Hornbach Holding AG & Co KGaA

XETRA:HBH

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the conference call regarding the first quarter results 2020/2021 of Hornbach Group. [Operator Instructions] Let me now turn the floor over to your host, Axel Muller.

[Axel Müller]

Yes. Thanks very much. Good morning, everybody, and welcome to the Q1 conference call of Hornbach Group. My name is Axel Muller, in charge of Investor Relations, and I'm sitting together with CFO Roland Pelka; and my colleague, Anne Spies, Investor Relations Manager. Yes, we published in the morning a nice set of figures for the first quarter, showing a strong performance against the backdrop of a very challenging context of corona pandemic. We are very happy to show these figures, and we would like to put some more color on the picture, and that's why I would like to hand over to Roland, please.

[Roland Pelka, CFO & Deputy Chairman of Management Board]

Thank you, Axel, for the introduction. Good morning, ladies and gentlemen. As you know, we already released and I talked at the announcement on June 9 to inform the market of our, despite the corona crisis, very pleasing sales and earnings performance in the first quarter of the current financial year. We were a bit surprised about this development. I think nobody expected this. But due to the high uncertainty in these times, we haven't increased our guidance for the full year so far. Now I would like to draw your attention to a couple of charts, which we have provided for this telco. Let me start with the first chart looking on the map with Hornbach stores. As you can see, the number of Hornbach DIY stores is -- hasn't changed compared to the previous year or the end of the previous year. So we still operate 160 stores across 9 European countries with a total sales area of close to 1.9 million square meters, and the average store size is 11,800 square meters. In addition, the builders' merchant business operates 35 outlets in Germany and 2 in France. That is one more compared to the previous year. They opened a new outlet in the southwest of Germany in the beginning of the current financial year. Looking on the next chart. So in this schedule, we have summarized the impact of the coronavirus pandemic on our store operations. And as you see, up to 64 stores across Europe have been closed or have been restricted in a certain way, so -- and on the other such -- so we have store restrictions in Germany, for example, in the states of Bavaria and the Lower Saxony and Saxony. And outside of Germany, we had restrictions in Luxembourg, in Austria and in Switzerland, Slovakia, Czech Republic. The stores were completely opened in the Netherlands, in Romania and in Sweden, but also with some kind of restrictions like limit of customers or amended opening hours or something like that. Okay. Despite this situation, coming to the next slide, please, we have had a fantastic sales development, especially in the month of April and May. And after 3 months, we show total sales plus of 17.8%. And very, very pleasing is the development in Germany, with a plus of 18.4% but -- in the Hornbach Baumarkt AG Group. And also the Hornbach -- the builders' merchant business had a good start in the new financial year, with a sales plus of 9.5%. Like-for-like sales, yes, we had an extremely good performance in Germany, with plus 24.4% after the first 3 months, and this compared to a very good first quarter in the previous year. And international, as you have seen, though we had some more -- the most important store restrictions are store closures or whatever, due to the corona pandemic outside of Germany. But we had positive developments in Austria and Czech Republic with 7.4%; in Austria, 7.6% after 3 months; in Luxembourg, 17.3%; in Netherlands, 22.1%; Romania, close to 18%-plus after the first 3 months; in Slovakia, minus 26.5%, but Slovakia was the country where we had the longest store closures. It was from -- until -- I think the stores opened again now on May 6. So we have the longest restrictions in Slovakia; Sweden, 22.4%; and Switzerland, flat, with 0.6%, although we had very long restrictions in Switzerland as well, more than, I think, 6 weeks limited shopping availability in our stores in Switzerland, very limited. So -- and this is, in this context, a very good result in Switzerland as well. Coming to the earnings performance in the first quarter. Extremely good sales development led to also a very good profit development. Adjusted EBIT number in the first quarter increased by 78.4% up to EUR 173 million. This is an absolutely record result. We never have seen such high profits in the first quarter as we have it now in the first quarter of the current financial year. Looking on the 3 segments. From a holding point of view, best development we have was -- we have seen in our core business, in the operations of the DIY store, the Hornbach Baumarkt AG subgroup nearly doubled the result compared to the previous year. But also the builders' merchant business and the property business had a good start in the new financial year. Nonoperating earnings was EUR 0.6 million. It was a sale of a former -- it was a former Hornbach store in Neunkirchen in Germany, which was closed a couple of years before, and we sold the land and had a book gain of EUR 0.6 million. And looking on the cash flow statement, this looks also very good. So extremely high cash inflow in the first quarter due to the good performance of our stores and also a positive impact of the working capital. This has to do also with the cutoff date. But overall, a strong increase in the cash and cash equivalents, so -- and this has also put a lot of cash in our company. Coming to the balance sheet structure. Good results led also to a very good equity, shareholders' equity ratio, 42.4% in the first quarter; and high liquid funds with EUR 703 million due to the high cash inflow in the first 3 months of our current financial year. Yes. Coming to the last chart of our short presentation, looking on what -- on the -- have a look -- outlook now for the full year. So for the Hornbach Group and the Hornbach Baumarkt subgroup, our initial forecast was that we expect a sales increase for the full year in a medium single-digit percentage range. Now we expect, including the corona impact, sales [indiscernible] for the full year on the previous year level. We know that, that is -- seems to be a very conservative outlook, and so maybe we'll change it after we have better information about the further development of -- in this extraordinary year. And the adjusted EBIT forecast initially was a level on the previous year level. Now we expect a slightly below previous year level. But this could also change in the next time, if we have a better picture now on the further development of the -- of this extraordinary year. And the capital expenditure number hasn't changed. So we increased our CapEx budget for the full year in line with our initial planning. And so we are in preparation for further store openings, especially the year after this year. So we already have stores under construction, which will open next year. This year, we will have 1 traditional store opening in Romania, which is a large-format store, close to the border of Slovakia -- no, that's not Slovakia, that's Hungary, yes?

