Hornbach Hldg Ag

Good morning, and welcome to our update call for the second quarter and first half year 2023-24 for Hornbach Holding. My name is Antje Kelbert, Head of Investor Relations. Today at 7 a.m., we published our financial results comprising the period from the 1st of March until the end of August 2023. Welcome also to our CFO, Karen Dohm, who will present today and will answer your questions. Please note, the entire conference including the Q&A session will be recorded and made available with the transcript on the company's website afterwards. Please also take note of this disclaimer, which is valid for the entire presentation and the Q&A session. And now I hand over to you, Karin, to walk us through the set of numbers.

Good morning, everybody, and a very warm welcome from my side as well. Let me start with some highlights. In Q2, we saw recovery in both sales and earnings with strong customer frequency in our stores leading to good sales. Our adjusted EBITs stabilized in Q2, including some catch-up effects in the garden area. As you recall from Q1, we had had a challenging spring season, which was impacted by unfavorable weather conditions. Inventor reductions had a positive effect on our working capital. This resulted in an adjusted free cash flow above previous year's period, excluding the repayments from the reverse factoring program at the beginning of the fiscal year. We also demonstrated our resilience by continuing to increase market shares in several of our key markets. Whilst our home market, Germany, remains a significant proportion of our business, we are seeing the benefits of our geographic diversification strategy. Reflecting the weaker macroeconomic outlook, specifically in Germany and the Eurozone, we have updated our guidance. Management is focused on striking a balance between closely managing costs whilst continuing to invest to improve operating performance and deliver long-term growth. Throughout the first half, we've taken a number of steps to improve our business and keep pushing those through. The management team has a track record in successfully navigating short-term challenges, and our long history shows us that Hornbach has been able to emerge stronger than its competition in relatively tougher times, by building on our market position. Leveraging our geographic diversification and leading interconnected retail offering, we are well positioned for when markets recover. We see the underlying long-term trends in our industry unchanged. Structural trends such as energy efficiency, demographic development, and an overall aging housing stock will continue to drive DIY spend on home improvement. We believe these drivers continue to underpin the attractions of our investment case. Let me highlight a couple of our key investment areas, including ESG-focused themes, delivering growth and further improving our logistics footprint. We have opened our new logistics center in Essingen, based next to our headquarters, which began operations in June. It includes a regional warehouse, stock inventory for our stores, as well as a cross-stocking facility for long and bulky goods. Furthermore, we continued our successful expansion in the Netherlands, with the opening of our 18th store in Nijmegen. At the beginning of the financial year, we completed the back-end migration of our online shops for the Spiker platform, which has improved performance and speed for our online offering by adding much more agility and flexibility to a nodular platform architecture. We've successfully continued to roll out process automation tools and standardization of back-office tasks. For example, we invested in a new software for 3D store planning, which makes our updates more efficient. Rolling out our strategy to reduce our CO2 footprint and switch to renewable energy, we've installed 20 photovoltaic systems on the roof of stores and logistics centers. We now operate systems running with an output of, in total, more than 12,000 kWp. Further rollout is going ahead in the next year. We also continue to expand our sustainable product offering with the rollout of biocertification for our private label plants and seeds, which is now implemented in eight of our nine countries. With regard to our supply chain emissions, which are the most important part of our footprint, we have joined forces with other leading international home improvement retailers in the Scope 3 Task Force of the Global Home Improvement Network. The goal is to develop a consistent methodology for measuring and reporting emissions. Together with other DIY and gardening stores, we are introducing an industry-wide solution for reusable plant trays, which are a big contributor to plastic waste in our stores. Let's double-click on our sales development. We are encouraged by the resilience of our sales in the first half, with group net sales close to the previous year's record level. Net sales of subgroup Hornbach Baumarkt, including the online retail, were almost flat. A challenging picture in Germany of minus 2.4% was balanced by a positive contribution from our international markets with an increase of 1.8%. As a consequence, on a Baumarkt level, the share of the international business further increased to 51.6% from 50.5%. In general, we've seen a slightly reduced average ticket size. but strength in smaller tickets while there was some softness in big tickets and discretionary purchases. Keep in mind that Q2 last year was also affected by some panic purchases which did not take place this summer, for example, electric heaters. Since the beginning of this year, we are seeing good demand in articles within our renovation assortments, hardware, and tools. More recently, specifically with sunny and warm weather continuing into autumn, We've also seen a strong demand in the outdoor living category. Sales of private label brands have also picked up in recent months. We're especially excited about broadening our offering of private label innovations, in particular for professional customers, for example, in our Modulan and Akit product lines. Our private label ranges are specifically designed to offer value for money products to our customers. We will continue to lean into product innovations that simplify the project saving our customers time and money. Let's drill down to country-by-country sales development. We saw a positive sequential trend in like-for-like sales across all our markets in the second quarter compared to the first quarter. In total, Hornbach Baumarkt increased like-for-like sales by 1% in Q2, the Fletchish home market development in Germany, but a 1.6% growth in the rest of Europe. We continue to see very strong numbers from the Netherlands with an increase of 7.5% in Q2 following an outstanding performance in Q1. Luxembourg, Slovakia, and Switzerland also recorded positive like-for-like growth in Q2. Overall, this performance has also driven our market share development, which you see on the next page. Despite the uncertain economic backdrop, persistent inflation, and softening consumer confidence, We are pleased to deliver market share gains in a number of our geographies. In our home market, Germany, we've seen slight increase from 14.7% to 14.8% in the period January to July 2023. We also continue to see a strong development in our market position, especially in the Netherlands and Czech. Switzerland has also contributed positively to our market share gains. When we look onto the e-commerce share of Hornbach Baumarkt, you see that net sales stood at 13.2% in the first half of 2023-2024, stabilizing at the level we saw by the end of Q1. Our