Ceconomy Ag Ord

Good morning, everyone. My name is Stephanie Richel. I'm the Vice President, Investor Relations at Seconomy. Welcome. Welcome to this full year results and strategy update webcast. We're excited to be here today and we have a lot of news to share with you. Before we start, let me briefly address the usual formalities. This replay is being recorded. A replay will be available on our website later today. Please also kindly take note of the disclaimer. Having said that, let me now hand over to our CEO, Bernhard Duttmann. Please go ahead.

Good morning, ladies and gentlemen. You see me smiling because I think it's a very good day for the economy. So welcome to our full year results call with our strategy update. We would have liked to welcome you in person. Unfortunately, this is not possible due to Corona. We also would have liked to be here with three persons. With the CFO Karin and the CEO of MediaMarkt, Aton Farhan. Although this is not possible, Corona again played a Against us, Karin is in quarantine. She is connected with us via her PC and she will be able to answer the questions later live on screen, but she is not with us today here in Dusseldorf. As if we have feared this to happen, we did a pre-recording two weeks ago for some parts of the presentations. And we will make use of it later. So luckily we did that. So we can give you, although Karen is not present at this moment, we can give you the presentations that we have planted. Ladies and gentlemen, when I joined the economy in October 2019, I did it with a clear focus on two tasks. The first task was to finish, to conclude the strategy process for the economy and the way forward of the economy. And the second task was to improve the relationship to the family Kellerhals and if possible to find somehow a solution. And today I'm very happy that we are able to tell you the story that we have found an agreement with Convegenta to roll up Convegenta as a shareholder of the economy and to take full ownership of the Medias Saturn business in the economy. And with this, I would like to begin my presentation to share with you the information on this transaction. So in a nutshell, what did we do over the last weeks? So we found an agreement with the family Kelleherts and now it is very clear with this transaction, we will acquire the 21.62% of Mediamarkt Saturn, which is owned by Convegenta today and bring it into our balance sheet in the economy. And we do it by some kind of contribution in kind by giving out new ordinary shares and some other financial instruments we talk about later. So Convegenta will become a new anchor shareholder of the economy. And they are committed to be in that role. So they have the target to be a stable shareholder and to roll up the shares to the economy. So the financing. of this deal is as follows. We have a mixture of ordinary shares. Secondly, we have a convertible bond and we have some limited amount in cash. This transaction will allow us to unlock a big value creation potential in the economy, which was locked up to this transaction. And with this value creation potential, the transaction will be value accretive from year one. We come to more detail in a minute. The transaction, however, is still pending on the approval of our shareholders meeting in February because the transaction is complex. And for that reason, we put it on purpose to the vote of our shareholders that they all can agree on this transaction. So let's go more into more detail. As I said before, Convergente will roll up or will become a shareholder of the economy. In the beginning of 25.9%, later it can even become more because from the convertible bond, they can move up the shareholding up to 29.9%. And that is the target what Convergente wants to achieve in shareholding. So we have on the one hand, a new shareholder structure, which allow a unified shareholder interest in the company. And all of them are looking forward that the strategy implementation will lead to the success of the economy in the future. In Psyconomy, with 100% ownership of MediaMarkt Saturn, we can simplify our governance. We have a lot faster decision process because we do not have the two-tier board structure in the company, which we had with an advisory board of Convegenta and a supervisory board at Psyconomy. That we will not have in the future. It will make our life a lot easier. Let's have a look. into the value creation potential from this transaction. I think the predominant part of this value creation comes from locked up today tax losses carried forward in this economy. These amount to 1.2 billion each for corporate and trade tax. And that will result in tax savings of 360 million over the next years. On top we have holding costs which were not tax deductible in the past but we can now deduct from our earnings of MediaMarkt.one. So this on top will lead to savings of around 10 million annually. All of this will reduce our tax rate by two to three percentage points, the underlying tax rate. The tax savings will lead to roughly 50 million benefits in the next three years. In the first year, a little less. In the third year, a little more. And that will be increasing over the years. And the