[Anne Spies, Investor Relations Manager]

Yes.

[Roland Pelka, CFO & Deputy Chairman of Management Board]

Hungary. Okay. Sorry. And -- but when -- we will have probably 2 openings maybe in the last quarter. We think it will be possible in December in Cologne and in Berlin, with a new store concept under the name of BAUHAUS. This is a store concept developed especially for floor and decor. So -- and yes, it's the test. And as I said to you, we have store preparation, or we have stores under construction now in the Netherlands, one for the next year, another one in Romania, and we are already preparing for store openings in other countries. Okay. That's -- so I'm coming to the end of my short presentation. And together with my colleagues, I now would like to -- we very much appreciate your questions now. Thank you for listening.

[Operator]

[Operator Instructions] Okay. And the first questions are coming in for today. It looks like the first question is from Mark Josefson calling from Pareto Securities.

[Mark Josefson, Analyst]

Great figures. Well done to the whole team. I have a couple of questions relating to Q1. First of all, with respect to the gross margin, at least 40 points or so at the Baumarkt, 30 at the holding level. You referred to the strong growth of online business has been an influence here. I wonder if there is something in cost of sales that is different for online sales compared to the brand sales, the store sales, or is it that the online sales focus on lower margin business? Or is it that greater visibility with online? I mean your sales have free Wi-Fi in all stores. Is it the greater price transparency with everyone now offering things online means that there's a gentle easing or gentle pressure on prices generally? That's my first question, the background to that. The second question relates to selling and expense -- selling expenses up 1%. Now I would not put -- I would not expect sales cost to grow at the same pace of sales. But 1% seems low, especially in the light of probable COVID-enforced additional costs. I'm talking about logistics here or on hygiene for customers and staff. So is there anything that has helped the cost base in Q1 that we should be aware of? Or is it just a very good housekeeping by the group? And my final question, and it doesn't relate to Q1 but to Q2. I know you don't comment on current trading, but I was very interested by the different monthly development of the sales with the Baumarkt subsidiary, flat, plus 18%, plus 34%. And for us on the outside, that provides a very good guide to the volatility that you guys in the retail trade are facing. But with respect to June, has there been a big falling off in the pace? Or did June at least start at a similar pace to what you saw in May of the plus 34%?

[Roland Pelka, CFO & Deputy Chairman of Management Board]

Okay. This is Roland Pelka speaking again. Thank you for your questions. Okay. First question, looking on our gross margin. The gross margin of Hornbach Baumarkt AG is 40 basis points below the previous year level. And for the holding, it's 30 basis points for the previous level -- below the previous year level. And the major reason for this decrease in the gross margin is the strong sales in online, strong online sales. As you know, we follow the so-called interconnected retail strategy. So we have same prices online and off-line. But the online margin is a little bit lower, first of all, due to the assortment of the demand of our customers. So they buy more lower cost margin products online. And on the other side, we have, in the cost of sales, the transportation, the delivery cost to our customers. And on the other side, the customers -- these delivery costs are not covered by -- or not fully covered by payments of our customers, and this is putting a pressure on the online on the overall gross margin. Looking on the market, there was no price pressure coming from the market, online or off-line. So the price that's -- at the moment -- in the past 3 months, we haven't seen any price pressures, major price pressures coming out of the competition or something like that. And so the gross margin decrease is more or less the result of the good development of our online business. Online sales 80% above the previous year level is an extremely high number. Coming to your second question, the cost side of the first quarter. First -- okay, first of all, we had a positive development in -- or positive impact of lower cost in media spendings. After the shutdown in March, we decided to stop major TV commercial campaigns and things like that. And it didn't make sense to have -- to spend a lot of money for media presence in a situation where nobody knew whether stores will remain closed or will open again and so on. At the end, we had close to EUR 18 million lower media spending in the first quarter compared to the previous year. But we expect now that the -- in the following months now and for the full year, that the media spendings, of course, now will increase again, and we started TV commercials and so on. So we will see much higher media spending in the next couple of months. On the other side, cost -- additional costs due to the corona pandemic, especially for hygienic -- hygiene products and the more security costs and things like that, and we believe that these extra costs amounted to a number of close to EUR 10 million in the first quarter, costs, which we wouldn't have seen without the corona pandemic. So this is my answer to your second question. Now on your third questions -- or third question, looking on the June trading, yes, the June trading is still good. We haven't seen any fallback or something like that. It's a little bit weaker compared to the first 3 months, but trading is still good. But okay, we are still cautious with our full year forecast. And as I already explained to the audience, we will -- we have our -- we will have the forecast under review, if we will have better -- when we will have better feeling about the next -- of our developments over the next further months.

