Ceconomy Ag Ord

Good morning everyone and welcome to our Q1 results call. With me today are CEO Bernhard Dittmann and CFO Karen Zornmoser, who will guide you through today's presentation. Before we start, let me briefly address the usual formalities. Firstly, please be aware that this call is being recorded. A replay will be available on our website later today. Secondly, please keep in mind that today's presentation and potentially also some answers to your questions during the Q&A session may contain forward-looking statements. For additional information in this context, please refer to the disclaimer. But now let me hand over to our CEO. The floor is all yours.

Good morning, everyone, and thank you for joining the call. Today, I would like to begin with a quick review on our first quarter. I will then pass over to Karin, who will guide you, as usual, through the financials. and the outlook for the year. We will close also as usual with a Q&A session where we are happy to answer your questions. Ladies and gentlemen, I would like to pick up where we had ended the last call and emphasize that our utmost focus is on execution. In the first quarter, we executed with a focus on the Black Friday period as well as the Christmas trading. And this year's Black Friday period was again successful. On the flip side, however, as Black Friday continues to gain importance, we again noticed that the Christmas business was impacted by pull-forward effects. The improvements of our online platforms in the past financial year and our service offerings have supported solid growth rates in our online business as well as the service and solutions business. Higher income from service and solutions as well as our cost optimization efforts contributed to our bottom line results improvement. Our operations in Germany performed particularly well in the first quarter. Karin will come back to this later. At the same time, however, we also faced some challenges in the first quarter. First, the performance of the Polish business is still not satisfying. We have worked out an action plan along some management changes to steer against the negative development. Second, we face an overall unfavorable macroeconomic environment in some countries paired with intense competition. We are keeping a close eye on this and want to make sure that we deliver a resilient performance also in this environment. These developments reflected well on our sales and earnings. Let's take a quick look at the guidance relevant to key figures for the first quarter. Our sales adjusted for FX and portfolio effect were down 0.5%. If we also exclude the IBU business, which is not treated as a portfolio measure, the underlying sales development would have been almost flat. Adjusted EBIT increased by 20 million euros versus the prior year period. This figure underlines the progress we have made over the last month. To sum this up, we managed to build the foundation for a sound financial year 2019-2020. Let's now take a closer look at our Black Friday performance. In 2018, for the first time, we set up a focused concept to leverage this important season of the year in the best possible way. It worked out well. We have therefore built on this proven concept in 2019 and managed to even be better prepared. For example, The countries were equipped with a detailed, harmonized playbook in advance to ensure a very disciplined campaign across the whole period and across all segments. In this context, the clear focus on services and the cross-selling of bundles has proven to be the right one for our customers. Our recent updated web platform functions very well without any disruptions, which is crucial in peak trading periods like this one. Coupled with a better availability and a strong improved delivery performance, this led to big improvements in customer satisfaction. Members of our loyalty programs took on the early access option to shop ahead of everyone else. With these efforts, we were successful in building again a profitable Black Friday, both in our stores and online. We are grateful to our thousands of committed colleagues who work hard to deliver a great customer experience every day. The Black Friday period was on top of all our minds. A look at the figures on the next slide underlines this. Black Friday was again the strongest single day ever for us. In total and compared to the prior year, we sold more than 1 million more items. Samsung and Apple smartphones, as well as Samsung TVs, were among the top three of our best-selling items with respect to net sales, as well as the total number of sales units. Dyson floor care products were also very popular, while gamers were eager to get the Nintendo Switch. We recorded around 15% more online shoppers who visited our web shops. In addition, we welcomed around 2% more customers in our stores during the five-day Black Friday period versus last year. These are impressive figures. All in all, we generated double-digit sales growth rates during that Black Friday period for both our stores as well as online. To give you some more flavor, let me briefly highlight that in particular, bundle offerings were very well received by our customers. And this plays exactly into our service strategy. We have successfully linked product sales with services and accessories. Especially popular, we're ready to use pre-installed smartphones and notebooks, both showing an impressive sales boost of about 60%. The same holds true for sales in screen protection offers, which increased by almost 70% compared to previous year. Both services are part of our core service offerings at the smart bus. Let me remind you that the increased focus on the attachment of service and solutions certainly supports our bottom line. Taking all of this together, we are very satisfied with a very executed Black Friday period. So this is it from my side for the moment. Let me now pass over to Karin for the deep dive into the Q1 financial performance.