major part of the 360 million will last for six to nine years, depending on the tax. The trade tax, they are a little longer than the corporate tax. On top, on the benefits, we also have some holding cost savings. The amount is four million, so you might have expected a little more, but you need to have in mind that we already have reduced our holding costs in the beginning of 2019 by 10 million from 40 to 30 million. So now the savings are a little bit more limited, what we can achieve on top. The third benefit the shareholders will have is that we move the minority share from Convergenda now to the earnings of the economy. This is on top an amount of more than 50 million. And all the elements together will ensure that the transaction is accretive for our shareholders from year one. On the year one would be this year after closing. So what are the key parameters for the transaction? Number one, we have 125.8 million shares, which we will issue as ordinary shares after generally assembly which have a value of 525 million on top we have a convertible bond at a nominal value of 151 million at an issue price of 160 million and we have a cash transaction so we pay upon closing 80 million to the con to convergenta and 50 million we pay only after we have given back the KfW facility. That means the whole transaction has a limited cash-out and debt issue. It is in line with our stable financial profile. Number two, it reflects the intention of Convergenta to become an anchor shareholder up to 29%. And if you add up all the considerations, you come up to a total consideration value of 815 million. When you ask me, so how do you calculate these kinds of values? It's based on a three months average share price, which is at four Euro 17, we measured up to Thursday evening. And with that, the shares of the 125.8 million is exactly the 525 million. Having said all this, there's still a process we have to go through. So we had agreed with Convergenta on the deal. We signed it yesterday, and we also got the supervisory board approval yesterday. Now we have in January 21, we will have the convocation of the annual general meeting. And in February, we have our shareholders meeting in Dusseldorf. It will be virtual meetings this year. And we hope that on that shareholder meeting, we will get the approval from our shareholders and investors to improve the capital increase for the consideration in kind for the shares, for the ordinary shares, for the issuance of the shares and the issuance of the convertible bond. The closing of the transaction would be around end of March, depending on when the court will register the new shares. So far, for the News of the day for the economy. And I think this news is an incredible news for us because it solved something which was in the room for many, many years. And finally we have done it. I'm really proud on my team that we have gone so far in achieving this. And I think with that one, We can now continue with our normal program, which we have intended for you to present. And that is to the results from last year, the strategy update, which is, I think, also important in light of all the new news from the outside world, what we get. And that is what we start now. So let's take a look back into the beginning of 2019. At the time when I joined, we had to set the reset button because the economy was off track and we need to stabilize the business. One of our main conclusion at that point in time was that it was not the insights we were missing what needed to be done. No, it was lacking the timely and consistent implementation. For that reason, we shifted our focus to relentless execution for all our strategic initiatives. And we defined four initiatives, and we have defined it in four tiles, and you might remember them. And the first one was omni-channel. In omni-channel, we delivered tangible results. We consolidated, first of all, the different online shops we had for the different brands. We also consolidated the IT platform from six different webshop platforms to one. In Germany, we implemented an improved webshop front end. And we introduced new apps which were far better in user experience than the existing ones. In last July, we introduced the marketplace for Germany. And we are pretty convinced that we, as the third largest online player in Germany, after Amazon and Otto, will have a marketplace with high relevance. We are already pleased by the momentum which we see in our marketplace, and the interest from suppliers who want to sell in our platform. The second tile was one of service and solutions. We implemented the harmonized service offering for our smart bars across all countries and all stores. At the same time, we tendered and refined our insurance and warranty packages for Germany and Austria. And we also launched the monthly subscription for extended warranties. The third one, category supply chain management. This is key for us. It is key in the transformation from the decentral structure to the central one. And the most important project we had was the launch of a centralized category management approach. We have given guidelines to all countries how to define the assortment. So the products in each