Hornbach Holding AG & Co KGaA

XETRA:HBH

Earnings Call Transcript 2020-Q1

[Operator]

The conference is now being recorded. Good morning, ladies and gentlemen, and welcome to the conference call regarding the First Quarter Results 2019/2020 of Hornbach group. [Operator Instructions] Let me now turn the floor over to your host, Axel Müller.

[Axel Müller, Head of Group Communications]

Yes, thank you very much. Good Morning. My name is Axel Müller. I am Head of Investor Relations for Hornbach group. I'm joined by CFO, Roland Pelka; and my colleague, Anne Spies, Investor Relations Manager. We released our set of numbers this morning at 7:00 and are quite happy that following quite a bit difficult season, '18/'19, we came back on track, and this is what we would like to discuss with you today. And in doing this, I would like to hand over to Roland, please.

[Roland Pelka, Member of the Board of Management]

Thank you, Axel. Good morning, ladies and gentlemen. So we are satisfied with our results for the first quarter of the new financial year. We met our sales and earnings targets. The forecast we made for the current financial year are still valid. Before we begin our discussion and you ask your questions, I would like to start by offering you a very brief overview of the most important facts. The total number of Hornbach DIY stores remains unchanged. We operate 158 stores in 9 European countries with total sales areas of 1.85 million square meters and weighted average sales areas of 11,700 square meters. Our online shop is active in all countries. The number of builder's merchant outlets operated by Hornbach Baustoff Union rose from 30 to 33. Sales at the Hornbach Holding Group grew by 9.1% to EUR 1.3388 billion. Sales at Hornbach Baustoff Union surged by 19.5% to EUR 77.2 million, while sales at the most important subgroup, Hornbach Baumarkt, rose year-on-year by 8.5% to EUR 1.261 billion. Like-for-like sales, i.e., excluding sales at stores newly operate -- opened in the past 12 months developed as follows: with growth of 19.8% in March, the new financial year began on a very pleasing note. The following 2 months also brought positive growth, specifically, that of 2.6% in April and 4.0% in May.On a cumulative basis for the first 3 months, we can report growth of 7.8%.The like-for-like sales in Germany rose by 6.9% and thus, significantly faster than the sector average.Outside Germany, we achieved sales growth in constant currencies of 8.7% with positive performances in all countries in this respect.Let's now turn to our earnings and performance -- to our earnings performance and start by looking at the Hornbach Baumarkt subgroup. Based on the slide, year-on-year reduction in the gross margin and on the fact that store and administration expenses grew less rapidly than sales, earnings before interest and taxes EBIT came to EUR 84.1 million, as against EUR 65.2 million in the previous year. Operating earnings were influenced by the conversion in accounting required by IFRS 16. This had a positive impact of EUR 5.4 million on EBIT. Earnings before taxes rose by 15.3% to EUR 69.8 million.We met our first quarter earnings targets for the -- for Hornbach Baumarkt subgroup. This statement also holds true for the earnings figures at the overall Hornbach Holding Group, where operating earnings surged year-on-year by 22.2% (sic) [ 22.8% ] to EUR 96.9 million. This figure includes positive earnings items of EUR 3.2 million due to the conversion in accounting required by IFRS 16. Earnings before taxes rose by 16.8% to EUR 85 million. In the first 3 months of the current financial year, we invested around EUR 49 million, mainly in land and buildings at the Hornbach Holding Group level.The IFRS 16 accounting conversion has significantly increased balance sheet volume. The equity ratios, nevertheless, remain at a good -- at good levels. The equity ratio at the overall group came to 41% as of May 31, 2019, while the equivalent ratio at the Hornbach Baumarkt subgroup amounted to 31%. Cash and cash equivalents totaled EUR 371 million at the overall group and EUR 313 million at the Hornbach Baumarkt subgroup. That brings me to the end of my introduction and the first quarter -- on the first quarter and thus to our outlook. What do we now expect? We will be launching operations, most likely in the third quarter, at Hornbach DIY stores in Sweden and Slovakia. A further location is set to follow in the Netherlands, most likely at the end of the fourth quarter. One small Hornbach compact store in Neunkirchen is expected to be closed as of August 31, 2019. The total number of Hornbach DIY stores will therefore, rise to 160 by the end of the financial year. Our full year outlook is unchanged on the forecast made in the annual report for the past financial year. We still expect to generate sales growth in the medium single-digit percentage range, and that both at the Hornbach Group and at the Hornbach Baumarkt subgroup level. We also still expect operating earnings to show year-on-year growth with earnings expected to rise by at least 30% at the Hornbach Baumarkt subgroup and by more than 15% at the overall Hornbach Holding Group. Total capital expenditures for the financial year as a whole are expected to amount to between EUR 110 million and EUR 130 million for the group.This brings me to the end of my comments. Together with Axel, I would be glad to answer any questions now you have. Many thanks for listening.