[Operator]

We have another question, and the question comes from Thilo Kleibauer calling from Warburg Research.

[Thilo Kleibauer, Research Analyst]

Yes. I have, yes, 2 or 3 questions. The first one is, now in Germany, we have the temporary VAT reduction starting on July 1. So what is your expectation? What effect can result from this? Do you maybe expect more price competition, more price pressure in several categories from this VAT reduction? Would be helpful to hear something. Second question, regarding your new concept, BAUHAUS. So maybe you can say, why did you choose this category for a kind of specialist concept, so the floor category? And probably it's a smaller store size compared to your large-format DIY store. So maybe you can also give us the selling space of the BAUHAUS store. And I would be interested if you also have -- when you start a new concept with a new name, if you also start kind of online channel and online sales for this new concept when you open new stores there in the autumn of the year. So these are maybe my first 2 questions.

[Roland Pelka, CFO & Deputy Chairman of Management Board]

Okay. Thank you, Mr. Kleibauer. This is Roland Pelka speaking again. Looking on the VAT reduction in Germany, so what we will do is we just -- we adopt the new VAT rates beginning July 1. So every -- each single price now beginning with July 1 will be calculated with the new VAT rate. So we fully pass over the lower VAT rate to our customers for all items in our store and online as the same as what we have off-line. That's our strategy. On the other -- on -- but for our customers, which have -- those customers who have a customer account, a digital customer account with us, they get -- and this is -- for these customers, we have the price guarantees. So that means if we will lower the prices now in July and they bought a product 4 weeks before the 1st of July, these customers will get a new -- a bonus for the new price, so -- and -- okay. And we think most of our -- what we have seen so far is most of our competitors do have a similar strategy. The -- most of our competitors or the most important one will pass over the new VAT rate to their customers. So in the beginning, we will -- I think we won't see a price war or price pressure, more price competition. But this could change in the -- when we look further, especially before the late calendar year, and nobody knows what then will happen. But in the beginning, no major price -- I personally don't -- wouldn't expect price -- more price pressure now. And -- but we wouldn't also expect a major impact on the customer demand. I personally don't believe that lower price, lower VAT rates will have a big impact on customer demand. Coming to your second question, looking on our new concept, BAUHAUS floor and decor. So the average store size is approximately 7,000 square meters average, obviously weighted selling space for both stores. And the major focus with this concept is professional customer, and they will also have an online bakeshop. And the BAUHAUS team now, I think, is beginning in mid of July. They will have their own communication to the interested audience, especially for the speciality magazines in our industry. And you will hear more of this BAUHAUS concept in the -- probably in the coming weeks.

[Thilo Kleibauer, Research Analyst]

Okay. But maybe one follow-up. You say it's more for professional customers. But to get it clear, it's an activity of Hornbach Baumarkt AG and that's not including Baustoff Union or Hornbach Holding.

[Roland Pelka, CFO & Deputy Chairman of Management Board]

It has nothing to do with Baustoff Union. So the BAUHAUS is a separate legal entity across BAUHAUS GmbH. And it is at least a subsidiary of Hornbach Baumarkt AG and has nothing to do with the builders' merchant business.

[Thilo Kleibauer, Research Analyst]

Okay. Okay. And the start-up costs are probably including in the line of the preopening costs, which are already in your account. Okay. Thank you.

[Roland Pelka, CFO & Deputy Chairman of Management Board]

You're welcome.

[Axel Müller]

Are there any further questions, please?

[Operator]

There are no questions -- further questions at the moment. [Operator Instructions] And there is a further question here from Tim Ashton calling from Frilsham Europe Fund.