country might be different slightly, but it is in a framework, in a clear framework. And that has been defined by the central category management department. And most important, With that approach, we have shifted the category management or the ordering of products from the stores to the countries. So much more centralized. If you now look how much we buy centrally, we have achieved on a country level a level of more than 95%, which we buy centrally on a country by country level. Lastly, Category and supply chain is also about logistics. We are in the process of improving our logistics also to a more central structure. It will need some more time as the whole category will need more time because category management needs systems in place and logistics in place. And both things are underway, but they still need time to be finished. The fourth tile was the tile of organizational cost structures. Actually, this was a tile which we started with to get back to a competitive cost structure for the group. And in August, we implemented the new operating model where we harmonized the organizational structure across the group and also introduced standardized processes. which are now a prerequisite for all countries. This new operating model will help us to reduce costs, but will even more help us to increase speed in the transformation. All that helped to stabilize the company in the year 2018 and 19. And we were very confident that we will be able to show in the year 19-20 sales growth and higher earnings. What we all know, it came differently. So let's have a look back how the corona pandemic influenced our business. So the year started quite well with an excellent Black Friday campaign and we finished the first quarter with good results. We increased the sales and we increased the earnings. So on both elements, we were successful. In January, we increased the level of sales development. In February, even we passed the January development and in March, we were even stronger. Up to mid-March, we're at a sudden point in time within one week, all of our stores, no, not all, but 90% of our stores were closed. We had to shift all resources immediately to our online activities. Luckily, we had prepared our online tools ahead of the time. So we were able to have a resilient online business which could deliver the high volumes. And you might remember what we reported after the quarter. that in April we had delivered 60% of our previous year volumes just via our online channels. So we managed successfully this phase in the lockdown phase. And at the same time, we prepared for an opening of the stores. The restrictions eased end of May, or in May. And end of May, almost all stores were open again. And There was always a question if Corona was the reason why the business in general would move a lot more towards online. But the post-lockdown phase was a clear evidence that customers want stores. They were coming back to our stores. In the first days, they were queuing to get into our stores. And the customers who came had a strong shopping intention. So they were buying more. So in the three months, June, July, in the four months, June, July, August and September, we had very good sales development. We even exceeded our sales volumes in our brick and mortar stores. At the same time, development on online remained positive. All in all, we were able to really grow our business in these four months, and we could compensate for the sales losses we incurred in the lockdown phase. And that resulted in a sales number where we had to show development only slightly below last year, despite the COVID-19 disruptions. And for EBIT, we achieved a good level Far beyond what we have anticipated in the beginning of the year, where we had no idea what this year would lead to. And also, when we did our internal forecast in July, the forecast was much lower. And also that the result was much better than it was expected from the markets. We did not only work on financials last year. We also worked on our ESG ambition because we have a clear ambition to make our operations sustainable by reducing the carbon footprint. We want to be a responsible partner for society, employees and customers. And we want to work in a compliant way. In terms of sustainability, we were successful in reducing our direct carbon emission compared to the base of 2015 by 75%. In the meantime, 80% of our power supply is provided with green electricity. We are working to extend the lifespan of products with repairs. Last year, we did 2.9 million repairs across the group. More important, what happens if a product comes to an end of its lifetime. We all know that it's e-waste. And in Germany, we take 50% of the total e-waste back from the consumers and feed it back to recycling. In diversity, we want to increase the female share, which stands at 38% today. And we have a good cultural fit with people from 128 nations in our group. Lastly, in our private label company, where we sell products directly from production sites, we have to make sure that these sites are audited for labor and human rights protection. And we achieved that for 97%. With that, I will hand over to Karin for the financial numbers of last year.