[Operator]

[Operator Instructions] The first question is from Juergen Elfers of Commerzbank.

[Juergen Elfers, Equity Analyst of Retail]

I would love to, as usually, discuss with Mr. Pelka the like-for-like developments, country-by-country in the first quarter.

[Roland Pelka, Member of the Board of Management]

Okay. So what do we have achieved? Firstly, like-for-like sales, as I said, in all countries, first of all in Germany, as I already explained, 6.9% plus in Germany; in Austria, we achieved a plus of 3.6% in the first quarter; Netherlands again, is performing extremely good with positive number of 10.5% growth in the first quarter; Switzerland is slightly positive on a constant currency basis with 1.1% plus in the first quarter; Sweden is performing now very good with plus 15.1% in the first quarter; and also, the Czech Republic is -- had a very good performance with growth of 11.9% in the first quarter; Slovakia, also very good with 10.9% plus in the first quarter; Luxembourg, 6.1% ahead of the previous year; Romania, 18.1% above of the previous year level.

[Juergen Elfers, Equity Analyst of Retail]

Yes. This -- in the Czech Republic, just -- double check, was 11.9%, correct?

[Roland Pelka, Member of the Board of Management]

This is correct, yes.

[Juergen Elfers, Equity Analyst of Retail]

Okay. Great. Then the second question that I may have is the -- whether you could shed some light on the evolution of your e-commerce activities in terms of sales momentum. How this has supported the dynamics that you've seen in the various markets.

[Roland Pelka, Member of the Board of Management]

First of all, we have growth in all countries with our online shop, and so we are very pleased with performance of our online shop. And in total, excluding click and collect, so we achieved a plus of 17% compared to the previous year with growth, as I said, in all countries. And so we are very happy with the performance of our online shop, it's doing very well.

[Juergen Elfers, Equity Analyst of Retail]

Mr. Pelka, would you happen to have the number also including click and collect, i.e., all digitally simulated sales?

[Roland Pelka, Member of the Board of Management]

Axel, do you have this number? Wait a minute. I have it here.

[Axel Müller, Head of Group Communications]

I just...

[Roland Pelka, Member of the Board of Management]

Okay. So [Foreign Language] Click and collect has a plus of 26% compared to the previous year.

[Juergen Elfers, Equity Analyst of Retail]

This is just click and collect or is it all e-commerce?

[Roland Pelka, Member of the Board of Management]

Oh. That's just click and collect. As I said, e-commerce growth was 20 -- wait a minute, 20 [Foreign Language] -- sorry, I was in the wrong line. So we have a plus of 20...

[Axel Müller, Head of Group Communications]

Maybe -- it's Axel Müller speaking. All together -- all in, that means including reserve and collect, we experienced 23.5% increase over year-on-year, including click and collect.

[Roland Pelka, Member of the Board of Management]

Including click and collect.

[Juergen Elfers, Equity Analyst of Retail]

And the growth rate that you mentioned earlier, Mr. Pelka, on click and collect was -- I didn't catch the number precisely. That was more than 20%, correct?

[Axel Müller, Head of Group Communications]

Click and collect has a increase of...

[Roland Pelka, Member of the Board of Management]

26%

[Axel Müller, Head of Group Communications]

26%.

[Juergen Elfers, Equity Analyst of Retail]

Okay. Okay. And altogether, when we now look at the 23.5% growth, what sort of sales share does e-commerce represent?

[Axel Müller, Head of Group Communications]

From the group perspective, it presents just over 10%. And of course, in looking country by country, depending on the majority of the Internet business, we have countries where it's a higher share, as for -- as in Germany and in Switzerland. And we have other countries, young countries, where it's lower.

[Juergen Elfers, Equity Analyst of Retail]

Okay. Okay. Then let me just, if I may, ask one more question and that concerns the closure of the Hornbach compact store in Neunkirchen at the end of August, 2019. If I recall that correctly, the store was opened in 2015 as was the -- another compact store in Alzey also in 2015, which had already been closed last year. There's only one compact store left in Bad Bergzabern, if I remember that correctly, opened in 2014. Is this the end of the compact concept?