Thank you, Bernhard, and good morning to everyone in the call. Ladies and gentlemen, I'm pleased to look back at a solid first quarter of the year. Let me guide you through the quarterly development in detail. Total sales came in at around 6.8 billion euros. This represents a slight decline of 0.8%. Adjusted for forex and portfolio effects and iBoot, sales came in roughly on prior year's levels. A look at the individual segments reveals a mixed picture. In DACH, sales more or less stayed flat despite a demanding comparison base. In Germany, we recorded a strong double-digit increase in sales over the Black Friday period. However, as Black Friday continues to gain importance, this was also accompanied by a sales pull forward. Consequently, the Christmas business in the first weeks of December was weaker than in the previous year. This was also reinforced by the late timing of Black Friday in a deliberately less campaign-intensive post-Black Friday period. In Western and Southern Europe, Forex and portfolio-adjusted sales declined by 2.9%. In Spain, the absence of a strong VAT campaign in the prior year period had a negative impact on the sales development. In Italy, sales were down on the back of a currently weaker consumer climate and intense competition. In the Netherlands, sales continued to decline. However, we have noticed a slight trend improvement towards the end of the quarter as the initiated countermeasures seem to start taking effect. In Eastern Europe, we saw a mixed picture and in total a sales increase of 11.3%. Turkey recorded a mid-double-digit sales growth, particularly driven by a positive market environment. On the other hand, in Poland, the sales decline continued, which was linked to an intense competitive environment. On the other segment, Sweden showed a solid sales development in local currency. The sales decline of the segment is linked to the sale of iBoot. In Q1 of the prior year, iBoot still accounted for around 15 million euros of sales. Let me now talk about online and service and solution. In the first quarter, online sales, excluding the Greek media market business, increased by around 4% compared to last year. Adjusted for iBoot, online sales even increased by 6%. Keep in mind that we faced a challenging comparison base with 28% online sales growth in the prior year period. The strong Black Friday campaigns had a particularly positive effect on the online business. Another reason for the positive development is our pickup option, which continues to be very well received amongst our customers. 47% of all online orders in the first quarter were picked up in our stores. I'm even more pleased to look at the development of our service and solution business in this quarter. Services and solutions developed very positively, with sales up to 10%. This growth was largely driven by a strong demand for extended warranties, thanks to our improved offerings. Also, demand for our smart bar services was soaring in this reporting period. We experienced double-digit growth rates for all three core services. ready to use, screen protection, and in-store repairs. Finally, although our business with mobile contracts increased slightly. Let us now move to slide 13 for a few on cross-profit, OPEX, and EBIT. In the first quarter, we had a slight trend improvement in the cross margin compared to the previous quarter. The cross margin only declined by 10 basis points to 18.3%. However, we continue to see pressure on the goods margin. In the first quarter, this was partly compensated by our growing exposure to services and solutions. Our cross margin also benefited from the successful management of the Black Friday campaign period in the first quarter. At the same time, due to our strict cost management, we reduced operational expenses by 50 basis points. This was largely driven by lower personal expenses supported by our reorganization and efficiency program, but also other operating cost savings related to an optimized personal deployment in our German stores. Furthermore, lower material and location costs had a positive effect. As a result, Adjusted EBIT increased by €20 million to €289 million. This includes a positive effect of IFRS 16 in the amount of €2 million. Underlying EBIT growth was driven by the DACH segment. Germany posted a significant increase in earnings, while the development in other countries in DACH was stable. Our active operational cost management has greatly contributed to this development in Germany. Also, the execution of our strategic initiatives continues to take effect. This translated into a higher income from services and solutions. Unfortunately, the group's earning improvement was not supported by all regions. Earnings in Western and Southern Europe were impacted by a weak consumer climate, and an intense competitive environment in Italy. The lower sales in Spain due to the timing differences and promotional periods also had a negative impact on the result of the segment. We expect to catch up the slight earnings shortfall during the next quarter. In the Netherlands, earnings continued to decline while we saw a slight trend improvement towards the end of the quarter. In Eastern Europe, the continuing difficult and competitive environment in Poland continued to weigh on profitability in the region. In Turkey, earnings developed slightly positive in a supportive market environment. Overall, it is fair to say that we see first improving momentum, especially in Germany with even more to become visible in the course of the year. I will now shortly explain the bridge from adjusted to reported EBIT. In the first quarter, we booked a positive EBIT effect related to the Greek transaction, which took place at the end of November. This effect amounted to 33 million