Good morning, ladies and gentlemen. If I had asked you in March this year how you would or what kind of financial development you would expect from this economy, AG, you would have been certainly very critical on that. Today I can show you that we mastered this corona related year very well. The sales came in slightly below prior year and we finished the financial year with an adjusted EBIT of 236 million euro. But let's start with a closer look at the development of the sales. Despite more than six weeks of stock closure, and the currency and portfolio adjusted sales is only slightly below prior year. It declined by 1.8% year-on-year basis. As Bernhard already mentioned, we have seen in the first five months a very positive sales development. based on successful campaigns during the Black Friday and Christmas period in the last calendar year. The stationary sales losses which we have seen during the lockdown period could partially offset by extraordinary online sales growth. We also have seen a noticeable sales recovery since we reopened the stores. driven by a catch up demand of our customers and by further stronger customer demand until the end of the financial year. If we look at the at the country level, we see different pictures. So Germany, Italy, Spain and Poland were mostly affected by the COVID-19 related stock closures. Turkey, Belgium and Austria were able to fully make up the sales losses of the lockdown period. They even achieved sales above the prior year's level. The Netherlands, Sweden, Hungary and Portugal were not affected by the stock closures and performed well during the last financial year. If we look at the sales development by product categories, we see that we have a high cross rate in the computer hardware as well as in the home appliances, thanks to the work from home trend. But on the other hand, we also have seen a negative cross rate on the brown goods due to the absence of major sport events in the current year. A key factor for us in this financial year was the resilience of our omnichannel business model. The online sales rose sharply by 44% to 4.2 billion euro. And if we look at the online sales share of the last financial year, we have seen a historical high with a share of 20.2%. This high cross was not only limited of the lockdown period. Even after the reopening of the stores, we have seen that the momentum remained high. Since the COVID-19 outbreak, we concentrated our marketing activities and resources on the online channel as customer increasingly switched to the online. On the right side of this slide, there's one figure which is pretty impressive. It is the growth rate of the online business in April. There we have seen a growth rate of more than 200%. And we delivered without any big disruptions. Our IT and logistics worked overall well, despite the exceptional order amount. During this time, we also implemented the shipment from store capabilities in order to use the product availability in the stores in order to fulfill the customer demands. The number underlines our tremendous progress in this whole process. But even after the lockdown, the online sales remain strong. increasingly by 50% on a year-on-year basis. Let's dive a bit deeper in the online sales development in Germany. As Bernhard already mentioned, we have not only consolidated the IT platforms, we also improved the webshop front end and the user interface of our app. These measures supported the online business success in 2020. This chart also illustrates the success of the online business. As you can see, we have consistently outperformed the online market in Germany. We did especially well in the third quarter during the lockdown, but also after the reopening of our stores. Our focus on the online sales activities since COVID-19 was just the right way, and we made it better than any other online player. The development of the services and solutions sales faced COVID-related headwinds. The sales decreased by 7.6% to 1.1 billion euro. The decrease was due to the temporary store closures and after the reopening of the stores based on a lower traffic in our stores. During the first five months we have seen a very positive development of the sales in this segment. We have even seen a double digit growth rate. Especially financing was negatively impacted by the store closures. to a certain part, intentional by the reduction of the 0% interest offers. Despite the lockdown, smart bars or the services on the smart bars which we offer remain stable, even though these services are a pure brick and mortar service. Our new and improved warranty extension showed a strong growth during the whole period and could partially offset the negative development of other service and solution categories. The cross margin, our cross margin, was significantly impacted by COVID-19 as well and declined by 120 basis points to 18.2%. This was mainly due to the COVID-related stock closures again resulting from a channel shift, the higher delivery costs, stock-related issues, and lower service and solution income. Since the store reopened, we could see a noticeable sequential improvement in the cross-margin trend, which continued until the end of this financial year. Please remember that we have seen a stabilization of the cross-margin in the first five months of the last financial year. For the new financial year, that means for the financial year 2020-21, we expect that the cross-margin will be supported by an increase of the stationary sales as well as a higher income from the service and solution segment. Moving down the P&L, let's have a look on the OPEX development. The OPEX ratio improved by 60 basis points to 70.8%. The COVID-related OPEX savings amounted to €227 million, mainly coming from contingency measures, which we rapidly took during the lockdown period in order to mitigate the negative effects. These include the short-time work for our employees. We also made progress in the operational cost savings, in marketing, in personnel, as well as in location