[Roland Pelka, Member of the Board of Management]

You're absolutely right. There's only one store left with the Hornbach compact store, and this is a store in Bad Bergzabern, which is not far away from our headquarter. And so I would say, from my point of view, the Hornbach compact store, as it was developed originally, is at the end. But we will use the Hornbach store in Bad Bergzabern to test more possibilities or alternatives on a limited sales base, on a very small sales base. And so maybe we will develop it further. But the Hornbach compact store, as it was originally developed, I think, it's not -- no longer valid.

[Operator]

[Operator Instructions] The next question is from Thomas Maul of DZ Bank.

[Thomas Maul, Analyst]

I have one, and this is on the Austrian market. I would be glad to hear an update on the competitive situation in Austria. How is the situation at the moment, how is pricing and so on?

[Roland Pelka, Member of the Board of Management]

Why are you asking, especially Austria? It's behind.

[Thomas Maul, Analyst]

I have a client here from Austria who is -- yes, interested in the Austrian market. So that's actually the reason.

[Roland Pelka, Member of the Board of Management]

Okay. Last year -- as you know, last year performance in Austria was not good. So one of the consequences was that we had to release the former Managing Director of our operations in Austria. Left the company, and so we had some changes in the organizations there. But as you see now in the first quarter of the current financial year, we achieved a positive growth in like-for-like sales, and so we are optimistic to -- for Austria. And the competitive situation is -- hasn't changed so far, so there is no impact coming from the competition.

[Operator]

The next question is from Juergen Elfers of Commerzbank.

[Juergen Elfers, Equity Analyst of Retail]

This is me again. I'm -- I just wondered whether I could ask a little more questions as you were available, and there were not that many people queuing in line. On the question on Austria, it's probably more appropriate for the German market. You gained 3 percentage points stronger growth than -- your growth was 3 percentage points stronger than the DIY peer group. Could you share with us your views on the drivers for this particularly strong performance and the market share gains?

[Roland Pelka, Member of the Board of Management]

Yes. First of all we -- I think, we had a better preparation for the spring season as we had the year before with some consequences. As you know, we increased the inventory level. And so -- but with -- in doing this, we were much better prepared for the demand in the first 3 months, in the spring -- very important spring season. And secondly as we also have more people in our stores, more staff, more educated staff in our stores to offer good service to our customers. And then we just -- on the -- and so we are very well prepared for the spring season. And this was, from my point of view, is the main reason for the very good development in the first 3 months, especially against the competition.

[Juergen Elfers, Equity Analyst of Retail]

Yes. In your view, has the online offering helped? Is -- do you still see Hornbach as being the leading online player in the segment?

[Axel Müller, Head of Group Communications]

Yes, definitely, I think, we are. I think, the outperformance like-for-like wise, is a hint or a signal that our outperformance in the online business is even stronger. So the 3 percentage points gap between Hornbach and the rest of the DIY world in Germany is owning to the fact that our e-commerce business is very successful and is contributing a high growth rate to the group performance.

[Juergen Elfers, Equity Analyst of Retail]

Previously, as you mentioned it, Mr. Müller, is the 7.8% like-for-like sales uplift a positive sales uplift on the store base and a positive sales uplift driven by e-commerce activities?

[Axel Müller, Head of Group Communications]

Both.

[Juergen Elfers, Equity Analyst of Retail]

Remember last year, we had periods in which we discussed whether the like-for-like sales growth would have been negative if you were to only look at the stores excluding all digital activities on the sales momentum. And now it is clearly the impression that given the strong summer -- spring sales development and the weak quarter last year, that the stores have also grown positively in like for likes, excluding all e-commerce activities? I just wanted to get that confirmed.

[Axel Müller, Head of Group Communications]

No, excluding e-commerce, we have also a potential growth rate in -- on a stationary basis.

[Roland Pelka, Member of the Board of Management]

The main driver. Definitely, we have growth in the stores and online.

