portion of everybody's expenses probably over the course of the next month, as a minimum. The question is the effect of that, because you can also spin the story and think about people wanting to change even further the way they are living. When you think about insulation, you might think about investments that people want to take in their own housings or flats to make sure that they can control their own energy consumption better. You might think about people investing more into alternative energy supplies for their own homes. So I wouldn't see that necessarily as a ditch, so to say, for our sales. I think that's just something where as good entrepreneurs, we need to make sure we have the right stock to support people, whatever they then want to switch perhaps some investments into.

Thank you.

There are no questions at the moment.

Okay. So there's still some time to to post some questions.

And it looks like we've just got one from Thomas Maul, who's calling from Deadset Bank. Over to you.

Yes, good morning. Thanks for taking my questions. I've just one, actually. Could you please give us an update on your Bodenhaus concept? What's new here? What do you plan? Thank you.

Okay. As you know, of Bodenhaus and their opening time was burdened by restrictions. So it was a very unusual phase for this Bodenhaus concept. Now we see that Bodenhaus has growing sales and we are working on that. But we did not, up to now, reach our original plans with a Bodenhaus site. But we are optimistic that Bodenhaus will come into a range where it could be multiplied. But it's too early to tell a lot about that next time, maybe.

It would be much... Okay, thanks for the update. Thank you.

If anybody else would like to ask a question, please do press 9 star now.

So I'd like to ask you again whether there is something left we could talk on and are there any further

remaining questions please at the moment we don't have any questions in the queue dear participants please press nine star now your final chance if you have anything to raise oh and it looks like we do have one from dilip padlani who's called from skm over to you hi uh congratulations on the excellent numbers i was just wondering um

why do you think you're gaining so much market share versus the underlying market in terms of your gap, in terms of growth versus the industry?

I think, um, From our analysis, and you can be sure we are investing quite some time to make sure we understand the good reasons behind that market share growth, because we're going to keep that, of course, and not just have one-off effects here. So that's one of the reasons why we not only look into these general questionnaires that some industry associations do, but we also continuously ask our own clients both in the online area as well as in the stores regarding their perception. And the intelligence that we get out of that is that, number one, it's literally the connectivity between our online and our in-store performance, the ability that we offer clients to and customers to use the various channels in a connected manner and allows them then to switch, so to say, from an online search to buying something in store and vice versa in their respective individual preferred way. And the other thing, the other component, so to say, is the sheer focus that we put into making sure that logistics and merchandise work well together and ensure not only availability of stock but also really trying to continuously maintain our promise to the customer that we're a reliable source both availability but also price. And I think that those are the areas that we literally try to focus on and I think that's what also clients perceive and customers give us as feedback. So I think that those are the things that we see as the drivers for our market share growth.

Got it. Thank you.

Thank you. Next up, we have Paolo Guina, who's calling from Tender Capital. Over to you.

Yeah, hi, morning. Thank you for taking my question. In terms of sustainability, we have seen during some months, some last semesters that you mentioned a couple of specific projects, both and specifically on private labels. Do you have any feedback on it and any, let's say, look through to market trends in terms of sustainability? due to the fact that we have just seen also the political results anyway, something that is related at global level. So yeah, any feedback on it?

Thank you. Sure. With political results, you mean the election that we had last Sunday in Germany or just checking?

Yeah, yeah, exactly.

Yeah, okay, okay. So then let me go backwards, so to say, to those two questions. First of all, in general, the election result, of course, as you could see in the public domain, there will be quite some time on coalition talks, I would expect. And sooner or later, there will be a new government emerging, probably relatively indifferent to or independent of the final coalition, of course the question of carbon dioxide footprint and footprint reduction also macroeconomically will be on top of the next government's agenda in whatever shape and form that government might look like. So that is our expectation. Secondly, independent of that, we have our own footprint, so to say, taken in the current setup into some of our internal activities. We are collecting currently literally all the necessary data, not only in the sense of creating that transparency for ourselves, but also having that then in the future as a basis for further programs on the activities around that. We have already started, as you might know, in some activity areas, thinking about here the fact that we exchanged all our lightning into LEDs. We have, right as you mentioned, specifically looked into our own products, so to say, the white label area, because that is quite naturally the part of your... of your stock where you have the most transparency and also influence, we will roll out as everybody who's falling under that law the new requirement with regard to logistic networks, which is something that the German government decided upon shortly before the election. This will enhance further our already existing requirements towards the sourcing and specifically the documentation of sources. So I think there are a number of activities which we keep pushing even further on top of what we already do, also to make sure we can continuously enhance our communication around because we convinced us not only about doing, but also giving that transparency to the public in a proper and appropriate manner.

Yeah, thank you. And if I may follow up to sustainability item, do you already see and provide any evidence in terms of sales paths? And the second one is, Do you think that in future semester you can have any, let's say, any gain from a marginality perspective linked to more sustainable products and the perception of customers of buying more sustainable products?

The marginality on sustainable products I got, but the first part of your question, there was a part which I acoustically didn't get. Sorry for that.

Yeah, absolutely. I mean, it's one single question. I mean, do you have any evidence in your sales figures at a single shop level and then overall sales figures related to specific paths in customer buying more sustainable products, the first one, and the second one that is linked is related to the marginality of sustainable products, more sustainable products, let's say, if there is any scope to improve the marginality of those specific products.

Okay. With regard to marginality of specific products, I don't see there, so to say, a product specific difference in margin between, let's say, a more sustainable product versus a less sustainable product at the very moment. Nevertheless, I think that the A, number one, as we said earlier, demand of customers to have, for example, to live in an environment where you have a healthy environment, where you use colors and flooring that are healthy, that are not emitting components that you don't want to have in your private room, for example, or the urge to make sure that, as a customer, you also can reduce your own energy consumption. and everything that that triggers with regard to investments into photovoltaic or other components. We are convinced that there is a lot where Hornbach can provide good advice and good products, and that that all is also in the future a good source for revenues and ultimately, of course, for EBITs. whether honestly the one product has a very different margin than the other, I don't think necessarily. I think it's a question of change in demand and of necessities to help customers reduce their own carbon dioxide footprint and live, as said, in a healthy environment. I think that's a very important role that we want to play. And secondly, perhaps indirectly, following up also on a question that came earlier, if you think that certain products will just become less profitable for anybody in that chain because of, for example, higher energy consumption that such a product might have. You, of course, will sooner or later, and I'm looking here, I'm extrapolating into the future, of course, then certain products will just not have any margin, neither for us nor for the original producer in the future. But that is, so to say, going a bit beyond our own P&L probably.

Yeah, for Virginia nurses, thank you.

Thank you very much.

Sorry.

No, there are no further questions at the moment.

Okay, so I would like to thank you that you have been with us in this call. Next news flow will be just a few days before Christmas with our nine-month results. And we wish you all the best. Stay safe. And looking forward to talking to you in the near future. Thanks. Bye bye.