costs. These cost efficiencies are related to the reorganization and efficiency program, which we announced in April 2019. The absolute savings in the OPEX came in at €212 million as we incurred some negative effects as well. If we look at the negative effects, we are talking about non-recurring effects. We are talking about 40 million non-recurring efforts, including a provision for legal risks in connection with contractual penalties in Q2, and impairment losses on software and Q4. And we are talking about around 27 million euro resulting from impairments of leasing related right of use assets. As you can see, we could partially compensate the decline in sales and cross margin by significant cost reduction. The adjusted EBIT of the financial year 2019-20 came in at 236 million Euro. That is 167 million Euro lower than the prior year level, but above our guidance, which we updated in July. Looking at the earnings in the segment, despite temporary stock closure, Germany finished the year with a solid operative performance. mainly due to cost reduction. The earnings were slightly below prior year only due to non-recurring effects of 40 millions. These 40 millions include legal risk provision in Q2 and the software impairment in Q4. In the other countries, the earnings development is slightly above prior year. In Western and Southern Europe, Spain and Italy recorded a significant earnings decline due to the negative COVID related sales and margin development. In the Netherlands, earnings were down year on year basis due to margin related factors and based on a highly competitive environment. The negative decline in the region Eastern Europe was driven by a decline of sales and margin in Poland. The EBIT in Poland was additionally impacted by impairments of right of use assets. Turkey showed slightly higher earnings due to a strong sales growth, while currency effects offset a part of the positive earnings development. In the segment others, The increased earnings, which you can see, are due to lower economy headquarter costs and the disposal of iBoot. Sweden, which is also part of the other segment, came in at prior year's level. This slide, ladies and gentlemen, shows you the bridge from adjusted EBIT of 236 million euro to the reported EBIT of minus 80 million euro. And you can see that we have two main columns between. In the first column, we are talking about the non-recurring effect in the financial year 2019-20. which mainly include a positive EBIT effect related to the Greek transaction in Q1, the expenses for already decided store closures announced in Q3, and the expenses related to the implementation of the new operating model, which we also announced in Q3. With regard to the expected 130 million restructuring expenses in the financial year 2019-20, we only booked 72 million. But please keep in mind that this is just the timing effect and the reminder will switch in the financial year 2020-21. But with this effect, you will see a shorter payback period. The other adjustments items are mainly the result of the non-cash effects impairment of the FNAC data stake in Q2. Coming to the free cash flow development. The least adjusted free cash flow came in at 453 million Euro. That's a strong increase of 586 million on a year-on-year base. This development was driven by a strong Q4, but also driven by some positive non-recurring COVID related effects. And these COVID related effects are not sustainable going forward. The significantly better free cash flow was mainly impacted by a networking capital inflow, which was supported by a strong sales momentum in Q4. and a higher purchasing volume in the expectation of a strong sales development during the Black Friday and Christmas period in this calendar year. For the financial year 2020-21, we expect networking capital to normalize. The positive cash tax inflow is due to tax refunds, which we get from prepayments out of the financial year 2018-19. And it is based on a lower tax prepayment in the financial year 2019-20. As you know, we suspended non-essential investments in modernization and expansion. Therefore, we had a slightly lower cash investment compared to the already low level in the prior year. For the financial year 2020-21, we expect cash investments to normalize of around 1.5% of total sales. As you are aware, the uncertainties regarding the further development of the COVID-19 pandemic, as well as the global macroeconomic environment remains high. We are currently again facing local lockdowns and stricter social distancing guidelines. Nevertheless, we decided to provide you with an outlook of our financial year 2020-21. The following outlook assumes that the further impact of the COVID-19 pandemic on both on the overall economic situation and of the group position will not differ significantly from the extent currently known. The achievement of the guidance also requires that there are no additional extensive temporary closures of a significant part of our business. It requires that there are no serious worsening in consumer confidence. And it also requires that the supply chains remain largely intact. The outlook is made, as always, before portfolio changes and associates. In addition, the outlook does not include non-recurring effects in connection with COVID-19 related stock closures, as well as the introduction of the new operating model. We expect a slight increase in Forex adjusted sales. Yes, we had an excellent start in the first quarter so far with a double-digit cross in total sales. But please keep in mind that we will be facing a high comparison base in the second half of the new financial year. Also, we expect some mild recession, especially in Southern Europe. The adjusted EBIT of our outlook exclusive associates is expected to come in at between 320 and 370 million euros. We are confident that this is a solid outlook for the current financial year despite the ongoing pandemic. Ladies and gentlemen, after a short break, we will come back with our strategy and our way forward.