[Tim Ashton;Frilsham SICAV Europe Equity Fund]

Fantastic set of results in difficult times, well done. Can I ask -- I mean, presumably, you're looking at these numbers and thinking how much demand is pulled forward if a lot of people have been on [indiscernible] or something. Have they taken the view, well, let's use the time to do a job we were going to do later in the summer. I was wondering if -- kind of as a very broad brush, maybe the Baustoff Union like-for-like number kind of probably represents -- possibly represents a kind of underlying like-for-like growth and maybe some of the excess above that you don't want to bet on for later in the year, or is that too pessimistic, do you think?

[Roland Pelka, CFO & Deputy Chairman of Management Board]

Mr. Ashton, I would like to hand over to Axel.

[Axel Müller]

Yes, Tim. Thanks for the question. First in -- ahead of the development we might see in the autumn and winter periods, it's obviously difficult to anticipate any movement. But my impression is that the overall demand is on a higher level compared to the previous year and will, if there's no really bad news, stand on a higher level, because cocooning or homing and improving your home is a very important issue in this corona year, and people tend even more and more to focus on their homes and their gardens and to work -- make projects over there. We can't see any fact which shows the dimension of shifting sales from autumn to spring or to summer or the other way around. It's pretty difficult to predict, to be honest. That's what we can answer on maybe in 1 quarter, 2 quarters later on, but not at this stage of time. The overall picture looks quite good for the DIY industry, and we are happy to outperform the industry in this environment, and we will have to see the following weeks and months.

[Operator]

There are no further questions right now. [Operator Instructions] And we have a follow-up question here from Mark Josefson calling from Pareto Securities.

[Mark Josefson, Analyst]

Yes. With respect to the minority payment, EUR 26 million in Q1 this year, quite a big increase over the EUR 12 million paid last year. But what is the background to the higher rate of growth in minorities compared to the group's own net income?

[Roland Pelka, CFO & Deputy Chairman of Management Board]

In the first quarter?

[Mark Josefson, Analyst]

Yes, yes. I mean it's a technical question, it's not the big -- maybe because it's a relatively small number that the percentage increase seems very high. So I think we had EUR 12.3 million last Q1 for the holding group and EUR 26 million for this time. I just wondered if there's anything particular with respect to minority payment.

[Roland Pelka, CFO & Deputy Chairman of Management Board]

There's nothing particular. This is a technical point, so nothing has changed. So from a group perspective, the minorities are the shareholders of the Hornbach Baumarkt AG, which are not -- all the free float of Hornbach Baumarkt AG, excluding the shares of Hornbach Holding, which -- so -- but nothing has changed.

[Operator]

And we have another follow-up question here from Thilo Kleibauer who's calling from Warburg Research.

[Thilo Kleibauer, Research Analyst]

Yes. One follow-up question from me. The tax rate was still very low in Q1. Also, I think slightly below 25% for the holding. Is this also your expectation for the full year tax rate? Or if we have the assumption maybe that the share of profits from Germany will increase in the current year, could this lead to a higher tax rate than maybe your normal tax rate level? This would be my question.

[Roland Pelka, CFO & Deputy Chairman of Management Board]

Okay. This is Roland Pelka speaking again. The tax rate in the first quarter for the Hornbach Baumarkt AG subgroup is 25.2% compared to 25.8% in the previous year. And on the holding level, tax rate in the first quarter is 24.7% compared to 26.3% in the previous year. So a lower tax rate on the group level compared to the Hornbach Baumarkt AG subgroup. And the tax rate is always as a result of the mixture of the distribution, or let's say, split of the profits. And -- so we have different tax rates in the different countries. The highest tax rate is still in Germany, with close to 30%. That includes corporate income tax plus trade tax on income. And we have the lowest tax rates, for example, in Romania, with lower than below 20%. But in each country, in all the countries where we have operations across Europe, the tax rates are lower than in Germany. And you are right, if Germany develops further, as we have seen it now in the first quarter, the tax rate could increase for the full year as a result of a higher share of German profits. But we haven't -- so that's not part of our forecast.

[Axel Müller]

Do we see any further questions?

[Operator]

There are no further questions at this time.

[Axel Müller]

Okay. So last order, I would say, if there's anything we couldn't answer on, please don't hesitate to post your question. So my question is, are there any further questions left so far?

[Operator]

[Operator Instructions]

[Axel Müller]

So just in case, we have no further questions?

[Operator]

No. There are no further questions.

[Axel Müller]

Okay. Many thanks. I would like to thank you for your time shared with us today. The next news flow will be end September, on September 29 for the half year's results. And Roland Pelka and Anne Spies and I would be glad to speak with you again at this stage of time. We will see how the next months of the second quarter will develop and are eager to share the update with you. We've got to thank you once again. And stay safe. Thank you very much. Bye-bye.