overall level of e-commerce sales still remains well above pre-pandemic levels, and we're excited about customer engagement across our interconnected platforms in all regions. Customer accounts have increased significantly in the first half of the year by 11%, to 3.9 million as at the end of August. This confirms the increasing attractiveness of our digital offering, which we are continuously enhancing with new features and services. More than half of e-commerce sales continue to be fulfilled through our stores, either through click and collect or our store delivery centers. This underpins the strength of our interconnected retail approach, leveraging the value of our dense big store network serving as a point of sale as well as storage and fulfillment facility. Moving on to our cost structure. Our gross margin was down by 36 basis point compared to last year, reflecting ongoing inflationary challenges. However, Q2 gross margin development indicates a stabilization in recent months. Going forward, we expect the stabilization trend to continue during the second half of the year. Our operating expense performance reflects for a large part higher wages, including inflation support payments, investing into our people and teams. At the same time, we steer our headcount very consciously to optimize both in our stores and specifically, of course, in the back offices. Keep in mind that the ratios were also affected specifically in Q1 by the deleverage from our top line results. We successfully reduced our store operating costs, which we managed down by more than 6%. This includes savings from lower energy as well as reduced energy prices. Just to note, selling and store expenses were also affected in H2 by non-operating effects from impairments. General and administration expenses have also increased due to higher wages as well as specifically from investments into technology and IT. We also kicked off our S4HANA project in H2 which we are expecting to run for the next two to three years. As a result, we see an EBIT development as highlighted here with an adjusted EBIT, which has stabilized in Q2 with minus 13% compared to Q1. For the first half of the year, the reduction summed up to 20%, and our EBIT margin came in at 6.4%. Let me summarize. We're focused on improving the gross margin in the second half of the year whilst maintaining our competitive pricing in line with our everyday low price strategy. We expect positive effects to result from decreasing purchasing costs for a range of products from the very high levels we saw during the pandemic and the beginning of the Russia-Ukraine war. namely 21 and 22. We continue to stay in constructive dialogue with our suppliers to ensure that decreasing input costs on their side are also well reflected in our purchasing prices. As said earlier, implementation of energy reduction measures are bearing fruit. We're benefiting from both decreasing energy costs based on falling prices as well as lower consumption. We balance any cost reduction measures carefully whilst not compromising our long-term development and opportunities of future growth. We are and we will also continue to invest in technology and our interconnected retail offering. We are very pleased with the outcome of our inventory development and inventory productivity. Inventories have already been reduced by 14% compared to the end of February. Beyond seasonal reductions, which were subdued in Q1, we brought down inventory levels by 6% in comparison to the same period last year. We will continue to optimize our differentiated ordering management to ensure high availability, both on stock and on shelves, with focus on our professional and project customers with respect to fast-turning project goods. This also includes the usual up-ramping of stock towards the end of this fiscal year, where we will focus on balancing the productive build-up of inventory for the next spring season while maintaining a high level of product availability. The successful inventory reductions obviously also are reflected in our cash flow. The development reflects the previous mentioned key items. Firstly, strong operating cash flow from continuously improving throughout H2. Second, successful stock reduction supporting specifically the change in working capital. And thirdly, our reverse factoring program influencing specifically the first quarter As you know, where we were keen to make sure that we transform the outflow of money for payments for goods from the Q4 of the previous year to the first quarter of this year. All in, we had therefore an adjusted cash flow of roughly $260 million in H1. CapEx spend was at $91.7 million in H1. of which 54% were spent on land and real estate maintained mainly for new store, which is consistent with our organic growth strategy. When we take a look into the balance sheet and compare that to February 28th of this year, you see that we had as planned a decrease by roughly 5.3% to 4.5 billion. This was mainly driven by the successful reduction in inventories on the asset side as well as short-term liabilities. Equity ratio is extremely stable, slightly built compared to last period with 44% and has further strengthened to a very comfortable level. Let me remind you that our balance sheet contains significant value in the form of own land and real estate, which amounts to 1.8 billion as of August 31st, 2023. The real estate is conservatively accounted for at amortized cost. While we are not a real estate company, those assets are a significant financial reserve that not every retail company can rely on. This further underpins our robust financial position and contributes to our conviction in the resilience of our business. Especially when you look back in industry, the DIY industry in general and specifically also Hornbach has re-emerged stronger from periods of economic downturn. At Hornbach we can also show a track record of delivering strong performance during these times by outperforming GDP, general retail, and the DIY industry in Germany, resulting in continuous market share gains and growth for us. Through the combination of the highest DIY sales density in Germany, compelling customer proposition, and our attractive ICR offering, we have been able to adapt and tackle external challenges in the past and will so in the future. Last but not least, successfully establishing new sales channels and geographic diversification have contributed significantly to the stability of our business. Summarizing that, before we move to Q&A, let me highlight once again, improving operating efficiency is a key priority for us and management is closely focused on cost and inventory optimization against both we have already delivered now in H1. In parallel, we will maintain our price leadership for our customers and remain a reliable partner for them with a strong focus as before on our professional customers and the depth and breadth of our store SKUs. We will continue to make targeted investments to improve operational efficiency and maintain our strong market positions. In line with our commitment to sustainability, we will continue to broaden our offering of sustainable products. Lastly, we have a robust balance sheet which enables reliable dividend payment. Overall, we are confident that we will continue to successfully navigate the current unique and uncertain environment, operate with agility, and respond to evolving customer dynamics. With that, let me conclude, and I hand back to Anjum.

Thank you, Karin. So we will now take your questions and start the Q&A session. And for this, I hand over to our operator. Please go ahead.