euros and mainly resulted from the deconsolidation of the negative net asset book value for medium accrues in our consolidated economy account and from a positive fair value of the 25% joint venture stake. On the other hand, we still had some trailing restructuring expenses related to the reorganization and efficiency program. Those, the positive net gain amounted to 30 million euros. We still expect a limited amount of trailing restructuring expenses to come in the next quarters. So in total, we continue to expect a smaller positive net effect of around 10 million euros in this financial year. Taking the positive earnings effect into account, as well as the other adjustment items related to CREES and FNAC, reported EBIT came in at 319 million euros in Q1. This represents an improvement of 84 million euros compared to the prior year period. As you might recall, in the prior year period, charges for top management changes and restructuring in the amount of 34 million euros burdened the results. Let us now look at the bridge from EBIT to EPS on slide 15. Please keep in mind here that we now see the reported figures. In the current period also, the effects from IFRS 16 are included. Along with the EBIT improvement, earnings before taxes improved by 92 million euros to 327 million euros. This was additionally supported by an increase in the net financial result from the MVU dividend in the amount of €13 million. Higher interest expenses, mainly due to the recognition of the interest component for operating leases under IFRS 16, had an opposite effect. The tax rate improved by 5.3 percentage points This improvement is mainly related to the non-taxable gain related to the Greek transaction. Our underlying tax rate, which means before any effects from associates, MVU or the restructuring, stood at 38%. Please keep in mind that the improvements from tax consolidation projects in the past two financial years seen from the activation of tax loss carry-forwards and those mainly one-time expense reductions, while the structural tax improvements that we executed are sustainable. At the same time, we are also currently working on additional minor improvements in Germany and in other countries. Therefore, we continue to expect the underlying tax rate to develop towards 35% in this financial year. On the back of the lower tax rate and the EBIT improvement, earnings per share increased by 17 euro cents to 47 euro cents. Moving on to slide 16. Pre-cash flow in the first three months amounted to €1.4 billion. €21 million, an increase of €27 million compared to the prior year period. However, this increase is related to the adoption of IFRS 16. We will also provide you with a lease-adjusted free cash flow, subtracting the repayment of lease liabilities for better free cash flow comparability under IFRS 16. Of course, there is no overall change in total cash flow for the group from the first time application of IFRS 16. The least adjusted free cash flow in the first three months remained below the prior year's level. This can be partly explained by the expected cash outflows related to the reorganization and efficiency program. Also keep in mind, please, The positive EBITDA effect related to the Greek transaction are not cash effective and those weigh on the other operating cash flow line. Furthermore, in the prior year, the other operating cash flow benefited from lower trade tax receivables and the settlement of receivables in connection with the Russia transaction. Another reason for the decline of the adjusted free cash flow, a higher cash tax payment. In the previous year, we benefited from lower tax expense payments due to tax optimization measures in the financial year 17-18, which became largely cash effective in the first quarter of the financial year 18-19. We expect to receive a major share of tax refunds for the most recent tax optimization in the current financial year, which should result in a year-on-year decline in cash taxes in the coming quarter. Let's now move on to the outlook. The underlying assumptions for the financial year 2019-2020 that we presented during our full-year call are still valid. With this in mind, we confirm our outlook for this financial year. With regards to sales, we still expect a slight increase in forex adjusted sales compared to the prior year. We continue to expect our adjusted EBIT to come in at 445 to 475 million euros. This includes a positive effect of pre-assembly 5 to 15 million euros due to the transition to IFRS 16. Our view on the development of the segments also remains unchanged. We expect DACH to contribute to the positive EBIT development and, in particular, Germany. At the same time, we stay cautious with respect to the developments in the Netherlands and Poland. Therefore, the segments Western Southern Europe and Eastern Europe are expected to perform broadly on prior year's level. The outlook is adjusted for portfolio changes and non-recurring effects in connection with the reorganization and efficiency program. Also, the earnings effect from associates such as FNUC are not taken into account. With respect to FNUC, as you are aware, the share price has declined quite strongly in the last week. At the current stage, share price level there is a risk of an impairment as of the next end of period that is end of march however let me be clear here a potential impairment of fnac stake would of course not be cash affected it would not trigger a capital increase nor affect our guidance overall the market and we believe that the fnac shares are currently undervalued and expect them to converge towards their fair value. I would now like to turn the call back to Bernard for his closing remarks. I look forward to your questions at the end of the session. Thank you, Karin.