[Juergen Elfers, Equity Analyst of Retail]

Okay. Okay. So then that's good. Then just if I may, Mr. Pelka, just a few details on the guidance. And I mean I believe, we have checked the numbers and as the numbers already at the full year results presentation. When you look at Hornbach Baumarkt and assume an EBIT guidance -- an EBIT uplift of 30%, that would be roughly EUR 25 million, of which, EUR 21.5 million would be coming from the IFRS 16 conversion. So there's just a low single-digit uplift that would come from the operational business. In the first quarter, the -- I'm talking about Hornbach Baumarkt here, in the first quarter, the operating earnings uplift was EUR 13.8 million. That would imply that as the year progresses, possibly in Q3 and Q4, you would have this number being trimmed by typically less positive earnings contributions. However, this year in Q4 -- in Q3 and Q4, you will see the first effect of the measures implemented you spoke of having thrown overboard above 140 projects in order to focus on what's most important, et cetera. So there's savings coming into the scenario.By how much you think, if it is a satisfying year, by how much do you think would the full year EBIT growth gain momentum if some of the extra operating earnings uplift, that you secured already in Q1, would be taken fully into account? What do you think? Is there a 40% EBIT uplift that's on underlying earnings? Would that be feasible?

[Roland Pelka, Member of the Board of Management]

So we have an unchanged -- we haven't changed our forecast of our -- there's still -- okay, we still believe growth in sales in the single-digit percentage range and EBIT growth on the Baumarkt level minimum.

[Axel Müller, Head of Group Communications]

30%.

[Roland Pelka, Member of the Board of Management]

This includes EUR 21.5 million impact -- as a one-off impact due to the adoption of the new leasing standard. But -- so last year, we had a cost problem. The reason for our -- for bad earnings last year, main reason was -- were the costs. And we had positive sales also last year, and -- but we had to work, and that's what we said, we had to work very hard on the cost side. And I think we will achieve some positive impacts as well coming from the cost side. But timeline -- yes, this takes time. And so the only thing I can say is, as of today, we still believe that the forecast we make in our annual report is still valid.

[Juergen Elfers, Equity Analyst of Retail]

Yes. And the work on the costs, so you mentioned in the full year results presentations, would be much rather back-end loaded, i.e., there will be positive effect pouring in Q3 and Q4. Is that a fair assumption?

[Roland Pelka, Member of the Board of Management]

Yes, Q4 was -- in Q4 we were -- this was a problem last year that we were surprised by this heavy development on the cost side, especially store expenses. And some people thought that we were perhaps -- no proper controlling. And we made some mistakes last year on the cost side. We worked very hard to -- now to fix it. And our controlling is very keen now to better control the cost. So on the administration costs and especially the store expenses -- and so I think, we will -- we should have a positive impact on the overall earnings level.But we didn't change our forecast so far.

[Juergen Elfers, Equity Analyst of Retail]

Yes. And this positive impact on the overall earnings level comes on top of the already secured EBIT uplift excluding IFRS 16 transition of the first quarter, i.e., the operational contribution at HBM of EUR 13.8 million. So I tend to believe that of course, the guidance of -- the underlying EBIT guidance of more than 30% seems a very cautious view at the moment.

[Axel Müller, Head of Group Communications]

This is Axe Muller speaking. Yes, I think you're right. It's a cautious approach. But on the other side, you don't know how the change of the economic environment will be over the next quarters. Altogether, it's -- maybe a fair approach to be conservative and to having the chance to meet your expectations or to over -- find some better figures over the year. But we tend to be cautious, and if it's better or if we see the expectations and the -- and our numbers are much better than the expectations, we will discuss that with the capital market, of course. But yes, this [ spectrum ] of time, it's better to be cautious because we have 3 quarters to run. And the first half will be the most significant part of the game, and of course, we have to see in the last quarter how fast are we able to see higher cost efficiency. We don't know it yet. It takes time. There's no button we push. And from today or tomorrow, we would see cost reductions in the stores. It -- that takes time, and we would see it over the year and come back to you when we see a better development than expected.

[Juergen Elfers, Equity Analyst of Retail]

Yes. Okay. But it's good. That's -- my final remark on this topic, it's good to know that you have enjoyed a relatively robust and dynamic earnings scenario for the first quarter. And for the remaining 3 quarters, I wish you guys all the best.

[Axel Müller, Head of Group Communications]

Are there any further questions?

[Operator]

At the moment, there seem to be no further questions.

[Axel Müller, Head of Group Communications]

Okay. So as I'd like to depose a final call, let's say. And if there's anybody to -- who would like to benefit from the time we shared together, you have a chance to ask us right now. If that's not the case, I would say, we got it. So any further questions?So that seems -- doesn't seem to be the case. I would like to thank you for the time you shared with us today. And we will have the next news flow for the half year's numbers in September on 26 -- September 26, and I would like to invite you to a [ physical ] conference down in Frankfurt. Yes. And we wish you a nice summer period, and take care. Thank you again. Bye-bye.

[Roland Pelka, Member of the Board of Management]

Bye-bye.